Chris Perry Column: We're Not In Kansas Anymore

I don’t know if you felt it, but I did. I am not talking about the backlash associated with the Town Meeting vote on short-term rentals or a growing concern about summer rentals being down. I am talking about a nationwide jolt to the real estate community whose initial shock waves are starting to hit Nantucket’s shores.

From coast to coast, the ripple effect has already had an impact with the brunt of the explosion expected by mid-summer. With Memorial Day Weekend kicking off Nantucket’s traditional summer sales period, what caused this eruption that could impact local sales and rentals?

A record-setting, multi-billion dollar antitrust ruling against the National Association of Realtors (NAR) late last year led to a $418 million settlement announced in March. Assuming the federal judge signs off on this agreement, the settlement is expected to take effect in August.

In a nutshell, the suit brought on by a group of home sellers accused the NAR of setting unlawful real estate agent commissions that ultimately led to inflated home prices. Additionally, it led buyers’ brokers to recommend more expensive homes to their clients resulting in higher commissions. Once the deal is signed off, among other things, it would eliminate the traditional practice of charging a 6 percent commission and home buyers would now be responsible for their own agent’s compensation.

Most experts believe that the first shoe to drop will be brokers’ commission rates since it will now be more competitive and sellers will be able to shop around for better rates. In fact, it is anticipated that some real estate companies and individual agents will now advertise their rates with the potential of buyers’ brokers charging a flat fee. With the average real estate commission across the U.S. hovering around 5.5%, a move downward toward the international real estate average of roughly 2 percent is not out of the question.

For the seller, this is music to their ears. They would no longer be responsible for a significant chunk of money associated with a traditional 6 percent commission that is then generally split equally between buyers’ and sellers’ brokers.

For the buyer, especially a local, first-time home buyer, the verdict is still out as the responsibility of paying a portion of the total commission will now shift toward their wallets.

With that in mind, how will this landmark settlement affect the island’s real estate market and those who are hired to sell property on Nantucket?

Interestingly enough, several of the local agents that I spoke with took a laissez-faire approach to the anti-trust suit and the $418 million settlement as if buyers, sellers, Nantucket brokers and their listings are immune to nationwide forces. Others, like Penny Dey principal owner of Atlantic East, are taking a more proactive approach. In fact, Dey recently conferenced with Catherine Taylor who is part of the legal counsel team for the Massachusetts Association of Realtors.

“I think it is important for all the real estate agents on Nantucket to educate themselves on this settlement and the potential impact on Nantucket. With the information we have, it appears that compensation for the buyer’s agent will likely come from the proceeds of the sale”, summed up Dey.

While the general consensus among local brokers seems to be “too early to tell”, I believe changes are coming because the “commission door” is about to be kicked open.

According to Lei Wedge who is a professor in investments and real estate at the University of South Florida, “This agreement will usher in new standards giving all parties more transparency and negotiating power which could eventually lead to lower transaction fees.”

While some of Nantucket’s high-profile brokers with a successful track might refuse to budge, the increase in competition between agents could drive commission rates down. Whether it is a single broker or an entire local firm, someone will cave and others will follow.

Granted, it has always been possible to negotiate commissions on Nantucket, and given the island’s high real estate prices, commission rates have already been below 6 percent for some time. However, sellers generally do not have much leverage unless they are selling a top-end home. Moving forward, all sellers will have additional leverage to negotiate discounted commission rates.

Ultimately, savvy Nantucket sellers and sophisticated vacation home buyers on Nantucket are not going to pass on the opportunity to save some money. In fact, there have been predictions that some buyers won’t use an agent at all and simply schedule showings directly with the sellers.

No matter how you slice it, it appears the Nantucket commission pie just got smaller. Moreover, most local experts are predicting a lower figure for the total gross sales in 2024 vs 2023. With the potential of lower commission rates added to the mix, it stands to reason that the total amount of commission dollars being paid out is going to take a hit.

In a dog-eat-dog real estate world out here, brokers will have to sell more properties or watch their total annual compensation shrink as commissions get squeezed along with the number of sales going to record.

The potential for that type of cash flow interruption will not sit well with the power brokers and their bosses on Nantucket. In turn, I anticipate agents will work feverishly to protect what listings they do have under contract to sell. However, increased competition will inevitably lead to brokers intensifying their efforts to secure more listings even if they are presently tied to rival offices.

According to Norm Miller, a professor at the U. of San Diego, “This settlement could lead to the mass exodus of brokers from the real estate industry. Potentially, 50 percent of the roughly 2 million agents nationwide could quit as the new rules become unworkable for many brokers….”

A forecast by Keefe Brunette & Woods projected that changes to the commission structure “could cause 60 to 80 percent of U.S. realtors to leave the profession…”

Panel Jia Barwick and Parag Pathak predicted in the Rand Journal of Economics that “a 50 percent reduction in commissions would result in 40 percent fewer agents…”

While I do not anticipate the same level of carnage, I do see the possibility of a reduction in the number of agents on Nantucket and a “new norm” coming to the island. Privately, even some of the most loyal brokers on-island have admitted that there needs to be a “culling of the herd.” This anti-trust settlement has the potential to bring that movement to bear even if new compensation models are introduced to the market.

Additionally, for first-time local home buyers, anxiety is building. If the buyer’s portion of the commission is not negotiated into the sale price, the local first-time home buyer will be required to pay that expense upfront. With entry-level homes on Nantucket hovering around $2 million and buyers’ commissions anticipated to be around 2 percent, that’s an additional $40,000 at closing for the buyer in addition to the down payment, closing costs, attorney’s fees and other charges or fees such as insurance or homeowner’s dues.

Despite many local brokers' efforts to reassure the community that it’s “no big deal”, not everyone is drinking the Kool-Aide. Since Nantucket real estate is a unique market heavily influenced by a tightly controlled broker’s network, it might take some time before everyone gets comfortable with the effects of the anti-trust settlement. Even though many local brokers are not members of NAR, Nantucket is not Kansas anymore; and as Bob Dylan wrote, “The times, they are a-changin’.”

Monitoring the Nantucket real estate market is a full-time hobby for many on-island. In addition to factoring in the rumors, backroom deals, and the utterly unimaginable prices, there are a number of local indicators one can track to see if this anti-trust agreement has had an impact on the island’s real estate market.

For example, we can check to see if another $30 million whopper like the one on Ocean Avenue in ‘Sconset has sold.

We can review Land Bank revenues for the week.

Another anecdotal indicator might be whether or not real estate offices continue with their generous financial commitments to local charitable organizations.

For me, the best “scientific evidence” to follow is to simply keep an eye on the number of leased Range Rovers that are anchored throughout the day on Main Street that never get a ticket.

If that fleet is reduced and you can find a parking space near the Hub this summer; then you know, commission rates have come down and the herd has been thinned.