The Bombshell Case That Will Transform the Housing Market

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michael barbaro

From “The New York Times,” I’m Michael Barbaro. This is “The Daily.”

Today, a bombshell legal settlement reached a few days ago is about to change almost everything about buying and selling a home and in the process make it significantly cheaper. My colleague Debra Kamin explains.

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It’s Wednesday, March 20.

Hi, Debra.

debra kamin

Hi, Michael.

michael barbaro

What a treat.

debra kamin

Talk about this is surreal. Want me just to go?

michael barbaro

No, I’m going to ask you a question.

debra kamin

I’m ready.

michael barbaro

This is a conversation.

debra kamin

Hey, I came ready to roll. What do you want from me?

michael barbaro

So, Debra, at the highest possible level, what just happened to American real estate?

debra kamin

Michael, there’s been this invisible hand that’s been guiding and controlling the real estate industry for over 100 years. And they have long thought that they were absolutely untouchable because they had so much power, so much influence, so much money. And the biggest crack in their armor that’s ever happened just happened on Friday.

michael barbaro

Hmm. Well, what is this crack in the armor, and I guess who even is this nefarious-sounding group that you’re talking about?

debra kamin

The group is the National Association of Realtors. Nearly 9 out of 10 home sales are handled by real estate agents affiliated with NAR. And the crack in the armor is that they have had these rules that have controlled how much buyers and sellers pay to their agents and how you work with agents to get a home on the market.

And then last week, for the first time in its history, NAR’s control over this huge industry basically collapsed, and with it so did many of the costs it was imposing on consumers.

michael barbaro

OK, this sounds huge. I think we need to slow this whole thing down. And I think the way to do that is to have you tell us the story of how the National Association of Realtors, which is not at all a household name, became such a powerful force in the ritual of buying and selling a home in the United States.

debra kamin

The NAR is huge. Over their existence, they have grown to 1.5 million members. More importantly, they’ve created a system where you really cannot sell a house unless you’re a member. They even own the copyright to the word “realtor.”

michael barbaro

They own the copyright to the word “realtor“?

debra kamin

They own the copyright. They even had a campaign a couple of years ago to convince people how to say it properly and correctly. They take this very seriously.

michael barbaro

OK, OK. I’ll buy it. How do you say it properly?

debra kamin

It’s “reel-tor,” “reel-i-tor.”

michael barbaro

“Reel-tor.”

debra kamin

Two syllables, not three.

michael barbaro

OK.

debra kamin

Very important.

michael barbaro

Extremely important.

debra kamin

So I should say, on paper, you can sell a house if you’re not a realtor, if you’re just a real estate agent and not a member of NAR. Exactly. But in practice, it’s really not that easy because of the system they’ve created. They make it very difficult.

For example, if you want to list a home for sale, you have to put it on something called an MLS, a multiple listing service. And MLSes, for the most part, are owned and operated by the local subsidiaries of NAR.

michael barbaro

They control the databases in which homes basically enter the market.

debra kamin

Exactly. And not only the databases in which homes enter the market but the databases through which realtors tell each other how much commission they will get paid if they sell those homes. And the databases are very important because databases are where real estate agents’ can see how much commission they will make if they bring a buyer or they sell a home.

Typically when you sell a house in the US, you pay a commission fee. It’s usually around 5 percent or 6 percent to realtors. This is how realtors are making their money. It’s what you’re paying them for everything they’re doing — listing the house, showing the house, answering all your questions.

michael barbaro

Making improvements on the house.

debra kamin

Yeah, and it’s how they make a living. But it’s a very high rate. 5 percent or 6 percent is one of the highest rates in the world. Almost no other developed country has a rate that high.

michael barbaro

OK, and let’s talk about 6 percent for just a minute. That’s a number everyone knows if you’ve ever, especially sold a home, because that’s a number you hate. You hate the fact, no offense to realtors, that you have to give 6 percent of the money you get for your home to a real estate agent.

debra kamin

Right. Well, two real estate agents.

michael barbaro

Right.

debra kamin

Because it gets split. Half goes to the seller agent. Half goes to the buyer agent.

