Insights@Questrom Podcast

Real Estate Ripples from a Landmark Settlement

• Boston University Questrom School of Business • Season 2 • Episode 9

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Join us as we unravel the implications of a game-changing $418 million settlement that is sending shockwaves through the real estate sector. We discuss how the National Association of Realtors' landmark decision is upending the traditional commission model, and what it means for the pockets of buyers and sellers alike. You'll gain a new perspective on the future of real estate transactions, with an in-depth analysis on how the Federal Reserve's latest move—or lack thereof—on interest rates adds to the complex decision-making process in today's market.

Joining the conversation is Keith Munsell, a seasoned expert with four decades in the field, who brings clarity to the often murky waters of housing trends and challenges. We dissect the Fed's influence, the relentless imbalance of supply and demand, and the daunting barriers faced by prospective homeowners. Get ready for a compelling episode filled with expert insights that will arm you with the knowledge to navigate the shifting terrain of the housing market, whether you're a first-time buyer or an experienced investor looking for your next big opportunity.

J.P. Matychak:

Hello everyone and welcome to another episode of the Insights@Questrom Podcast. I'm JP Matychak. My co-host, Shannon Light, is on another assignment today, so I am flying solo for this important conversation about the real estate market. The real estate market took center stage in the national news due to a recent settlement reached by the National Association of Realtors to end litigation of claims brought on behalf of home sellers related to broker commissions. The National Association of Realtors to end litigation of claims brought on behalf of home sellers related to broker commissions. The National Association of Realtors, which hasn't admitted any wrongdoing in the settlement, will pay $418 million over four years to compensate home sellers. And under the terms of the settlement, the multiple listing services, or the MLS governed by the association are no longer allowed to offer a commission to a buyer's agent. This could potentially have wide-ranging implications on the real estate business. But this settlement wasn't the only news impacting the real estate market.

J.P. Matychak:

Last week, the Fed announced that they would hold interest rates at current levels for the time being, although they do still expect to make three rate reductions this year. For many homebuyers and sellers for that matter hoping for some relief, they are left with the tough decision to make a move now or hold out for later this year. Here to talk about both of these topics is Keith Munsell, master Lecturer in Strategy and Innovation at Boston University Questrom School of Business. Keith is a real estate executive with over 45 years of experience in real estate management, development, finance and construction. He's an accomplished housing manager, turnaround specialist, entrepreneur, author and teacher, holding numerous licenses and awards. Keith, thanks for joining me.

Keith Munsell:

Thank you for having me.

J.P. Matychak:

So let's start first with the news that came out last week related to the settlement agreement between the NAR and home sellers across the country. So the lawsuit claimed that the policy surrounding broker commissions allowed for inflated fees, and some of the claims even stated that may have violated antitrust laws. So can you talk a little bit about how seller and buyer commissions have and currently work under the current model of home buying.

Keith Munsell:

Certainly. I'd like to start that by saying that typically in the purchase and sale of a home you have a listing agent or a listing broker and a selling broker. Now, typically the listing broker negotiates the contract between the seller and the owner and the proposed terms, conditions under which the seller will accept an offer, and in fact those items are negotiable, like what fixtures may go with it, does the TV come with it, do the andirons in the fireplace, et cetera, hand irons in the fireplace, et cetera. The listing broker currently gets paid to market the property to clients and peers by advertising in newspapers, on the web, creating brochures, staging the home, conducting open houses for both clients and competitors, or other brokers install yard signs and the like, for which they typically charge a commission, and that commission is negotiated.

Keith Munsell:

And what was unclear in the settlement is some of the verbiage appeared that brokers fix the commissions at either 5% or 6% and that actually is not accurate. They are always negotiable, though industry standards might dictate that it was 5% or 6%, but you could always negotiate that. On the other side of the table we have the buyer's broker and the buyer's broker shows their prospective clients the property and helps negotiate the purchase and sale agreement and any additional conditions. Typically, the way this worked is under the listing contract, that's the contract between the listing broker and the seller. They would figure out what the fee would be Once that property sold the selling broker or the listing broker same thing sold the selling broker or the listing broker, same thing would split that commission with the buyer's broker. Today, according to that suit which, by the way, still has to be ratified by a judge that is no longer allowed, so that the buyer will have to hire their own agent will have to hire their own agent.

J.P. Matychak:

So what might this look like now? You laid it out very clearly as how this worked. You had the standard commission, you'd split it and whatnot. Now, if they can't do that, what might this look like For, say, the buyer side, who typically would have had those fees kind of wrapped into their financing or whatnot at closing? What could this look like?

