Zillow Group Inc. and other real estate stocks are in turmoil following a significant court decision in Missouri that has dealt a heavy blow to the already beleaguered industry. The verdict found that the National Association of Realtors (NAR) engaged in collusion to uphold high brokerage commissions, resulting in nearly $1.8 billion in damages. This case is one of several recent lawsuits concerning the compensation structure for real estate agents. Simultaneously, the Justice Department is closely examining the commission-sharing system, which typically requires home sellers to pay a 5% to 6% commission, divided between their agent and the buyer’s representative.
In the worst-case scenario for the industry, the federal government might consider prohibiting the practice of sharing commissions. Such a move would disrupt how real estate agents have conducted business for decades, a development that is particularly unwelcome at a time when the US real estate market is experiencing a slowdown, with mortgage rates nearing 8% and existing home sales approaching historic lows not seen since the foreclosure crisis.
The verdict delivered on Tuesday does not directly impact the Justice Department’s stance, but it revolves around the same core issues. The lawsuit, referred to as the “Sitzer/Burnett” case, shares similar concerns. The Department of Justice has also intervened in a Massachusetts case related to the traditional commission system, indicating their keen interest in this matter, according to analysts at Stephens Inc.
Stock Prices Plunge
Zillow’s shares plummeted by 6.9% on Tuesday, marking the largest decline since June 2022. While Zillow doesn’t rely directly on commission income, its primary business involves selling marketing services to buyers’ agents. The stock has now fallen over 80% from its peak in February 2021 when it thrived during the pandemic housing boom.
Brokerage firms also witnessed sharp declines on Tuesday, with Compass Inc. experiencing a 6.2% drop and Redfin Corp. seeing a 5.7% decrease.
None of these companies were named in the lawsuit. The lawsuit was filed in Kansas City, Missouri, targeting the Realtors association, Keller Williams, and Berkshire Hathaway’s HomeServices of America. In contrast, Re/Max and Anywhere Real Estate Inc. settled with the plaintiffs earlier this year, agreeing to pay $55 million and $83.5 million, respectively, and to no longer mandate agents to be part of the NAR.
In separate statements, HomeServices and NAR expressed their intention to appeal the verdict, while Keller Williams is also considering this option.
HomeServices noted, “Today’s decision means that buyers will face even more obstacles in an already challenging real estate market, and sellers will have a harder time realizing the value of their homes. It could also force homebuyers to forgo professional help during what is likely the most complex and consequential financial transaction they’ll make in their lifetime.”
In addition to the Missouri case, plaintiffs in Illinois, where a trial is expected to begin early next year, are pursuing as much as $40 billion in another private class-action lawsuit against the NAR.
A System in Question
Collectively, these cases challenge a commission system that is notably distinct to the United States and is often considered more costly for consumers compared to countries such as Australia and the UK. However, the most significant threat to the industry would be a case brought by the Justice Department seeking to dismantle the commission-sharing structure entirely.
The Department of Justice initiated its investigation into the real estate industry during the Trump administration, leading to an agreement with the NAR that included enhanced price transparency to resolve the matter. In 2021, Biden administration officials withdrew from this agreement, expressing their desire to pursue potential antitrust claims against the NAR in the future. In January, a federal judge affirmed that the DOJ remains bound by the settlement, a decision that the department is currently appealing as the Biden administration broadens its antitrust investigations beyond traditional areas.
“While most industry observers are focused on the class action lawsuits, we believe that potential DOJ involvement, at some point, could present an entirely new set of challenges,” cautioned analysts at Stephens.
