Homebuilders, Zillow in spotlight following ruling on realtor fees

A Missouri jury ruled against the National Association of Realtors and several major real estate brokerages in the Sitzer/Burnett trial, finding that NAR’s policy known as the “compensation cooperation rule” raised, inflated or stabilized broker commission rates paid by home sellers. Currently, homebuilders pay buyer agent commissions and BofA thinks the outcome could potentially be a slight positive for homebuilders, but says it is “too early to tell the full implications without a final judgment in the case issued.” Also commenting on the news, Jefferies noted that major changes to compensation practices could significantly reduce buyer agents, which would force Zillow (ZG) to pivot its business model, creating execution risk and potential near-term revenue headwinds.

LOTS OF UNKNOWNS STILL: On Tuesday, the jury in the Sitzer/Burnett case — the first of two such antitrust lawsuit cases — found the National Association of Realtors, HomeServices of America — a Berkshire Hathaway company (BRK.A), and Keller Williams guilty of inflating broker commissions. The defendants are being ordered to pay $1.78B in damages. Immediately after this verdict was read out, lawyers representing the defendants in the case filed another lawsuit, alleging substantially the same claims in the Sitzer/Burnett case but this time against Compass (COMP), ExP World Holdings (EXPI), Douglas Elliman (DOUG), Redfin (RDFN) and a few other private brokers. BTIG notes that Anywhere Real Estate (HOUS) and Re/Max (RMAX) are not a party to the new lawsuit as they previously settled in both the Sitzer/Burnett and Moehrl cases. And because their settlement applies nationwide, the firm’s understanding is that neither can be a party to any potential copycat lawsuits in other states that piggyback off of the allegations in the Sitzer/Burnett/Moehrl cases.

BTIG thinks the most likely outcome from Tuesday’s verdict is the complete banning of NAR’s Mandatory Participation Rule, which currently requires a sellers broker to offer compensation to the buyer’s broker in order to list on an MLS, even if its 0c. For the residential brokers, the firm believes a banning of the Participation Rule likely doesn’t change much.

The firm says that at first blush, the news is a negative for Compass, ExP World Holdings and Douglas Elliman in its coverage now that they are a party to the new lawsuit filed by the same lawyers in the Sitzer/Burnett case. That said, longer term BTIG thinks Compass is positioned relatively better than others in the industry as it has some of the most productive agents, and Douglas Elliman operates largely in the luxury segment, where the firm believes buyers will still want the help of an advisor through their home buying journey. The firm thinks the impact to ExP World Holdings is mixed at this point. Lastly, BTIG believes the incremental monetary impact to Anywhere Real Estate and Re/Max is going to be negligible in the near-term as they’ve already settled on a nationwide basis, but given that Re/Max is also an agent-count-dependent business model, fewer agents overall is a headline risk to the stock.

SLIGTH POSITIVE FOR HOMEBUILDERS: Also commenting on the jury’s ruling against the National Association of Realtors and several major real estate brokerages in the Sitzer/Burnett trial, BofA notes that currently, homebuilders pay buyer agent commissions and it thinks the outcome could potentially be a slight positive for homebuilders. Nonetheless, the firm believes it is “too early to tell the full implications without a final judgment in the case issued.”

EXECUTION RISK, NEAR-TERM HEADWINDS: Jefferies lowered the firm’s price target on Zillow Group to $48 from $60, while keeping a Buy rating on the shares after the jury in a major class action lawsuit on agent commissions concluded on Tuesday that defendants conspired to inflate commissions. Major changes to compensation practices could significantly reduce buyer agents, which would force Zillow to pivot its business model, creating execution risk and potential near-term revenue headwinds, said the firm. While Jefferies thinks the decision increases the chances of a ban on commission sharing and Zillow having to pivot the business model, it says the impact to Zillow’s Premier Agent business is “hard to determine at this point” given unknowns regarding a potential injunction, the pace of changes, and the company’s ability to mitigate. In addition, while a near-term headwind, it could be a long-term tailwind for Zillow as the firm thinks the U.S. market could look more like international markets, where seller agents rely on listing portals to attract potential buyers to their listings.

PRICE ACTION: In Wednesday morning trading, shares of Zillow were up about 1% to $35.72, while Redfin’s stock had slid almost 1% to $4.64. Also lower were shares of Compass and Douglas Elliman, which had dropped over 5% and 4%, respectively. Meanwhile, ExP World Holdings and Anywhere Real Estate were down about 1%. On the flip side, Re/Max had gained about 2%, Toll Brothers (TOL), KB Home (KBH) and PulteGroup (PHM) over 3%, and Lennar (LEN) about 2.5%.  Other publicly traded homebuilders include Beazer Homes (BZH), D.R. Horton (DHI), Hovnanian (HOV), and M.D.C. Holdings (MDC).