Keith Munsell:

Well, you've made a very good point, because historically that fee is baked into the price of the property and, if I can take your listeners just through a small little math problem, Perfect, I did. I think you'll find that, in fact, this settlement is actually injurious to the buyer as opposed to helping the buyer. I think the unintended consequences are that this will actually cost the buyer more money.

J.P. Matychak:

Interesting Okay.

Keith Munsell:

So let's take a look. Let's pretend that the math is relatively easy. But let's pretend that the sale price is $800,000 and the broker charges, under today's market, a 5% commission. So that's $40,000. Typically that would be split somewhere along the lines of 50-50, 50% going to the listing broker, 50% going to the buyer's broker. Now that would be $20,000 for each broker. Now when I say broker, I also mean brokerage firm. So typically that broker would then split their commission with the firm. So maybe it's split again 50-50, which means that the selling broker would get $10,000 to put in their pocket and the buyer's broker would get $10,000 to put in their pocket. Now one of the things that you mentioned which I think we need to go back to for a second is that that $800,000 price has baked into that price the commission Today that is going to be extracted from that price. So let's take a look and extract half of that. So let us say, instead of now selling the house for $800,000, we're going to subtract out the 20,000 that would be the buyer's broker's commission. So now we have that house on the market for 780. Two and a half percent of that, the listing broker's commission, would therefore be 19 and a half thousand dollars. Again, split 50-50 with the house or their employer. So really what's happening on the listing side of the equation is the broker might be getting $250 less. Instead of putting $10,000 in their pocket, they're going to put $97.50. Not a huge difference.

Keith Munsell:

But let's look at the buyer's broker scenario. So if I look at the buyer's broker scenario now, the buyer is going to have to hire their own agent. So let's take a look at what a typical transaction might look like. If I look at the under today's terms. I look and say if you finance 80% of this purchase or you put down 20% equity and there are reasons for the 20% which have to do with lenders' exposure to the market If you put down 20%, that would be $160,000 under today's scenario. And let's say you have $15,000 worth of closing costs and moving expenses and alike.

Keith Munsell:

If we move over to the proposed or we'll assume the judge will go along with this in what the future will look like come the middle of July, we're going to say that 20% of that $780,000 is $156,000. So that would be your down payment. If I add the same closing cost $15,000, that means I'd come up with having to come out of pocket $171,000 instead of $175,000 today. So you'd say, well, I'm saving some money. Ah, but we haven't accounted for the buyer's broker. So what are you going to pay the buyer's broker? What are you going to pay somebody to help you find your home? If it's that same $19,500 or $20,000, then it ends up that you're going to pay something closer the $175,000 you might pay now, because that fee is no longer baked into the purchase price. And we haven't even talked about how appraisers might look at this.

J.P. Matychak:

Right.

Keith Munsell:

Because appraisers are going to look back in history and say what did similar properties sell for, given a reasonable market exposure, similar locale, no adverse effects, and they're going to look at that $800,000 price. They're not going to look at the new, maybe $780,000 price. So consequently, I don't see the prices coming down, but I see the out-of-pocket expenses by the buyer increase. I don't know if that was helpful and I don't know if there was too much math in that, and if so I apologize.

J.P. Matychak:

No, no, no. I think it's good to illustrate that because I think, when you've been around real estate enough and, as I told you before the show, I'm in the process of buying a house right now, and so I've been keeping an eye on a lot of this stuff and you, of course, do the calculus of like okay, what is my monthly fee going?

J.P. Matychak:

to be or my monthly mortgage and everything like that. But obviously a part of the calculus is like how much money do I have to bring to the table when I sign the papers, right I have to bring to the table when I sign the papers right? And it's interesting to kind of see this transition that will happen potentially of more money having to be out of pocket up front and that takes away from potentially money that you'd be putting into renovations that you might need to make or upgrades that you might want to do, because people have a budget of what they want to bring out of pocket to the table and I think this is one of those unintended consequences of that. So talk a little bit more about this sort of the antitrust part of this. And, as you said, people thought it was fixed and whatnot.

J.P. Matychak:

And clearly Things can appear fixed because a lot of the times when you see what is the commission and whatnot, it's very similar. But there's a market standard, right. You can't go out there and charge all of a sudden a 10% fee if no one else is doing that right. So it may appear as people are fixing those prices, but they're not. It's just a market standard standard. So talk a little bit more about that and how this settlement will handle that, or will it address those issues? Or is it really like that was a red herring and they're just kind of trying to appease this and we're just going to have to deal with the consequences of it?

