Shares of real-estate companies experienced a sharp decline on Tuesday after a Missouri jury made a ruling that could potentially disrupt the way people purchase homes. The jury found that the National Association of Realtors, HomeServices of America, and Keller Williams colluded to inflate or maintain high commission rates. This decision has raised concerns about the buyer-agent business, as a judge could potentially issue an injunction to prevent commission sharing on multiple listing services (MLSs).

Possible Implications for Homeowners

The recent ruling has put the spotlight on the real-estate industry’s commission structure and raises questions about its future impact on homeowners. If the judge decides to restrict commission sharing on MLSs, it could have significant consequences for buyers and sellers alike.

Stock Market Reaction

The stock market has already responded to the news, with several major real-estate players experiencing significant drops in their share prices. Opendoor Technologies Inc. saw a 9% decrease, while Zillow Group Inc. and Redfin Corp. both fell by 7%. RE/MAX Holdings Inc. also faced a decline of 4%.

Potential Changes to the Participation Rule

Analyst John Conaltuoni suggests that the recent ruling could lead to significant changes in the Participation Rule, which currently requires seller agents to disclose the compensation offered to buyer agents through MLSs. Conaltuoni believes that this rule could either be banned entirely or become optional in the future.

If a ban were to be implemented, negotiations regarding buyer agent commissions would take place during the offer presentation process, removing the seller’s incentive to compensate buyer agents. This shift would likely result in buyers being responsible for directly paying the agents, which could lead to a reduction in their use since many already struggle to cover closing costs.

On the other hand, if the Participation Rule remains optional, it is likely that things will continue as they currently are.

Homeowners’ Reluctance to Sell

In addition to the commission structure concerns, there is a broader issue at play. Homeowners have been hesitant to sell their properties for reasons beyond the commission system. This phenomenon, commonly referred to as the “lock-in effect,” has contributed to a shortage of houses on the market. Understanding this trend is essential for comprehending the current state of the real-estate industry.

Zillow Faces Potential Challenges as Real Estate Industry Evolves

Zillow, one of the leading players in the real estate industry, may have to make significant adjustments in response to recent developments. With nearly two-thirds of its revenue generated through its Premier Agent business, any changes in usage could impact the company’s bottom line. Analysts believe that a decrease in the use of buyer agents would require Zillow to shift its focus toward seller agents, potentially resulting in short-term obstacles to revenue growth. As a result, Bernstein’s Nikhil Devnani has lowered his price target on Zillow’s stock to $48 from $60.

Despite not being directly impacted by the ruling, Zillow may still face repercussions down the line. The Premier Agent model heavily relies on buyer commissions, and any reduction in commission rates could pose challenges to the industry’s revenue growth. However, if there is greater transparency and a clearer separation between who pays for buyer and seller agents, the impact may be less severe. Devnani suggests that maintaining the current structure while improving transparency would be a more favorable approach.

Meanwhile, Redfin, another major player in the real estate market, saw a drop in its shares following the ruling. However, CEO Glenn Kelman expressed optimism in a blog post titled “Change Comes to the Real Estate Industry.” He acknowledged that it might take some time for the judge to determine the specific structural changes resulting from the verdict and that appeals could prolong the process.

Kelman also highlighted how traditional brokers are likely to adjust their practices regarding fees. Instead of recommending customary fee percentages, agents will now emphasize that the fee for a buyer’s agent is entirely up to the seller. This shift aligns with Redfin’s long-standing approach and encourages open conversations about fees.

RBC Capital Markets analyst Brad Erickson commented on Redfin’s exposure to these risks. He noted that slightly more than half of Redfin transactions come from the buyer’s side. Consequently, both Redfin and Zillow’s stocks have already accounted for these potential challenges.

As the real estate industry undergoes significant changes, Zillow and other companies will need to adapt to remain competitive. While uncertainties persist, industry players are preparing for a future where transparency and flexibility around fees will become increasingly important.

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