michael barbaro

Right. And just to put it in perspective, because I think it’s useful, if you’re selling $1 million house, 6 percent fee is $60,000. If you’re selling a half million dollar house, it’s $30,000. Either way you slice it, it’s a lot of money to put in somebody else’s pocket for a huge investment that you made.

debra kamin

You’re trying to get the money into your pocket, but it’s coming out of your pocket and going to the agent. Exactly.

michael barbaro

You’re saying the National Association of Realtors should be seen as essentially the force behind that 6 percent fee, the loathed 6 percent fee staying what it has been for so long.

debra kamin

NAR will say we never set 6 percent. We don’t have 6 percent set in stone. That is true. But they created rules that led to a system where that 6 percent has become the industry standard, and anyone trying to challenge it, their business model has fallen apart.

michael barbaro

Fascinating.

debra kamin

And here’s how they control the market. For example, if you’re a real estate agent and you want to open that home for a customer, in most markets, NAR controls the lockboxes that you use to open the homes. Everyone knows what those lock boxes look like, with little punch key. NAR actually owns one of the two companies in America that makes those lock boxes.

michael barbaro

Wow.

debra kamin

And in many markets, they require their agents to use their own technology. And then let’s say you open the home, you bring a buyer, you want to sell the home. The actual technology that you use to sell the home, which is DocuSign, they own a controlling stake in that company.

So every aspect of the home-selling transaction, from the very beginning to the very end, that hand of NAR is guiding it and behind it, and it’s been there for a hundred years.

michael barbaro

Wow. I mean that sounds an awful lot like monopolistic level of power.

debra kamin

The word “monopoly” gets thrown around all the time when critics are talking about NAR. Another word that comes up a lot is the word “cartel.” There’s a lot of power. There’s a lot of control. And there’s also a very organized drive to go after anyone who tries to challenge them.

michael barbaro

Hmm. This is just not a level of influence that I associate with a trade group. I think of trade groups as gathering people together for professional development.

debra kamin

Yeah, Having a happy hour at the hotel.

michael barbaro

Networking.

debra kamin

Exactly.

michael barbaro

Not controlling A to Z elements of the industry. If there was an NAR in journalism, it sounds like they would control the printing presses. How is it possible that no private company has come along and tried to break into this NAR-controlled market or that the government hasn’t looked at it and thought cartel, monopoly, we got to bust this up?

debra kamin

People have definitely tried. So it’s not that it’s people have not tried. The challenge is that NAR, because they have so much power, they have quashed any attempts at challenging them.

michael barbaro

Like what?

debra kamin

They sue the heck out of anybody who comes after them. There have been upstart companies that have tried to advertise homes outside of these multiple listing services the NAR controls. And NAR has sued them, and then you get buried in tens of thousands of dollars of legal fees. For an upstart tech company, that’s a death blow.

michael barbaro

Mm-hmm. What about the government?

debra kamin

The government has also been going after NAR for more than 20 years. The DOJ and NAR have been locked in a battle back and forth since 2005. But in terms of the government, NAR is not just a trade organization. They are also a political action committee.

They have the largest PAC in Washington in terms of dollars raised, and they give millions of dollars to candidates who are in line with their agenda. And they spend millions of dollars fighting candidates who are not in line with their agenda.

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So anyone in the government who wants to go after NAR knows that they are fighting a battle that probably is bigger and more moneyed than they really want to deal with.

michael barbaro

Right. Sounds a little bit like another Washington organization with a similar acronym which is the NRA, the National Rifle Association, which has kept a very strong lid on efforts to challenge its authority with campaign dollars.

debra kamin

There is a playbook for this sort of behavior, and it is followed pretty clearly.

michael barbaro

Right. But I don’t think any of us quite understood it was happening in the housing market.

debra kamin

Right. And at the end of the day, it wasn’t the government that brought them down. And it wasn’t a venture capital firm with a ton of money fighting them or trying to be an upstart group. It was five normal blue-collar homeowners and a personal injury lawyer from Missouri who had never dealt with the housing market before in his life.

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michael barbaro

We’ll be right back.