Keith Munsell:

Well, I would take your last sentence as exactly right. We're just going to have to deal with the consequences of this. I think that there has been the appearance of a 5% or 6% commission as standard. And I think that has been pretty standard in the industry. But I think what people forget is that this is all negotiable. You know, 5% of $100,000 purchase price is probably not enough money to get brokers, listing brokers and selling brokers interested. On the other hand, if you're selling a million-dollar piece of property, 5% might be too much.

Keith Munsell:

So, I think part of it is dependent upon the value of the property. If I could digress from your question for a moment, I think one of the problems that we're going to find is that we have been under building for decades and so, consequently, if you look at the supply and demand situation, typically in typical times Typically in typical times a listing should probably be on the market for 90 to 120 days. Today, that property for sale goes under agreement typically within 30 days. I should never ask a question I don't know the answer for, but you just said you were looking for a house. How quickly did your broker indicate you had to move to secure that property?

J.P. Matychak:

So let me get a clarification. So you know we're interested. And how quickly did they say we need to get an offer in?

Keith Munsell:

Yes.

J.P. Matychak:

Oh, it was within days. I mean it hit the market and it was. We were under agreement within a week.

Keith Munsell:

That is atypical in normal times. For 20 years back in the 80s and 90s, my brother and I owned a residential I should say residential real estate sales company in Chestnut Hill part of. Newton, brookline and Boston, and I would say, during that time you might entertain offers, but they wouldn't come out for 30 or 45 days. It was never the way it is today.

Keith Munsell:

But, when you've underproduced for decades and there's very little product out there. The product is not coming down in price, even though the interest rates are high. The hope is you can buy a house now. If the interest rates come down and, as you suggested, the Fed is talking about some rate reductions over the ensuing months or years, then you can refinance that. But you need to get your foot in the door now and that is very difficult.

J.P. Matychak:

It is. And the deals that are happening right now are just crazy the amount of different contingencies that are just being waived throughout the process because of this feeling of like you have to move and you've got to move now because supply is just not there. So I want to put a pin in that, because I'm going to come back to the supply and demand, because I think there's a bigger conversation to have there on the broader market. And let's shift the conversation to the announcement by the Fed last week that they were going to hold interest rates steady for the time being. They weren't convinced, around inflation and everything like that, that they should bring them down yet, but still committed and signaled that they were planning on reducing them at least three times over the next year, and I think that people were a little surprised that they didn't take at least a marginal step toward reducing.

J.P. Matychak:

We started to come down a little bit. We were in the high sixes and then quickly rebounded right up to the low sevens. What effect is this going to have? Because I think people were waiting around. We're starting to go into the hot spring sales season. What is the impact of this going to be? Are people going to make moves or not? What do you think is going to happen?

Keith Munsell:

A simple question with a somewhat complex answer.

J.P. Matychak:

Yeah.

Keith Munsell:

So I would say a couple of things here. One is that if you're moving into a house that's already been built, that means somebody is moving out of that house and that somebody now might have to secure a mortgage at, as you suggested, a 7% rate. On the other hand, if they refinanced two years ago, three years ago, four years ago, five years ago, they are probably somewhere plus or minus 3%. Yeah, most people are not going to move from a 3% mortgage to a 7% mortgage. Hibosh, on a lot of product that, as you suggested, typically comes online in the spring, because if you have a family and you want to secure the property, you want to move over the summer, you want to put your kids in the local school system. That's not going to happen, right. I just don't see, without a lot more product out there, I don't see any slackening of pricing period.

J.P. Matychak:

And it's interesting you say that, because I know I've talked to some folks that kids have moved off to college and they're looking to downsize and we're hanging around the barbecue or whatever. And they're talking about like we can't afford to downsize and we're hanging around the barbecue or whatever. They're talking about like we can't afford to downsize. One would expect, like if I downsize, I'm going to be able to pay less, but I'm not. I'm going to pay more because during COVID, I decided to refinance my home when mortgage rates were 2% right, and so it really has created this supply shortage of housing, and so it sounds like this has all been connected for decades of new homes being built, and the combination of lack of homes being built, combined with people not selling, leaves this situation of supply.

