Mica Dillard, a single mother of three, recently closed on her first home. As a first-time homebuyer, she was not familiar with the process and leaned heavily on her real estate agent, Pierre Douglas of Keller Williams Realty, for guidance.
Like many first-time homebuyers, Dillard didn’t have an adequate amount of up-front capital to pay the down payment. Douglas was familiar with a number of programs that existed in their community and sought out a lender who provided her with a state-funded grant, as well as two additional grants available in her neighborhood.
He educated her on the process, negotiated with the seller and connected her with the resources needed to complete the transaction. As a result of Douglas’ advocacy, relationships and representation, Dillard was able to get all of her down payment and closing costs covered, resulting in a lower-than-expected mortgage payment for her.
This story is familiar for many buyers and for many people of color who have, for generations, lagged behind in homeownership rates. The buyer’s agent plays a significant role in first-time homebuyers attaining homeownership, providing education, resources and much-needed guidance, especially in cases where no one in their previous generations has yet reaped the benefits of homeownership.
The Sitzer | Burnett commission case has the potential to reshape the dynamics of agent commissions and buyer representation, which could have a ripple effect on various aspects of the real estate industry. While discussions often focus on the financial implications for real estate professionals, what often goes unnoticed is its potential impact on fair housing, especially for minority homebuyers in pursuit of homeownership.
Let’s dissect how changes in commission structures may impact representation and affordability, exacerbating existing disparities in the housing market.
Homeownership disparities in the US
Homeownership has consistently been proven as the most effective way to build generational wealth. According to a 2020 Federal Reserve study, homeowners in the U.S. have a net worth 40 times that of renters. However, racial differences in household wealth are some of the most visible and impactful manifestations of racial inequality in the United States.
Even before the COVID-19 pandemic, white households had eight times as much wealth as Black households in the U.S. In 2022, the median wealth among white families was $285,000, $61,600 for Hispanic households and $44,900 for Black households. Most of the wealth disparities are a direct result of disparities in homeownership.
The homeownership gap refers to the differences between homeownership rates by racial group. According to the Federal Reserve Board, in 2022 the Black homeownership rate was 45 percent, while the white homeownership rate was 74 percent. The gap in the homeownership rate between Black families and white families in the U.S. is bigger today than it was when it was illegal to refuse to sell someone a home because of the color of their skin.
A ‘rigged’ system
The Sitzer | Burnett trial recently concluded with the jury ruling in favor of the plaintiffs. In the aftermath of the trial, counsel for the plaintiffs claimed on CNBC that homeowners were victims of a “rigged system.” The term “rigged system” is not entirely inaccurate, but it is entirely incorrect when applied in this context.
The historical discrimination ingrained in housing policies at federal, state and local levels has created significant disparities. In 1934, the federal government began backing and insuring home mortgage loans, creating FHA and VA loans to reduce the down payment people needed to buy a home and increase the opportunities for homeownership.
To reduce perceived risk, the government adopted loan underwriting standards, publishing those standards in the FHA Underwriting Manual. One of the key elements was segregation of people by race and ethnicity. This furthered the segregation efforts by refusing to insure mortgages in and near African-American neighborhoods — a policy known as “redlining.”
At the same time, the FHA was subsidizing builders who were mass-producing entire subdivisions for whites — actively promoting racially restrictive covenants with the requirement that none of the homes be sold to African-Americans.
Although deed restrictions were declared unenforceable by the U.S. Supreme Court in 1948 (Shelley v. Kraemer) the practices persisted through the 50s and 60s. They were later made illegal by the Fair Housing Act in 1968, however, the Fair Housing Act was not enforced by HUD until 1988.
The damage done by the many decades of redlining, deed restriction and other discriminatory practices can be compared to the impact of compounding interest and have resulted in today’s current homeownership gap. A “rigged” system? Indeed, it was. Many Americans have been a victim of a “rigged” system for centuries, but not in the context of buyer representation.
Financial challenges and housing affordability concerns
A recent study conducted by the Urban Institute found that 68 percent of renters identify saving for a down payment as the greatest barrier to homeownership. Traditional mortgages typically require a down payment of at least 3 percent up to 20 percent of the home’s purchase price. Saving a substantial amount of money can be difficult for those just entering the housing market.
