A Missouri jury's verdict that the National Association of Realtors colluded with brokerages to keep agent commissions high created a shockwave throughout real estate stocks earlier this week.
Zillow (NASDAQ:Z) and others plunged on Tuesday after the ruling, which could change how Americans purchase homes, or specifically, how they pay for broker fees.
The jury awarded nearly $1.8 billion in damages, reflecting a series of recent lawsuits challenging how real estate agents are compensated.
The Justice Department is also investigating the commission-sharing system, which typically requires home sellers to cover a 5% to 6% commission, divided between their agent and the buyer's representative.
The Participation Rule (PR), a requirement by the National Association of Realtors (NAR) that mandates specifying compensation for buyer agents when listing a property, is at the center of the debate. Plaintiffs argue that PR is anti-competitive and facilitates collusion between agents, potentially pressuring sellers to fund payment. The jury's ruling in favor of the plaintiffs may lead to PR being banned or becoming optional, altering the dynamics of buyer agent compensation.
Potential repercussions for real estate industry
The ruling could also have long-lasting impact on high-flying real estate equities. Zillow (NASDAQ:Z) Group's Premier Agent (PA) business, which generates the majority of its revenue from buyer agents, may face near-term headwinds if the use of buyer agents declines.
The judge could issue an injunction that could ban commission sharing on Multiple Listing Services (MLSs), which would significantly reduce the use of buyer agents. This could force Zillow (NASDAQ:Z) Group (Z) to pivot its business model, creating execution risk and possible near-term revenue headwinds, analysts at Jefferies suggested.
As a result, Jefferies reduced Zillow's price target (PT) from $60 to $48 due to the uncertainty surrounding the impact on Zillow's business model and potential execution risk in light of the recent legal developments.
Shares of Zillow were up around 0.5% by midday Wednesday at $35.69.