(Bloomberg) — Zillow Group Inc . and other real estate stocks tumbled after a Missouri jury dealt another blow to the battered industry, finding that the National Association of Realtors colluded to keep high brokerage commissions.
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The jury awarded nearly $1.8 billion in damages in the case, one of several recent lawsuits over how real estate agents are paid. The Justice Department is also looking into the commission-splitting system, which typically puts home sellers on the hook for a 5% to 6% cut of the sales price, split between their agent and the buyer’s representative. .
Read more: US real estate agents’ lucrative commission system faces growing antitrust risk
In a worst-case scenario for the industry, the federal government could seek to ban distribution commissions, which would change the way real estate agents have done business for decades. That would be particularly bad news at a time when U.S. real estate is largely frozen, with mortgage rates hovering near 8% and existing home sales near unprecedented lows since the foreclosure crisis.
Tuesday’s verdict does not directly affect the Justice Department’s position, 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 commission system, indicating that the watchdog is paying attention, according to analysts at Stephens Inc.
Stock drop
Shares of Zillow fell 6.9% on Tuesday, the biggest drop since June 2022. While the company doesn’t rely directly on commission income, its core business is selling marketing services to buyer’s agents. The stock has fallen more than 80% since its peak in February 2021, when it was in the midst of the pandemic housing boom.
Brokerage stocks also fell on Tuesday, with Compass Inc. falling 6.2% and Redfin Corp. 5.7%.
None of those companies were named in the lawsuit, which was filed in Kansas City, Missouri, against the realtor association, Keller Williams and Berkshire Hathaway’s HomeServices of America.
Two other brokerages, Re/Max and Anywhere Real Estate Inc., settled with the plaintiffs earlier this year, agreeing to pay $55 million and $83.5 million, respectively, and stop demanding that the agents belonged to NAR.
In separate statements, HomeServices and NAR said they intend to appeal, while Keller Williams said it would also consider that option.
“Today’s decision means buyers will face even more hurdles in an already challenging property market and sellers will find it harder to realize the value of their homes,” HomeServices said. “It could also force homebuyers to forego professional help during what is likely to be the most complex and consequential financial transaction they will make in their lifetime.”
In addition to the Missouri case, plaintiffs in Illinois, where a trial is expected to begin early next year, are seeking up to $40 billion in another private suit against the NAR.
System challenge
Taken together, the cases are a challenge to a commission system that is largely unique to the US and is seen as more expensive for consumers than in countries such as Australia and the UK. Still, the biggest threat to the industry would be a case brought by the Justice Department to completely dismantle the commission-sharing structure.
The DOJ began investigating the real estate industry under the Trump administration, and NAR agreed to steps, including greater price transparency, to resolve the case. Biden officials in 2021 backed out of that deal, saying they wanted the ability to file future antitrust claims against the group.
A federal judge said in January that the DOJ is still bound by that settlement. The department is appealing that decision as the Biden administration expands antitrust scrutiny outside of traditional areas.
“While most industry supporters are attuned to class-action lawsuits, we believe the DOJ’s potential involvement, at some point, could create a whole new set of challenges,” the analysts said by Stephens.
(Updates with industry context throughout.)
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