According to the Q2 2023 NAR Housing Affordability Index, homebuyers need $98,429 to qualify for a home loan. The problem is that the median family income sits around $91,270. Any increase in transaction costs or fees, as a result of changes in commission structures, may exacerbate existing financial challenges.
Buyer’s agent commissions: A barrier for minority homebuyers
The recent commission lawsuit alleged that the National Association of Realtors and several large brokerages had artificially conspired to inflate the commissions paid to real estate agents. Specifically, the suit alleged that homesellers were required to pay commissions to the buyer’s agent, which sellers claimed forced them to pay excessive fees to the agents.
The truth is that the buyer’s agent compensation is negotiable. In Dillard and Douglas’ case, Dillard signed a buyer representation agreement that indicated she would be responsible for paying the buyer broker commission unless the commission was received by the seller’s agent, which it was.
But what if it hadn’t been? Would Dillard have been able to pay for her representation out of pocket when the down payment was already a barrier?
Homeownership is already a considerable financial undertaking. If sellers are prohibited or deterred from paying a buyer’s broker commission, it could cause additional barriers and exacerbate existing disparities.
For Black or Hispanic individuals, whose median incomes are notably lower than their white counterparts, the prospect of increasing transaction costs creates an even more challenging obstacle, making it harder for them to navigate the already intricate and costly process of purchasing a home and, in some cases, causing them to delay making a purchase.
According to the Federal Reserve, in the United States, the average Black and Hispanic or Latino households earn about half as much as the average white households. In 2021, households whose head was classified as Asian or White had median incomes that were higher than the national median, while households headed by people classified as Black or Hispanic had median incomes that were lower than the national median.
The median household income for Asian families was $101,418, for white families it was $77,999, for Hispanic families $57,981, and only $48,297 for Black families.
Access to information and representation
As discussions around the Sitzer | Burnett commission case unfold, it is important to consider its potential ramifications on buyers’ access to information and representation.
As demonstrated by the story of Dillard and Douglas, the role of buyer’s agents in the real estate transaction process is crucial as they serve as advocates for homebuyers, providing representation and guidance throughout the complex journey of purchasing a home.
Any changes to commission structures may influence the level of service and attention buyers receive. If these changes reduce agent resources or incentives to work with certain demographics, it could limit access to crucial information and representation for minority homebuyers, hindering their ability to make informed decisions.
The additional expense of buyer representation may cause buyers to forego buyer representation altogether. When a buyer is unrepresented in a transaction, the listing agent may be the only licensed party in the transaction and thus solely represent the seller. The inability to pay for representation puts the buyer at a severe disadvantage.
The buyer’s agent protects the buyer’s interest throughout the transaction, ensuring that the contract terms favor the buyer. They negotiate the purchase price, contingencies and other terms on behalf of the buyer. Buyer’s agents provide valuable guidance to ensure clients understand and comply with all legal requirements and inform them about market conditions, pricing trends and potential challenges.
This empowers buyers to make informed decisions. Having buyer representation is advantageous for buyers.
Sadly, discrimination in housing persists. According to the 2022 NAR Snapshot of Race and Home Buying in America report, 50 percent of Hispanic/Latino homebuyers, 48 percent of Asian homebuyers and 46 percent of Black homebuyers state they experienced steering in their homebuying process. Steering is the practice of influencing a buyer’s choice of communities based upon one of the protected characteristics under the Fair Housing Act.
Working with real estate agents who will properly represent buyers regardless of race, location or compensation structures is critical to the pool of homes buyers view and also to buyer satisfaction.
Focus on fair housing
The Sitzer | Burnett commission case is not just about changes in agent commissions; it is about the broader implications for the accessibility of homeownership, especially for minority communities. As the real estate industry grapples with these potential shifts, it is crucial to maintain a focus on preserving fair housing principles and ensuring that any changes do not inadvertently widen existing disparities.
Proactive measures, such as ensuring equitable access to information, advocating for fair representation, and closely monitoring affordability concerns, are essential in mitigating the potential disproportionate impact on minority homebuyers. A thoughtful and inclusive approach to these discussions is essential to safeguarding the dream of homeownership for all.
As the head of inclusion and belonging for Keller Williams Realty International, Julia Lashay Israel advises, trains and coaches leaders, team members and agents to recognize and address diversity, equity and inclusion opportunities and challenges across the organization.