Why Zillow, Redfin, and Other Real Estate Stocks Fall After Arbitration Ruling

Shares of real estate names fell on Tuesday following a jury verdict that could shake up the way people buy homes.

An earlier Missouri jury on Tuesday found the National Association of Realtors, Home Services of America and Keller Williams colluded to raise or maintain high commission rates. In a note to clients, Jefferies analyst John Conaltuoni said a judge could issue an injunction barring commission sharing on MLSs or multiple listing services, which would affect the buyer-agent business.

See also: Missouri Jury follows the commission structure of the real estate industry. Here’s what that means for homeowners.

Shares of Opendoor Technologies Inc.

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Shares of Zillow Group Inc fell 9% on Tuesday.

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Shares of Redfin Corp fell 7%.

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Shares of RE/MAX Holdings Inc. fell 6%.

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decreased by 4%.

Conaltuoni thinks the latest ruling could bring major changes to the Participation Rule, which requires the NAR to disclose the compensation paid to buyer agents when seller agents list through the MLS. In his view the rule of participation may soon become prohibited or optional.

Such a ban would “result in negotiation of buyer-agent commissions when an offer is made because there would be no way to communicate splits going forward,” he wrote. “This would remove the seller’s incentive to compensate buyer’s agents, forcing them to seek compensation directly. Shifting the burden of payment to buyers would meaningfully reduce the use of agents who are already struggling to cover closing costs.”

Conaltuoni further commented that if this clause is discretionary, the “status quo” will continue.

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According to: Why aren’t homeowners selling their homes? It is not just a ‘lock-in effect’

What do these developments mean for Zillow, which reports earnings Wednesday afternoon? Nearly two-thirds of the company’s revenue comes from its Premier Agent business, which consists primarily of revenue from buyer agents. “[A] It is imperative to reduce their use [Zillow] “To pioneer product offerings for seller agents and to create short-term interventions toward revenue,” he wrote, while lowering his price target on Zillow’s stock to $48 from $60.

Bernstein’s Nikhil Devnani wrote that Zillow “is not a party to this case and is not directly affected by the ruling,” but there is potential for repercussions.

“Premier Agent is built around buyer commissions,” Devanani said. “Further reductions in commission rates (which could happen if co-op compensation is completely prohibited in a worst-case scenario) will create challenges to industry revenue growth in our view. We believe maintaining the current structure with greater transparency will have less impact. A stronger decoupling of who pays buyer and seller agents is needed.

While Redfin’s shares fell along with other names on Tuesday, Chief Executive Glenn Gellman posted a blog post saying: “Change is coming to the real estate industry.”

“It could take days or weeks for a judge to determine what structural changes a jury’s verdict would entail,” he wrote, and appeals could take years.

But traditional brokers “will undoubtedly now train their agents to welcome conversations about fees, as Redfin has done for years, especially when advising a seller on what fees to pay buyers’ agents,” he continued. “Instead of saying that a buyer’s agent fee of 2% or 3% is typical or recommended, agents will say that the buyer’s agent fee, if one is offered, is entirely up to the seller. That’s the way it should be.”

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RBC Capital Markets analyst Brad Erickson wrote after the ruling that more than half of Redfin’s transactions come from the buy side. In his view, its stock and Zillow’s “reflected somewhat the coming of these risks.”

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