The Changing Landscape of Real Estate Transactions – Part Two

The NAR settlement still has not been fully finalized but here is what we know for certain. Buyer’s agent compensation is no longer going to be advertised in the Regional MLS for Portland as of August 17th. The Oregon House of Representatives passed legislation that covers a lot of the new rules relating to real estate but they will not come into effect until January 1st, 2025. It doesn’t really matter because all the brokerages and MLS in Oregon, in cooperation with the Department of Justice, are acting on August 17th based on the terms of the settlement of the Sitzer-Burnett trial. As of August 17th, buyer’s agents will be required to have a signed agreement before showing any listing, even if the person who wants to see it isn’t interested in buying it. However, open houses have been exempted from this requirement. Buyers will still be able to tour open houses without having any agreement with the agent hosting the open house or having their agent attend. For all other showings, there are going to be fines handed out to agents who show properties without having some form of written agreement with the buyer before opening the door. There is a digital way of tracking this since access is given via digital lockboxes that use Bluetooth. The agreement can be any length and technically have any terms that the parties agree to as long as there is some form of agreement in place.

Ultimately for a buyer’s agent to be able to negotiate their own commission to be paid by a seller, a buyer broker agreement will have to be in place before the offer is written. If the buyer has agreed that an agent should be compensated for their work, regardless of whether they or the seller are paying them, then the agent at that point can negotiate for their compensation to be paid by the seller while still looking out for their client’s best interests. The reasoning is the buyer would have to pay for representation out of pocket if the seller doesn’t agree to pay for it and therefore the agent is still acting in their client’s interests in asking for payment at closing as a seller concession. Going forward, it will be negotiated similar to the way buyers ask for sellers to pay for their closing costs. In fact, it’s now covered by the same newly designed form. Prior to August 17th, buyer’s agent compensation will remain publicly advertised, so buying sooner than later could be in many buyer’s best interests. If there is more transparency about what a seller is willing to pay for, that is a clear benefit to the consumer.

Realtors don’t want to see these changes take effect for various reasons. The new rules could be a source of disputes between agents and their clients depending on how honest buyers are about having a buyer representation agreement in place. Some buyers are probably going to get sued if they try working with multiple buyer’s agents and not disclosing it. The one positive aspect of having to hire a buyer’s agent in writing is it will force consumers to do more research and perhaps more business will come to experienced realtors. This could result in more home transactions going smoother since a lot of issues arise from inexperienced agents making mistakes. In reality, the vast majority of buyer’s agents were already asking for buyer’s representation agreements to be signed in June, well before August 17th. This is because not having an agreement can affect our ability to collect payment, even if the seller is offering compensation. During the transition to mandatory buyer broker agreements in Washington, some agents had their commissions returned to the seller after the transaction closed due to the lack of a pre-signed buyer broker agreement before the offer was submitted. The only way there is guaranteed enforceability to get a commission is if compensation is clearly defined in writing before an offer is written. These types of discussions have been happening with sellers about listing their homes for as long as the MLS has existed. Now buyers will have to go through a similar process in interviewing and hiring representation.

There has been some discussion about home prices falling as a result of these changes. I don’t see that happening and here is why. Fundamentally, prices are dictated by supply and demand. As per the graph below, a minimum of 25.2 million homes were constructed in the United States each decade from 1970-2010. After the Great Recession in 2009, the rate of home building in the United States fell off a cliff. Only 5.8 million homes were built in the US from 2010-2019. There were 1.5 million housing units built in 2023 which is 40% below the levels of building pre-2008. At the same time, we have a population bubble who are currently at home buying age. There is the largest number of people aged between 25-40 in the history of the United States right now. There has never been more people of home buying age in history.

We will be playing catch up for several more years based on the housing shortage. It is commonly estimated demand for real estate exceeds the supply of homes in the United States by between 3-5 million housing units. Based on current rates of home building, this could be rectified by builders within 2-3 years in theory. The issue is Gen Z continue to get older so there are more future buyers that need to be taken into account. This would be especially true if mortgage rates were to fall. There was an estimate that was widely publicized last year claiming that 4-5 million buyers would enter the housing market for every 1% drop in mortgage rates. This was a gross overestimation given 4.8 million homes sold in the entire United States in 2023. Back when rates were under 3%, such as in 2021, almost 7 million homes sold that year. That being said, if we were to see the 30 year fixed rate fall to 4% sometime in the future, maybe we would see an additional 4 million buyers enter the market. Either way, the supply issue in housing is not going away anytime soon.

Since 2022, some have argued that elevated mortgage rates would cause home prices to dramatically fall based on decreased affordability. That hasn’t happened yet and the 30 year fixed rate has been over 6% for 24 months. While we have been seeing large seasonal swings in home prices in Greater Portland, that was already happening dating back to 2021. Given the vast majority of mortgages are locked in at fixed rates, having higher rates actually locks away a substantial amount of the inventory of homes that would have been available. If you own a home with a mortgage and are paying a 3% rate, unless you absolutely need to move for some reason you are likely not selling. The main reasons people sell in the current environment are because of a new job, marriage, retirement, divorce, death, or some change in family dynamics. Homeowners improving their properties instead of moving has led to a boom in the construction industry as kitchen remodels, bathroom remodels, new decks and patio spaces are in extremely high demand. Also, many people who purchase a house in the current environment keep their previous home as an investment. The mortgage payment of many potential sellers is usually lower than the amount of rent their property can generate. The price of renting has also risen substantially over the last few years. Primary residences being converted into investment properties has further reduced the supply of listings that would have otherwise hit the market.

The new rules may reinforce the perception amongst some first-time buyers that they cannot afford to buy homes. This kind of thinking has permeated popular culture for some time as the Dave Ramsays of the world push buyers to think they need to have a 20% down payment to buy any property. That math doesn’t work when there is a housing shortage. This January, the average home price in the Portland Metro was $564,600. As of May, it had jumped to $629,000. Someone would have had to save $16,100 per month to even keep pace with the amount of equity they would have earned over the last 4 months from already owning a house. We are talking tens of thousands of dollars per year in opportunity costs when mortgage insurance is only approximately $100/month if you have good credit. The level of concern prospective buyers attribute to paying mortgage insurance simply doesn’t make sense. Buying a home with 5%, 10%, or 15% down is absolutely fine. The idea is to get a foothold so you can participate in home price appreciation and not lose out on getting a home in the first place.

I think the importance of having a qualified buyer’s agent represent you in perhaps the largest transaction of your life has been heavily covered. If you would like to read more about the pitfalls during home buying that you should look out for, please refer to the link to my first article on the changing landscape of real estate transactions. That being said, I will share some statistics that my team put up in the second quarter. I submitted 11 written offers on behalf of 9 groups of buyers over the last 3 months. 10 out of 11 of the offers were accepted! The other agent on my team, Barbara Williams, managed to secure 4 properties on only 5 written offers as well. So as a team, we secured 14 of the 16 properties our clients targeted in the second quarter.

The reason I am sharing our team’s statistics with you is there probably wasn’t another two person team that put up those kind of numbers in Portland last quarter. We won almost every bidding war we participated in. Also, we were able to negotiate $200,000 in seller paid concessions for our clients, mostly during one on one negotiations with sellers or after inspections. We also sold a couple listings at record valuations. Basically, almost everything went right for our clients these last few months. However, we are only as good as our last transaction. We are actively looking for more people to help. If you know anyone thinking of making a move, please reach out to me or send them my contact information. Even if I can’t directly help, I can probably point them in the right direction.