A change to the real estate commission structure is shaking the industry — and homebuilders and consumers appear to be the winners.
This week, Compass (COMP) agreed to pay $57.5 million to settle antitrust claims related to commissions. It’s the first major brokerage to announce a settlement since the National Association of Realtors (NAR) agreed to pay $418 million as part of a lawsuit alleging the industry conspired to inflate agent fees.
Experts say the NAR settlement — which essentially decouples buyer and seller agent fees — is a win for consumers because it will create transparency around how commissions are set and paid and ultimately lower costs.
“This will reshape the housing market in the greatest fashion we’ve seen in over 50 years,” KBW analyst Ryan Tomasello told Yahoo Finance Live (video above).
US Realtor commissions have ranged from 5% to 6% since the 1950s, and are usually split between the seller’s and buyer’s agents, with the home seller footing the entire bill.
Increased transparency will make it easier for buyers to negotiate fees or bypass the use of agents entirely. Buyer agent usage in most countries is uncommon, averaging 33% compared to the US’s rate of nearly 90%.
For buyers who decide to use an agent, advocates say fee costs are likely to substantially decline. Right now, US commission rates are among the highest in the world. Commissions on a $500,000 home sold in the US would be about $25,000 to $30,000 — compared to roughly $6,500 in the UK.
As a result, the total commission pool, currently $100 billion nationally, could be slashed to $70 billion, according to KBW’s analysis.
Read more: How to sell your house without a Realtor
A ‘major boost’ for homebuilders
Changes resulting from the NAR settlement are a “major boost” for homebuilders, who typically paid the buyer agent’s commission.
In a note to clients, Evercore ISI’s Stephen Kim wrote that agent commissions have been a “significant drag” to builders’ profitability, therefore a “shift in broker fees represents a significant positive for builder margins.”
“This would disproportionately advantage large homebuilders, who have their own salespeople and robust online shopping environments; it is far easier to buy a new home without a buyer’s agent than an existing home,” wrote Kim.
Homebuilder stocks have already been on the rise as high mortgage rates continue to limit the supply of used homes for sale. A reduction in commissions could help further drive demand, National Association of Home Builders CEO Jim Tobin told Yahoo Finance Live.
“As commissions come down, I hope we will see costs to builders come down as well,” Tobin said. “That translates into lower home prices for consumers.”
Shares of Lennar (LEN), Toll Brothers (TOL), and PulteGroup (PHM) have rallied to record highs this year, powered in part by the NAR settlement but also on the prospect for Fed rate cuts. Toll Brothers is up about 25%, while Lennar and PulteGroup are up 12% and 14%, respectively.
Brokerage models ‘at risk’
While homebuilder stocks have clocked gains in the past week, investors dumped shares of Zillow (Z), Redfin (RDFN), and Compass (COMP) on fears a change to agent fees will be costly for major brokerages.
Analysts warn of downside risk ahead, arguing the shift in cost structure is only partially priced in at current levels.
In a note to clients, Morgan Stanley’s Matt Cost wrote that while there is a “credible bull case where commission levels remain stable”, shares of Zillow, RE/MAX, and Compass “could decline further to the extent the market fully prices in material downside to commission rates going forward.”
Cost emphasized Compass as the brokerage most at risk, given “substantially all of its revenue is tied to broker commissions.”
But the new changes don’t signal doom and gloom for all listing platforms. In an environment where more buyers will do the house hunting themselves, platforms that help sellers advertise their listings have room to grow.
KBW’s Tomasello thinks that CoStar Group (CSGP) is a “winner” and “key beneficiary” because it caters to seller agents — a focus he expects other platforms to pursue.
“Real estate portals that have historically relied more on the buy-side piece of this commission pool for their revenue models, [such as] companies like Zillow, Realtor.com, may need to reconsider the role that they play in the housing market and potentially shift that focus more to the sell side in terms of advertising homes,” Tomasello said.
CoStar shares rallied 8% after the NAR settlement was announced last Friday. Shares are up 12% year to date.
Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.
The National Association of Realtors (NAR) is set to cough up $418 million in damages and eliminate commission rules in a landmark deal experts say will significantly shake up the real estate industry.
“This will blow up the market and would force a new business model,” Norm Miller, a professor emeritus of real estate at the University of San Diego, told The New York Times.
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The NAR agreed to settle after a series of lawsuits accused the organization of conspiring to artificially inflate home sale commissions.
Ryan Tomasello, an analyst for investment banking firm Keefe, Bruyette & Woods, published a report in October prior to the settlement. In it, he predicted changes to the commission structure could lead to a 30% reduction in the $100 billion Americans pay in real-estate commission fees each year.
What’s more, Tomasello says, it could drive more than half of the nation’s 1.6 million realtors out of the industry.
The end of the 6% commission fee?
Real estate agents across the U.S. typically charge a commission between 5-6% — one of the highest rates in the world — that is often divided equally between the buyer’s agent and the seller’s agent.
However, recent lawsuits argued the NAR stifled competition among real estate brokers and violated antitrust laws by requiring the seller’s agent to make an offer of payment to the buyer’s agent and implementing rules that led to steep standard commission fees.
This settlement means the NAR can no longer set any rules that would allow a seller’s agent to set compensation for a buyer’s agent. The association’s Multiple Listing Service (MLS) — which buyers and sellers use to view for-sale properties — will no longer feature any fields offering broker compensation either.
Experts say the agreement — and potential slide in commission fees — could revive the sluggish housing market.
“This will be a really fundamental shift in how Americans buy, search for, and purchase and sell their housing. It will absolutely transform the real estate industry,” said Max Besbris, an associate professor of sociology at the University of Wisconsin-Madison, according to The New York Times.
However, others warn the possibility of lower commission fees and demand for buyer agents could deter folks from pursuing careers in the real estate industry.
Read more: Generating ‘passive income’ through real estate is the biggest myth in investing — here’s how you can do it in as little as 5 minutes
DOJ still investigating
The Department of Justice’s antitrust division is continuing to investigate NAR practices — particularly whether the organization’s rules have led to price-fixing on commission fees and whether MLS databases have been constraining competition.
The Realtor group continues to deny any wrongdoing.
“Ultimately, continuing to litigate would have hurt members and their small businesses,” Nykia Wright, the interim CEO of NAR, said in response to the lawsuit agreement.
“While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances.”
The agreement must still receive approval by a federal judge before it can take effect.
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