How Class Action Suits Are Increasing Home Buying Costs: A Closer Look at the Impact on Lower-Income Buyers

The recent class action suits targeting real estate practices have brought significant changes to the housing market. While these suits aim to address unfair practices, they also come with unintended consequences, particularly for lower-income buyers. In this blog, we'll explore how these legal actions are increasing home buying costs and disproportionately affecting lower-income buyers.

Increased Costs and Affordability Challenges

According to the National Association of Realtors (NAR), even a 1% increase in home buying costs can severely impact affordability for lower-income buyers. For example, if the median home price is $300,000, a 1% increase translates to an additional $3,000. Lower-income buyers, who often have smaller down payments and tighter budgets, find this increase to be a significant barrier to homeownership.

Changes in Commission Structures

Commission structures are a critical component of real estate transactions. A study by the Consumer Federation of America (CFA) shows that typical real estate commissions range from 5% to 6% of the home's sale price. Legal changes resulting from class action suits could lead to higher commissions or new fee structures. On a $200,000 home, a 6% commission amounts to $12,000. If commissions rise to 7%, the cost jumps to $14,000, further straining the budgets of lower-income buyers.

Reduced Incentive for Real Estate Agents

The NAR reports that approximately 10% of real estate agents handle about 90% of transactions. These top agents might shift their focus to higher-priced properties if commissions on lower-priced homes become less lucrative. According to a report by Inman, less experienced agents, who might have fewer resources and less market knowledge, could end up working with lower-income buyers. This shift can lead to worse representation and less favorable outcomes for these buyers.

Financing Challenges

Lower-income buyers are already more likely to face higher mortgage rates and less favorable loan terms. The Urban Institute highlights that if new regulations increase transaction complexity, lenders might tighten their requirements, making it even harder for lower-income buyers to secure financing. A 0.5% increase in mortgage interest rates can add about $30,000 in interest over a 30-year loan on a $200,000 mortgage, significantly impacting affordability.

Access to Affordable Housing Programs

Programs like FHA and VA loans are crucial for lower-income buyers. The U.S. Department of Housing and Urban Development (HUD) indicates that changes in real estate practices could reduce the number of agents specializing in these programs. Lower-income buyers might struggle to navigate the complexities of these loans without adequate support. FHA loans accounted for about 13% of home purchases in recent years, underscoring their importance to this demographic.

Market Dynamics and Economic Disparities

The Harvard Joint Center for Housing Studies reports that lower-income households spend a larger percentage of their income on housing costs. If home buying costs rise due to changes in commission structures, these households might delay purchasing or settle for lower-quality housing. This can exacerbate existing inequalities and limit the ability of lower-income buyers to build equity through homeownership.

Conclusion

While class action suits in real estate aim to address unfair practices, they bring unintended consequences that can disproportionately impact lower-income buyers. Increased costs, reduced access to experienced agents, and heightened financing challenges make homeownership more difficult for this group. As the market adapts to these changes, it's essential to consider policies and practices that support lower-income buyers, ensuring that homeownership remains an achievable goal for all.