Shares of Zillow Group (NASDAQ: Z)(NASDAQ: ZG) fell 13.5% on Friday after the National Association of Realtors (NAR) agreed to settle a series of lawsuits brought by home sellers alleging the industry has conspired to boost agent commissions.
The move appears likely to pave the way for reduced broker commissions on real estate sales — a development that could potentially curb one of Zillow’s bread-and-butter revenue streams.
On the NAR’s historic settlement
In a press release earlier today, the NAR announced an agreement to settle all outstanding litigation against the organization and its members in exchange for a $418 million payment made over roughly four years. The NAR continues to deny any wrongdoing.
The NAR also agreed to put in place a new multiple listing service (MLS) rule prohibiting offers of broker compensation on the MLS, though they could continue to be an option consumers can pursue off-MLS through consultation with real estate professionals. In addition, NAR will enact a new rule requiring MLS participants working with buyers to enter into written agreements with those buyers.
In other words, this will make it significantly easier for home buyers to negotiate fees with their own agents and could mean more buyers simply forgo using agents altogether.
This affects Zillow, of course, in that the development seems very likely to reduce the commission rates real estate agents are able to collect for their services, which could in turn mean significantly fewer agents willing to maintain their active licenses.
What’s next for Zillow investors?
Though Zillow has been striving to expand into other segments of the real estate market — including mortgages, rentals, and display ads — nearly half (48%) of Zillow’s total revenue last quarter came from buy-side residential transactions. Within that, around 80% of Zillow’s Premier Agent program revenue came from buy-side deals.
Suffice to say that if this settlement and subsequent rule changes result in a seismic negative shift in realtors’ pay structure — and noting said rules are set to take effect in July — it could mean Zillow is in for a rough road ahead.
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Steve Symington has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zillow Group. The Motley Fool has a disclosure policy.
Why Zillow Group Stock Dropped Today was originally published by The Motley Fool