Commissions lawsuit verdict pummels Compass, Elliman, Zillow stock
Sitzer/Burnett trial took a bite out of residential firms
Real estate brokerage investors can’t catch a break.
Stocks of major brokerage firms, which had been trending down since the start of a landmark antitrust suit against the National Association of Realtors, Keller Williams and HomeServices of America earlier this month, took a beating this week when the jury found the defendants guilty of colluding over commission rates.
Compass stock hit a 52-week low Wednesday afternoon, Elliman stock initially surged but fell over 7 percent by late afternoon, and Zillow stock fell 8 percent Tuesday but closed up slightly Wednesday, similar to Redfin stock, which fell 13 percent Tuesday but was up slightly Wednesday from its open.
The exception is Anywhere Real Estate. The company, which was initially named as a defendant in the Sitzer/Burnett suit before settling in an $85 million deal weeks before the trial, had Its stock closed Wednesday up roughly 12 percent over the past five days.
“The lawsuits are effectively … threatening the whole foundation of U.S. real estate, which is the co-operative compensation model,” said Stephens analyst John Campbell. “There could be an instance, like in the United Kingdom and Australia, where there’s a lot of transactions that have no buyer agent at all.”
That kind of doomsday scenario would mean fewer agents and lower revenues for firms.
To be sure, the lawsuit isn’t the only factor affecting stock prices. Brokerages have contended with high interest rates weighing down performance in recent months, along with overall economic uncertainty and deadly conflict abroad.
“Chaos and confusion really is the theme of the day for almost the whole society right now, not just real estate,” said Olshan Realty owner Donna Olshan.
Resi’s legal headaches
But there’s more trouble on the way for real estate firms. Minutes after the defendants were ordered to pay $1.8 billion in damages for conspiring to inflate commissions, another lawsuit was filed by the same plaintiff’s attorney, with a similar complaint against Compass, Redfin, Elliman, eXp, Weichert Realtors, United Real Estate and Howard Hanna Real Estate.
In the short term, public brokerages will have to choose between incurring hefty legal expenses or ponying up millions for a settlement deal, as Anywhere did shortly before reporting third-quarter earnings. Anywhere’s volume in the third quarter fell 12 percent year-over-year, though the firm posted a net income of $129 million.
Executives said in previous earnings calls the litigation costs had “meaningfully impacted” their EBITDA, or earnings before interest, taxes, depreciation and amortization.
“There’s real pressure on these companies to eek out a good bottom line and there’s only so much cost-cutting you can do,” said Olshan, adding that attorneys’ fees can easily run several thousand dollars per hour.
The new round of defendants will likely opt to settle, RealTrends co-founder and residential brokerage analyst Steve Murray predicted.
“If they have to write a check to settle, they will. That’s my guess,” he said. “I’ve already had private conversations with two of the additional named defendants, we already had this conversation with them and their counsel.”
Campbell said the verdict arriving just before earnings may actually benefit brokerages.
“People are very negative on real estate brokerages and agents,” he said. “The earnings season gives them a forum to explain their value add to customers.”
That’s exactly what Zillow CEO Rich Barton did during the company’s third quarter earnings call, held one day after the verdict was announced.
“We strongly believe Zillow is well positioned to thrive regardless of how it all plays out,” Barton said.
Barton, who said buyer’s agent activities only account for less than 50 percent of the company’s revenue in the third quarter, added that he doesn’t believe the lawsuits will eliminate buyer’s agents entirely. If they did, the market would likely transition to a “pay-to-play” model led by digital listing marketplaces, similar to some international markets.
Though this could lead to a “more profitable business model” for the firm, Barton added that Zillow is not pushing for the elimination of buyer’s agents, a scenario he described a “step backward” for the industry.
Campbell sees a correction in store for stock prices. He pointed out that a doomsday scenario could be years away if NAR and its co-defendants decide to appeal.
“Where I think the market is wrong at this point is not that these can’t happen, but they’re not certain,” he said. “These stocks have all faceted in a degree of certainty.”