Commissions

(Bloomberg) — Zillow Group Inc. and other real estate stocks plunged after a Missouri jury struck a fresh blow against the battered industry, finding that the National Association of Realtors colluded to maintain high brokerage commissions.

Most Read from Bloomberg

The jury awarded nearly $1.8 billion in damages in the case, one of several recent lawsuits concerning how real estate agents are paid. The Justice Department is also scrutinizing the commission-sharing system, which typically puts home sellers on the hook for a 5% to 6% cut of the sale price, split between their agent and the representative for the buyer.

Read more: US Realtors’ Lucrative Fee System Faces Mounting Antitrust Risk

In a worst-case scenario for the industry, the federal government could seek to ban sharing commissions, which would upend how real estate agents have done business for decades. That would be especially bad news at a moment when the US real estate is largely frozen, with mortgage rates approaching 8% and existing home sales nearing lows not seen since the foreclosure crisis.

The verdict Tuesday doesn’t directly affect the Justice Department’s stance, but the lawsuit, known as “Sitzer/Burnett,” revolves around the same set of issues. The DOJ also recently injected itself into a Massachusetts case related to the traditional commissions system, signaling that the watchdog is paying attention, according to analysts at Stephens Inc.

Stocks Drop

Shares of Zillow fell 6.9% Tuesday, the biggest decline since June 2022. While the company doesn’t rely on commission income directly, its core business is selling marketing services to buyers’ agents. The stock has dropped more than 80% from its peak in February 2021, when it was riding the pandemic housing boom.

Story continues

Brokerage shares also sank Tuesday, with Compass Inc. falling 6.2% and Redfin Corp. dropping 5.7%.

None of those companies were named in the lawsuit, which was filed in Kansas City, Missouri, against the Realtors association, Keller Williams and Berkshire Hathaway’s HomeServices of America.

Two other brokerages, Re/Max and Anywhere Real Estate Inc., settled with plaintiffs earlier this year, agreeing to pay $55 million and $83.5 million, respectively, and to no longer require agents to belong to NAR.

In separate statements, HomeServices and NAR said they intend to appeal, while Keller Williams said that it would also consider that option.

“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,” HomeServices said. “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 the Missouri case, plaintiffs in Illinois, where a trial is expected to start early next year, are seeking as much as $40 billion in another private class-action lawsuit against the NAR.

System Challenge

Taken together, the cases are a challenge to a commission system that is largely unique to the US and seen as more expensive for consumers than in countries such as Australia and the UK. Still, the bigger threat to the industry would be a case brought by the Justice Department to dismantle the commission-sharing structure altogether.

The DOJ started investigating the real estate industry under the Trump administration, and NAR agreed to measures, including increased price transparency, to settle the case. Biden officials in 2021 pulled out of that agreement, saying they wanted the ability to pursue future antitrust claims against the group.

A federal judge in January said the DOJ is still bound by that settlement. The department is appealing that decision, as the Biden administration expands antitrust scrutiny outside traditional areas.

“While most industry followers are tuned into the class action suits, we think that potential DOJ involvement, at some stage, could create a whole new set of challenges,” analysts at Stephens said.

(Updates with industry context throughout.)

Most Read from Bloomberg Businessweek

©2023 Bloomberg L.P.