J.P. Matychak:

And it's simple supply and demand right? I think it is. Yeah, if there's not enough supply out there, people are going to be fighting for these properties. And so what? What impact does this have long term though, on, say, the prices of these houses? Are we looking at a, a bubble of some sort in the next five, ten years, where maybe we turn around with interest rates, more supply hits the market and you know home prices coming back down. What are you thinking there?

Keith Munsell:

You know I should have been prepared for all these questions. You should have sent me all these questions.

J.P. Matychak:

You're bringing some good points up and I want to just ask that you know.

Keith Munsell:

You know. Going back to what you said, there's not enough supply. I don't see municipalities just opening up their zoning and some of them have under the new MBTA zoning requirements Yep, yep. But to get something zoned versus to get something built is totally different.

Keith Munsell:

So if you look at items like copper has gone up 60% over the last 18 months you can't get help to fix your toilet or repair your electrical system because people are busy. I think that without government interference and I don't mean interference in a bad way here, but government interference, maybe government impetus that we're going to run into this problem not only locally but nationally. I mean, we are not the only high-priced area around the country and it's just getting harder, I think, to be able to purchase a home. I want to go back for a moment to talk about the example that I mentioned. So I was looking and saying you might have to come up with somewhere between $175,000 and $190,000.

Keith Munsell:

That down payment is typically the biggest impetus for home buyers. It is not the monthly affordability but is the ability to save the down payment and through the NAR suit we have just made that more difficult, in my opinion. So interest rates let's say they come down. Where are they going to come down To 5%, pretty good rate historically speaking, but conversely, house prices are going to go up. So I don't think it's going to cost you a lot less to get into a home from a cash flow point of view. Anyway, I'm not sure I answered your question.

J.P. Matychak:

No, no, you did. I probably rambled on.

J.P. Matychak:

No no no, I think that that's exactly right. That is the piece of this that, as you said, can almost be the barrier. Sometimes it's not the monthly payment. It's okay, that's great, that's fine, we can do that. It's right now, in times where you have a little bit of inflation going on. Prices of everything are up for the most part, and have been for the last year. A lot of families the average family is living paycheck to paycheck. It's hard to put away and save for a massive outflow of cash for the purpose of buying a home, and so I think it, just like you said, this has the potential of making that even harder, and that's one of these unintended consequences.

Keith Munsell:

I totally agree with that. And then you look at what is being built, and let's just take the Boston area and you say, well, what's being built in Boston? Well, you're looking at a number of apartments, very few condos, because banks don't want to finance the condos because they're afraid that the buyers are not going to obligate themselves to a 7% mortgage. So you have some residential for rent properties going up. They're expensive. They're expensive to build and they're expensive to rent. Without naming any names, my class and I visited a local property, nice, two bedroom unit, small, you know, maybe 800 square feet. It's renting for $4,200 a month square feet. It's renting for $4,200 a month.

Keith Munsell:

Now you get a roommate, so that's $2,100 a month and you have some cable expense, electrical expense, et cetera. You've got to be making the better part of $100,000 in order to be able to afford that rental. How are you going to rent that apartment and save money for a house at the same time? I think we are in kind of a cyclone here, where I don't see us getting out without some government help and I don't see the government stepping in.

J.P. Matychak:

Wow. So a lot to think about here, and I think all eyes will be on the real estate market here in the coming months, especially during the home buying season and as the Fed continues to meet throughout the year. Keith, thank you for joining me. This was incredibly helpful. Thanks for shedding light on the real estate market. I appreciate it.

Keith Munsell:

It is my pleasure. May I make one final comment? Sure, yeah, absolutely Go ahead. So, in my opinion, the major takeaway from the NAR settlement which is where we started- this is that buyers brokers must have a contract and remember a contract requires consideration money with their clients. So the buyer's broker and the buyer have to have a contract. Where before we said that was baked in. Yeah, and the clients, unlike the past, where the commission is paid, is going to be the unintended consequence of actually raising the price of buying a home.

J.P. Matychak:

Wow.

Keith Munsell:

Keith, thank you, I appreciate it, my pleasure, jp.

J.P. Matychak:

JP. Thanks, call me up again next time. Yeah, well, that'll wrap things up for this episode of the insights at Questrom podcast. I'd like to thank our guest again, keith Munsell, master lecturer of strategy and innovation at Boston University, Questrom School of Business, remember. For additional information on this show, our previous shows as well as additional insights from Questrom faculty on the world of business, visit insight s. bu. edu. On behalf of the entire Insights at Questrom team, I'm JP Matychak. So long.