Shares Plummet as Jury Ruling Rocks Real Estate Industry
Shares of major real estate companies experienced a significant drop on Tuesday after a Missouri jury ruling that could potentially revolutionize the way homes are purchased. The jury found that the National Association of Realtors (NAR), HomeServices of America, and Keller Williams colluded to inflate or maintain high commission rates. This ruling has raised concerns about the future of commission sharing on multiple listing services (MLSs), which could negatively impact the buyer-agent business.
Opendoor Technologies Inc. witnessed a 9% plunge in shares, while Zillow Group Inc. and Redfin Corp. fell 7% and 6% respectively. RE/MAX Holdings Inc. also experienced a decline of 4%. The market reacted strongly to the verdict, reflecting the potential impact on these real estate giants.
According to Jefferies analyst John Conaltuoni, the recent ruling could lead to significant changes in the Participation Rule. This rule, which mandates NAR seller agents to disclose compensation offered to buyer agents via an MLS, may be banned or become optional. Conaltuoni argues that such a ban would introduce negotiations about buyer agent commissions when offers are presented, eliminating the upfront communication of splits. This shift in payment responsibility to buyers may result in reduced agent usage, as most buyers struggle to cover closing costs.
Conaltuoni suggests that if the rule became optional, the industry would likely remain in the “status quo.” However, any significant changes resulting from the ruling could have a significant impact on Zillow, which is set to report earnings on Wednesday. Nearly two-thirds of Zillow’s revenue depends on its Premier Agent business, predominantly consisting of revenue from buyer agents. A potential reduction in their usage would force Zillow to pivot and cater to seller agents, leading to near-term challenges in revenue generation.
While Zillow is not directly implicated in the case, there is a potential for broader repercussions down the line. Bernstein’s Nikhil Devnani highlights that Zillow’s Premier Agent model revolves around buyer commissions. A reduction in commission rates, which might occur if cooperative compensation is outright banned, would pose challenges for industry revenue growth. Devnani believes that maintaining the current structure with increased transparency would have a lesser impact but suggests the need for a stronger separation of payment responsibility between buyer and seller agents.
Despite Tuesday’s drop in Redfin shares, the Chief Executive, Glenn Kelman, expressed optimism in a blog post titled “Change Comes to the Real Estate Industry.” He noted that while it may take days or weeks for the judge to determine the structural changes resulting from the jury’s verdict, traditional brokers will likely train their agents to welcome conversations about fees. This approach aligns with Redfin’s practice for years and allows sellers to have more control over the buyers’ agent fee.
RBC Capital Markets analyst Brad Erickson acknowledges that over half of Redfin’s transactions originate from the buyside. He believes that both Redfin’s and Zillow’s stock had already priced in some of the risks associated with the ruling.
Overall, the real estate industry faces an uncertain future as a result of this jury ruling. The potential changes to commission sharing and buyer-agent compensation have sent shockwaves through the market, prompting investors to reevaluate their positions in major real estate companies. The coming days and weeks will likely shed more light on the consequences of this verdict and the subsequent actions taken by industry players.