Zillow, Redfin drop after realtor group agrees to cut commissions

Shares of realtor stocks, including Zillow (Z) and Redfin (RDFN), declined on Friday morning following a report that a real estate trade group agreed to a landmark deal that will eliminate a foundation of the industry.

NEWS: The National Association of Realtors has announced an agreement to settle the wave of commission lawsuits brought by home sellers, Debra Kamin of The New York Times reports, citing a copy the paper obtained of the agreement. Under the terms of the agreement, the organization, which has set the guidelines for home sales for decades, will pay $418M in damages and eliminate its rules on commissions.

The deal, which lawyers anticipate will be filed within weeks, but still requires the approval of a federal court, would end a multitude of legal claims from home sellers who argued that the rules forced them to pay excessive fees.

In NAR’s statement confirming that it has reached a settlement, Nykia Wright, Interim CEO of NAR, stated: “NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers. It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals.” 

NAR added: “Two critical achievements of this resolution are the release of most NAR members and many industry stakeholders from liability in these matters and the fact that cooperative compensation remains a choice for consumers when buying or selling a home. NAR also secured in the agreement a mechanism for nearly all brokerage entities that had a residential transaction volume in 2022 that exceeded $2 billion and MLSs not wholly owned by REALTOR associations to obtain releases efficiently if they choose to use it. NAR fought to include all members in the release and was able to ensure more than one million members are included. Despite NAR’s efforts, agents affiliated with HomeServices of America and its related companies—the last corporate defendant still litigating the Sitzer-Burnett case—are not released under the settlement, nor are employees of the remaining corporate defendants named in the cases covered by this settlement.”

WHAT IT MEANS: Without the traditional 6% sales commission rate guaranteed, real estate agents will now most likely have to lower their commissions as they compete for business. Economists estimate commissions could now be reduced by 30%, driving down home prices across the board, the Times says, adding that the opening of a free market for Realtor compensation could mirror the shake-up that occurred in the travel industry with the emergence of online broker sites such as Expedia (EXPE) and Kayak, which is owned by Booking Holdings (BKNG).

“The forces of competition will be let loose,”  said Benjamin Brown, co-chairman of the antitrust practice at Cohen Milstein and one of the lawyers who hammered out the settlement. “You’ll see some new pricing models, and some new and creative ways to provide services to home buyers. It’ll be a really exciting time for the industry.”

PRICE ACTION: In morning trading, shares of Zillow are down nearly 8% to $50.87 and Redfin fell 4% to $6.06. Meanwhile, Compass declined over 7% to $3.17.