The Problems are the Path: New Standards in Residential Real Estate and the FED on Interest Rates

 The National Association of Realtors nationwide settlement that takes effect August 16, 2024 will create a new standard in Residential Real Estate.

Prior to the settlement buyers and agents would link up, be shown property and made offers with the knowledge that the seller had posted on the Multiple Listing Service the seller's intention to pay the buyer's agent his commission and how much!

The new rules change dramatically.  The change may put many buyers on a defensive path of "what if".  The path is that the buyer will be required to sign a Buyer/Broker Fee Agreement that states the commission their agent/broker will have negotiated with the buyer to be paid if their agent/broker represents the buyer in a purchase. The agreement has a clause that states the agreed commission of the agreement will be offset by any fees received from the seller to the buyer's broker.

This may cause buyers to worry, what if the seller will not pay the agreed fee the buyer signed for?  The cost of buying real estate for Residential will look like Commercial Real Estate.  The old process in Commercial was that buyer pays his agent, seller pays their agent.  There were always conditions that the seller would pay the buyer's fees.  Some times the rebate of fees would be stated in an Offering Memorandum or an online link advertising commercial properties, or negotiated between agents.

On Saturday the new standard will be that NO SHOWING of residential property will occur without the agency agreement and the Buyer/Broker Agreement and a Negotiated Fee Agreement.  That requirement will be for any showing irrespective if the buyer goes directly to the listing agent or through their buyer agent or at an Open House.

As an example if buyer goes to an open house, the buyer likes the property and wants to see disclosures or talk to the agent showing the property regarding interest in purchase, the buyer will be required to sign the agency agreement and the Buyer/Broker Agreement with a Negotiated Fee Agreement.

This is a new situation, some agents are bewildered on the outcome, or the affect on their business.  Some may not wish to be in the new real estate world and seek other choices for a career.

In total the change will affect sales and agent population.  

The buyer will need to take into affect their planning of affordability. If they want to purchase a $1 million property.  The fee of 2.5% will be $25,000, for example.  If the seller will not pay the full amount the buyer must now look at a downpayment in excess of the negotiated deposit with the lender plus closing costs if any. Affordability will certainly be pressured.

In a buyer world where affordability is already under pressure from increasingly higher listing prices and sales and higher mortgage rates the addition of a possible payment to the buyer will put pressure on buyer interest

Will sellers be willing to pay for buyer's fees.  I would wonder if this is a seller's market why a seller would be willing to pay for the buyer's fees?  I believe we may see sellers not paying.  Now if the seller is pressured by a personal situation, they may pay. If the market turns to a buyer's market the seller will be forced to pay.

The next question is what is the seller willing to pay and how much is the listing agent telling the buyer's agent.  Once the mandatory posting on the MLS is gone the seller's agent/broker may decide to keep more than a 50/50 split.  The broker may decide the broker wants a large cut of the fees and the agent must get a larger percentage of the total fees paid by the seller.

This may be the Top of the Residential Real Estate Market!  Buyers hold back and sellers refuse to pay.  Standoff!

FED acton on interest rates may see this as an opportunity to not change rates in September.  Housing is One Third of the CPI basket of prices used the the CPI figures.

So far the CPI is slightly down from past numbers and housing prices increased, Consumer Spending is still strong and Employment numbers positive.  IF the FED thinks "let's see what will happen to housing"? The impact could be a benefit to the FED numbers.

First no rate cut, or small rate cut, will hurt Landlords of all nature.  From single family to multifamily landlords who will see the value of their properties decline in value.  That will affect the mortgages on them as they mature.  Landlord mortgages are 5 and 10 year maturity.  (30-year mortgages are only for residential buyers.). The low interest rate mortgages that were from 2020 to 2022 will be maturing next year for all 5-year mortgages.  To those owners who levered their properties, they will be faced with adding equity to offset the lower valuations and higher interest rates during a refinance or sell.

Certainly the stock market will not be happy!  Too many strategies have been created by investors over the planned cut in rates in September.  Stock prices lower, more equity losses.  More selling in the stock market in what many market forecasters are saying is overpriced.  A good reason Warren Buffet has sold Apple and Bank America position plus others to add to the still enormous cash position.

The FED is still in a position of creating the next president.  A cut helps the Democrats, doing nothing helps the Republicans.  Which party will cut the deficit?  Which party will allow the FED to keep its independence?

I doubt Trump will have the power that Nixon had when he appointed Arthur Burns who bowed to Nixon on rates.  Too narrow of a senate to give Trump control to put Trump's man in charge.  Jawboning is the only pressure that Trump could create.  Doubtful Powell will bow and kiss the ring!. And Kamala?  Doubtful she puts any pressure on the FED.  A quarter of a point and then wait and see?  Whomever is elected!  Then too, no cut and wait and see.  

Even if the cut is a quarter a point and then nothing until next year?  What benefit is it to go from 5.25-5.5% to 5-5.25%?  Residential Mortgage Rates have already dropped to 6.5% in anticipation of a cut.  It went from just above and below 7% and home prices went up.  The net is ZERO!

I still like the Commercial Real Estate Market for Investors!  Residential is good for cash buyers and weakening prices.  To those who find the right residential property offer 10% less to figure in the possibility you may pay your agent.  if the seller pay the better off you are!