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So, Debra, tell us about this unexpected cast of characters that ends up bringing down the National Association of Realtors.

debra kamin

So, Michael, in 2018-2019, there was a group of home-sellers in Missouri who had learned that they had paid pretty high fees to their real estate agents and they might have a legal case against them.

michael barbaro

Mm-hmm. They were probably paying that standard 6 percent fee to their agents when they sold the house, right?

debra kamin

They were paying the standard 6 percent fee, but the key was they had not known that that fee was actually negotiable. They thought they had to pay it.

michael barbaro

OK, here I need to pause. It is actually negotiable?

debra kamin

It is actually negotiable?

michael barbaro

It is?

debra kamin

It is. And that’s the thing. NAR has always said, we don’t set the fees. There is no standard fee. But in practice, if consumers don’t know that the fee isn’t negotiable, and if consumers are told by their agents that they cannot negotiate the fee, that is the fee.

michael barbaro

Hmm. OK, so these folks discover that perhaps they didn’t need to pay 6 percent and did — what do they do?

debra kamin

They contacted a lawyer, and they started going through the contracts that they’d signed when they sold their homes. So one of the people went back through her contract, and the contract actually said what fee do you want to pay your agent? And it said 6 percent, 7 percent, 8 percent or 9 percent.

michael barbaro

[LAUGHS]:

debra kamin

So she did the smart thing, and she chose the lowest fee, circled 6 percent. And that’s what she paid.

michael barbaro

Right. In other words, like a tipping machine that says 20, 22, 25 —

debra kamin

It’s like when you buy a coffee and the tip starts at 22 percent.

michael barbaro

Right, right.

debra kamin

Exactly.

michael barbaro

It’s inconceivable that there’s anything beneath that.

debra kamin

Or that you actually could opt out.

michael barbaro

Right.

debra kamin

Exactly.

michael barbaro

OK.

debra kamin

Someone else, he’s the son of a factory worker. He’s now the head of Mothers Against Drunk Driving in Missouri. These are really blue-collar people he was told that he was going to be charged 5.5 percent. He found out later that he was charged 6 percent. So his agent just jacked up the fee without telling him.

So all of these people realized we left money on the table at the most important financial transaction of our entire lives, and we probably have a legal claim against the institution that set the rules that made it so this was possible.

michael barbaro

NAR.

debra kamin

NAR. So not only are they upset that they had to pay 6 percent and they could have negotiated it and did not know, they also are realizing that they have paid the fee to the agent that’s representing the person that they’re going against in the negotiation for the home sale.

michael barbaro

Which is the buyer.

debra kamin

Which is the buyer.

michael barbaro

Right. Because as you said earlier, the nature of the 6 percent fee is that it is split between the seller’s agent and the buyer’s agent, which no one really tells you or reminds you, but that’s what happens.

debra kamin

Because it’s all happening through a backdoor on these multiple listing sites that you can only see if you’re a real estate agent who belongs to NAR.

michael barbaro

OK. So what ends up happening to all these sellers once they discover in their minds that they’ve been wronged and that they want to do something about it?

debra kamin

They hire this attorney, Michael Ketchmark. He’s a personal injury lawyer from Missouri. Pretty much nobody outside of Kansas City had heard of him until this moment. He decides he’s going to file a class action lawsuit. This is not the best time for NAR.

This is actually the moment that they were really coming onto my radar as a reporter. I had spent last summer focused on sexual harassment allegations at NAR, and I discovered that NAR’s president — his name was Kenny Parcell — had years and years of sexual harassment accusations against him that had been covered up, and women had been paid off.

And at “The Times,” we published a big exposé on those allegations at the end of August, and he stepped down two days later.

michael barbaro

Your reporting got the head of this incredibly powerful organization to step down.

debra kamin

It did, and there have been other resignations since then. And that moment for NAR really put them on the world stage. Suddenly, people are aware that the leader of the organization is an alleged sexual harasser. And women who’ve been whistle blowers about the sexual harassment have been paid off.

And all of that is happening at NAR behind the scenes when this case, where they’re being accused of price-fixing ends up going to trial.

michael barbaro

Got it. OK. So what ends up happening to this case as it moves through the legal system just as NAR’s leader has been…