Shares of real estate companies plunged on Tuesday after a jury verdict had the potential to upend the way people buy homes.
A Missouri jury concluded early Tuesday that the National Association of Realtors, HomeServices of America and Keller Williams colluded to increase or maintain commission rates. Jefferies analyst John Conaltuoni said in a note to clients that a judge could issue an injunction to prevent commission splitting across MLSs or multiple listing services, which would hurt the buyer-agent business.
See more: A Missouri jury is examining the real estate industry’s commission structure. Here’s what that could mean for homeowners.
Shares of Opendoor Technologies Inc. OPEN fell 9% on Tuesday, while shares of Zillow Group Inc. ZG Z fell 7%, shares of Redfin Corp. RDFN fell 6% and shares of RE/MAX Holdings Inc. RMAX fell 4%.
Conaltuoni believes the recent ruling could bring big changes to the Participation Rule, which is a NAR requirement for seller agents to disclose the compensation offered to buyer agents when listing through an MLS. In his opinion, the participation rule could soon be banned or optional.
Such a ban “would result in broker commission negotiations occurring when an offer is presented, as there would no longer be a way to communicate the breakdown in advance,” he wrote. “This would remove the seller’s incentive to compensate buyer agents, forcing them to seek compensation directly. Shifting the burden of payments to buyers would likely significantly reduce their use of agents, as most are already struggling to cover closing costs.”
Conaltuoni further noted that if the rule became optional, the “status quo” would likely continue.
Read: Why don’t homeowners sell their homes? It’s not just the “lock-in effect”
What would these developments mean for Zillow, which reports earnings on Wednesday afternoon? He noted that nearly two-thirds of the company’s revenue comes from the Premier Agent business, which itself consists primarily of revenue from buyers. “[A] A reduction in their use would be necessary [Zillow] “We want to focus on offering products to sellers and creating near-term sales headwinds,” he wrote, while lowering his price target on Zillow shares to $48 from $60.
Bernstein’s Nikhil Devnani wrote that Zillow is “NOT part of this case and is not directly affected by the ruling,” but there is a chance it could have an impact down the road.
“Premier Agent is based on buyer’s commission,” said Devnani. “And a reduction in commission rates (which could happen in the worst case scenario if co-op compensation were banned entirely) would, in our view, pose challenges to the industry’s revenue growth. In our opinion, maintaining the current structure with more transparency would have less impact. There would need to be greater decoupling of pay for buyer and seller agents.”
As Redfin shares fell along with other names on Tuesday, CEO Glenn Kelman published a blog post titled, “Change is coming to the real estate industry.”
“It may take the judge days or weeks to decide what structural changes the jury’s verdict will bring about,” he wrote, and appeals could take years.
But traditional brokers “will no doubt now train their agents to welcome discussions about fees, just as Redfin has done for years, particularly when it comes to advising a seller about what fee to offer to the buyer’s agents,” he continued. “Instead of saying that a 2% or 3% buyer’s agent fee is common or recommended, agents will say that a buyer’s agent fee, if offered at all, is entirely up to the seller.” That’s how it should be. “
Brad Erickson, an analyst at RBC Capital Markets, wrote after the ruling that just over half of Redfin transactions come from the buy side. In his view, his shares and those of Zillow “partially reflect these risks.”