Zillow Stock Falls as Realtor Settlement Forecasts Lower Commissions

The recent legal settlement reached by the National Association of Realtors (NAR), totaling $418 million over four years, has sent shockwaves through the real estate sector. This landmark settlement, if approved by a federal court, is expected to bring significant changes to how consumers buy and sell homes, particularly in terms of lowering commissions for homebuyers and sellers.

Following the announcement of the settlement, shares of Zillow (Z) and other real estate companies, such as Anywhere Real Estate (HOUS), Compass (COMP), and Redfin (RDFN), experienced notable declines, reflecting investor expectations of the settlement’s impact on industry spending and competition for lead generation. The settlement is seen as a potential catalyst for a long-awaited transformation in the real estate market.

One of the key changes brought about by the settlement is the implementation of a new Multiple Listing Service (MLS) rule that prohibits offers of broker compensation on the MLS. This rule change effectively ends the previous requirement for sellers to compensate a buyer’s agent, a practice that has been a standard part of real estate transactions for years. Starting in July, agents will also be required to enter into written agreements with homebuyers they represent, adding a new layer of transparency to real estate transactions.

The settlement’s impact extends beyond commission structures, with one analyst predicting that commissions could fall by 25% to 50% as a result of the new rules. This reduction in commissions is expected to benefit online and discount real estate brokerages, which can now access the MLS without having to meet the previous commission requirements. These brokerages may be able to offer lower commission rates to attract more business, potentially reshaping the competitive landscape of the real estate industry.

While existing homeowners are expected to benefit from lower commission fees upon the sale of their homes, first-time and less-wealthy buyers may face challenges. The reduction in commissions and the lack of a prearranged fee structure could potentially hamper agent motivation to work with these clients, leading to fewer options and higher costs for these buyers.

The NAR’s settlement comes at a time of significant financial and administrative challenges for the organization. Former CEO Bob Goldberg resigned last year following a $1.8 billion verdict against the organization over commissions, while former president Tracy Kasper resigned in January after a blackmail threat regarding a past personal matter. These challenges highlight the complexities and pressures facing the real estate industry as it navigates a period of rapid change and transformation.