NAR real estate commission lawsuit drama continues

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The lawsuit settled earlier this year against the largest real estate brokers in the country and the National Association of Realtors has completely changed the way residential real estate is purchased. Is this good? Bad? Well, it is not yet really decided and its getting more confusing daily.

Before we go into that, let's take a look at the market and see where we're at.

I always say there's two parts to an economy and this is actually just standard economic theory. There's demand and supply. Demand is measured probably or at least driven by interest rates in the housing market and supply is how many houses are for sale.

Let's take a look at the latest demand, driven by mortgage rates. Last week they continued their march up, increasing by 0.1%, closing over 7% for the 1st time since July.

It now seems clear that our government has been lying about both the jobs numbers and the banking statistics to juice the numbers for the election, but now with only a few weeks to go the reality is that rates are back to rates around 6.5% and are high enough to start reducing home purchases.

Now, on the supply side, inventory continues to drop while staying near to historic lows.

The inventory, while still about 12% higher than last year, and is dramatically below the historic pre-COVID averages by 30-40%. As long as inventory remains at these levels, housing prices cannot crash or decline significantly absent some dramatic change to the economy. All that said, these numbers may change in reaction to the jump in mortgage rates these past 3 weeks.

Now, real estate is a local market here in Los Angeles, my primary market.

Our overall market rating increased slightly from a 36 back to a 37 as it was a few weeks ago. I am keeping a close eye on inventory as the significant increase in mortgage rates still has not had an effect on inventory, but it inevitably will.

This week, we take a look at the mess that the NAR / real estate agency lawsuit and proposed settlement has created. As I have said before, this is 1 judge, 1 jury, in 1 city, with the power of the US Department of Justice as a knife to the throat of the real estate industry extracting as much money as they can to destroy the entrepreneurial spirit of real estate.

One of the stated goals is to reduce the commissions of real estate agents, as people who do not understand the business often compare our system to other countries where real estate is less affordable than traditionally in the US. Politically, it is always easy for bureaucrats to blame anyone making money, but the reality is the business of real estate is touch, and most real estate agents do not make much. The average grosses $89,000 a year, but that is before license fees, MLS fees, and all the other fees of running a business, including typically paying a brokerage a portion of the commission.

Yet, the real estate news industry has breathlessly reported their hope that the settlement will reduce commissions, jumping on any statistic that supports that. I have reported a few of these false reports in the past, but one thing to keep in mind is that ALL businesses, or at least those other than technology monopolies like Google and Facebook, face competitive pressures. I noticed this email last week from the CEO of Poshmark, an online service for high end products, noting they were having to reduce their fees to remain competitive.

Since real estate transactions are down by 30% over the past few years, and the industry is basically in what would be termed a depression, it is not surprising that agents would feel incredible pressure to reduce commissions, yet this lawsuit does not seem to have that desired effect. Too bad for the bad guys!

One of the results of the lawsuit is that the national brands are crippled, spending money on wasteful legal fees rather than investing in their business. As a result, agents are unable to change companies to find new services for their customers. Housing Wire reports the lowest rate of changing since 2016.

Seeking to take advantage of the chaos, the CEO of Compass is attempting to replace the Multiple Listing Service, or MLS, which is a cooperation of multiple agencies, with its own proprietary equivalent.

He is saying with a straight face that sellers want homes to be only marketing to Compass agents and not to the market as a whole. Even he does not have the audacity to suggest that's better for sellers, to have such limited exposure, but he is hoping that the investment analysts he was speaking to will realize its a way for his company Compass to trick sellers into only working with his company even if it means paying higher commissions and/or netting less proceeds for their sale. This is what aspiring monopolists look like, and how companies become worth over $3 billion while paying ZERO income taxes and seeking to disrupt competitors that have been paying those pesky taxes.

The professor of law that published the most comprehensive review of the proposed settlement has now filed an objection, declaring that the settlement ’is the worst of all possible worlds.’

Her conclusion is something I have said several times, the settlement "... is an example of something concocted by lawyers without a full appreciation of how this would play out in the real world.”

It would seem to me this "settlement" also would face new scrutiny if the election changes the Presidency, as the Trump Department of Justice had dropped its prosecution of real estate companies but the Biden administration picked it up almost immediately.

In other news....

I have previously reported how UCLA has basically stolen land dedicated to US Veterans and was recently stopped by a federal court judge. Now the judge is ordering that while everyone continues their stalling tactics that the VA start building housing on the parking lot portion immediately!

It is funny how our city allows drug-infested homeless encampments on our streets and provides housing for illegal immigrants but is so slow to provide housing for our veterans on land that is owned by the VA and is designed for veteran housing.

A tool used to provide financial privacy is being removed, as the Corporate Transparency Act (CTA) will now make it required to disclose ownership interests in corporations. (Hat tip Bornstein Law).

The positive here is that it will prevent criminals from hiding their interest, but there thousands of real estate investors that created LLCs for the sole purpose of hiding their identity and maintaining privacy. They will still at the time of purchase as the information is not required for 30 days from filing, but most real estate investors should consider corporations for liability and tax purposes, as the privacy value has been severely diminished.

In more bad news in Los Angeles, the city has moved to prohibit landlords from evicting tenants in order to remodel units.

Just in case you were hoping there was some voice of sanity in Los Angeles, the vote was 11-0 to start the process of drafting the legislation. My pathetic councilmember Katy Yaroslavsky said “My policy will ensure that a tenant has the ability to maintain tenancy, keep paying rent, and stay in their apartments,” but she does not anticipate that in a building with multiple units this means the entire building can never be improved as there is always one tenant that wants to stay. This explains why the rental units in Los Angeles are so limited in number, so poorly maintained, and why rents are so expensive. Very nice campaign slogans make terrible economic policy, and letting career political hacks like Katy, who basically got the job on the coattails of her father, are a perfect example.

Good news in real estate, at least for those who own real estate, values increased by 4.2% year over year as reported in August.

Real estate continues to be a great hedge against inflation, a great tool to defer taxes, and a great way to leverage your investment returns.

So, what should YOU do about buying or selling real estate in today's market?

If you are looking to buy a home and live there for a while, real estate has always been a great long-term builder of wealth and there is nothing to suggest that is changing if you can afford the home.

If you want to move or downsize, it's still a great market to sell, but a bit more challenging than in the last few years.

Finally, if you can find a property that will give you cash flow, this is a great time to get solid cash flow and enjoy the tax benefits of real estate.

How can I help you? Call, text, or email me.

Bill

Bill Gross

Broker Associate, BRE 01022275

Certified Probate Expert

Direct: 310-210-0008 , [email protected]