How will first-time buyers fare if sellers can’t offer buyer’s agent compensation?

As housing workers adjust to practice changes that went into effect in August, and the industry awaits final approval of the NAR settlement from the court in November, questions continue about the sellers’ offers.

A program known as affiliate compensation allows sellers to choose to pay the costs of buyers’ agents. By making a compensation offer, sellers communicate to consumers, as a marketing ploy, that their operating costs can be reduced.

The settlement requires listing agents to stop making compensation offers to buyer agents on Multiple Listing Services (MLSs). It clearly allows such offers to be made outside the MLS, however. But lawyers and advocates who wish to go further than a settlement have indicated that they want to see these promises stopped altogether. They do this without addressing the negative impact of such changes on first-time buyers, veterans, and other cash-strapped buyers.

If sellers can’t inform buyers about offers outside of the MLS, many buyers won’t have the information they need to decide whether a home purchase is financially feasible. For buyers who are trading or can rely on family wealth to make up the difference, covering their agent’s costs shouldn’t pose much of a problem. But for first-time buyers and other investors—those who aren’t relying on real estate proceeds, who may be using a 100% subsidized VA loan, their agents may have to apply for assistance to raise enough money to close—know up front about the seller’s contribution to the agent’s fees. their may be important.

Activists focused solely on the concerns of real estate agents—who have gained billions in equity from their properties in recent years—now creating the rationale behind why co-op compensation benefits for poor buyers are being eliminated. None of these arguments hold water.

Advocates argue that buyers who want help from a seller can ask for approval on their purchase. But such a buyer who competes with multiple offers is likely to see his offer fall to the bottom of the pile. In a bidding war, stock buyers and investors will win, and early buyers will lose.

Some suggest that buyers can overcome this obstacle by raising their offer price to win approval for the seller to get the same price. But this trend will have an inflationary effect on home prices. In fact, if buyers widely use this strategy, it will “bake” the price of commissions when they were not baked before. This strategy will only work if the home appraises at a higher value, of course—leaving the buyer with more money for the loan and monthly payment.

Advocates also argued that buyers would benefit from “reduced housing prices.” But housing economics shows that prices are set by supply and demand, not by money. High house prices are caused by a housing shortage. Lowering commissions will not cause sellers to lower their prices. They will continue to charge the highest the market will bear, and leave consumers with additional upfront costs.

The so-called “luxury solution” presented by these lobbyists—funding real estate commissions—also leaves buyers in a worse position. Assuming that financial regulators will spend the years necessary to make changes, the commission cannot be added to the bill unless the home appraises at a higher value. If the home doesn’t measure up, the financing can be a different personal loan, which increases the borrower’s income ratio, which can make them less creditworthy or increase the cost of borrowing. “Funding the money” leaves the consumer with a higher interest rate. These “solutions” do not leave consumers better off.

Lawyers who present questionable arguments help create a two-tiered system of sales services. Sophisticated, lucky buyers will do well, but those without a lot of cash may be forced to go unrepresented, pay for mistakes after the purchase, make higher monthly payments, or quit the market altogether.

What does that mean in the long run? If we close off access to real estate services for first-time and entry-level buyers, if investors snap up inventory and turn it into rentals, what will our industry look like in a decade or two? These are questions that promoters who want to develop the real estate industry cannot answer. But we have to, if we want to keep the American dream of home ownership within reach of tomorrow’s buyers.

Alexia Smokler is the Director of Fair Housing Policy and Programs National Association of Realtors.

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