Real Estate Commissions Are Dropping in High-End Markets—Here’s Why
Real estate commissions are seeing a notable shift, especially within the luxury market, as commission rates on high-end home sales drop to levels we haven’t seen in years. Although class-action settlements and revised National Association of Realtors (NAR) regulations are still relatively new, they’re already influencing commission structures. Here’s a closer look at what’s happening, why it matters, and how it could impact homebuyers and sellers in the Phoenix area.
Real Estate Agent Commissions: What’s Changing?
While recent changes haven’t had a sweeping effect on commission rates across all markets, high-end properties are seeing the biggest impact. According to a recent analysis by Redfin, buyer’s agent commissions dropped slightly from an average of 2.35% in March to 2.34% in October 2023, with the luxury market driving the more significant shifts.
In the wake of NAR’s August rule changes, agents are having more direct conversations with clients about commission structures and how they work. Redfin’s Chief Economist, Daryl Fairweather, shared that these changes are leading to more transparency and greater awareness of commission costs. “This has opened up more conversations and helped clients understand fees upfront,” said Fairweather.
The Luxury Market Leads in Lower Commissions
The most dramatic changes are happening at the high-end of the market, with homes listed at $1 million or more seeing commissions drop from 2.24% in August to 2.11% in October 2023. Earlier this year, these commissions sat at 2.32%. Meanwhile, homes priced under $500,000 saw a minor dip in commission rates, from 2.49% in January to 2.42% in August. Mid-range homes, priced between $500,000 and $1 million, experienced a modest decrease, from 2.34% in January to 2.24% in October.
The trend in falling commissions has been developing for years, with a long-term decrease from 2.89% in 2013, per Redfin’s research. The COVID-19 pandemic spurred a competitive housing market, where sellers offered reduced commissions due to the high buyer demand, establishing a pattern of smaller commissions for high-demand properties.
Why the High-End Market Is Feeling More Pressure
Luxury homes often have lower commission percentages due to higher overall sales prices, but recent shifts are accelerating this trend. As Daryl Fairweather explains, many sellers are realizing that commission rates are flexible and that in competitive markets, they may negotiate for the buyer to cover some or all of the commission costs. This is especially true for properties that are in high demand or face intense buyer competition. With fewer bidding wars in today’s cooling market, sellers struggling to attract buyers may even raise commission rates to draw more interest.
The Legal Landscape: NAR’s Recent Settlements
The recent wave of commission shifts began after a landmark $1.78 billion jury verdict against the NAR and several large brokers. The verdict found that certain NAR practices — such as requiring sellers to offer commissions for buyer agents — had inflated commission rates and restricted open competition. As a result, the NAR and several real estate firms settled, paying nearly $1 billion collectively and instituting new rules in August that included removing mandatory commission offers on NAR-affiliated listing platforms. Some local associations, however, remain unaffected by these changes and are not bound by the settlements.
These updates mark a significant moment in real estate history, with many industry insiders predicting further changes in commission structures. As of now, buyer-agent commissions are no longer required for listings on the Multiple Listing Services (MLS) affiliated with NAR.
Future of Real Estate Commissions in Phoenix’s Market
This shift in commission rates could continue, especially if housing demand picks up in 2024. According to Fairweather, “Commissions may face more downward pressure next year if bidding wars resume.” Sellers in highly desirable markets, like certain areas of Phoenix, may find they can negotiate buyer-paid commissions, particularly for luxury homes. However, properties struggling to attract interest may still offer higher commission incentives.
In a recent survey by The Real Brokerage Inc., 63% of agents reported that sellers are still frequently covering buyer-broker commissions. This aligns with data showing that, even post-settlement, 55% of sellers are offering commissions of 2.5% or greater. Nonetheless, a significant 30% of sellers are offering commissions below 2.5%, reflecting a shift toward more varied commission structures.
Agent Opinions and the Impact on Buyer-Seller Dynamics
As real estate agents adjust to these changes, opinions are mixed. According to Clever Real Estate, 64% of agents oppose the new commission structures, while 76% believe the updates could be challenging for first-time homebuyers. Many agents believe that without a clearer understanding of commission structures, buyers may hesitate to hire an agent. This shift could lead to a realignment in how agents are perceived, especially among new buyers who may see direct value in agents’ services once fully informed of their fees.
Interestingly, fewer people are searching for real estate agent jobs than in recent years, with job interest hitting its lowest level since 2016, per Flatworld Mortgage Solutions. This trend follows a peak in real estate job growth during the housing boom of 2021-2022, and could suggest fewer agents entering the field in response to changing commission dynamics.
Conclusion: What It Means for Phoenix Buyers and Sellers
For Phoenix’s real estate market, these developments mean that commission rates are becoming more negotiable, especially for high-end properties. With market transparency improving and commission structures adapting to meet the needs of both buyers and sellers, agents anticipate that clients will benefit from more upfront discussions around fees. However, as the housing market fluctuates, Phoenix homeowners should stay informed about commission trends and seek advice from their real estate agents about potential savings.
