How Real-Estate Brokers Are Reacting to the Historic Commission Verdict

Residential real-estate brokerages are seeking to reassure investors after last month’s $1.8 billion verdict against the National Association of Realtors, another potential blow to an industry already reeling from a severe housing-market slowdown. 

Industry analysts say the historic verdict could prompt changes in how real-estate agents are paid and eventually push commissions down. A federal jury on Oct. 31 found NAR and two large brokerages conspired to keep costs artificially high. 

Many brokerage executives have said this month that modifications to the system are likely to be small and could take years to play out. They maintained that any changes are unlikely to harm their businesses.

“We do not anticipate these lawsuits will result in any changes to our business that will significantly disrupt the agent-buyer relationship,” said Howard Lorber, chief executive of Douglas Elliman, during a Nov. 8 earnings call.

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Some analysts have been less sanguine. In a report released ahead of the verdict, Keefe, Bruyette & Woods predicted that the lawsuits could lead to a 30% reduction in the $100 billion that Americans pay in real-estate commissions every year and push well over half of the almost 1.6 million agents out of the industry. 

“It’s surprising to us that most companies have been very quick to dismiss the risk of material impacts to their business models or the industry at large,” said Ryan Tomasello, managing director at Keefe, Bruyette & Woods. “You have more and more lawsuits being filed.”

Residential brokerage stocks sold off after the Oct. 31 verdict, though some have recovered losses since then and rallied on Tuesday after data showed that October inflation cooled more than expected and bond yields fell. 

Shares of broker Redfin and Anywhere Real Estate, the parent company of brokerage firms Corcoran, Century 21 and Sotheby’s International Realty, both rose more than 15% on the day.

NAR plans to appeal the verdict and, in the meantime, will continue to advocate for homeownership and put consumer interests first, the group said in a written statement.

Real-estate brokerages faced a tough business environment even before the verdict. The volume of home sales has slumped this year and is on track for the worst year since at least 2011 because of higher mortgage rates and a limited supply of homes for sale. 

Redfin and Re/Max Holdings are among the real-estate firms that laid off employees after the housing market slumped. Anywhere Real Estate said in January that it had reduced its workforce by more than 10% since June 2022.

Looking ahead, a much larger suit against the Realtors association and brokerages, involving 20 markets from Philadelphia to Miami, could go to trial next year, and at least two nationwide lawsuits against NAR and other large brokerage companies were filed after the Oct. 31 verdict.

Under the current system, sellers pay a commission that goes to their own agent, who then shares it with the buyer’s agent. In most markets, sellers have to include the amount they will pay a buyer’s agent when advertising a home on a database known as a multiple-listing service.

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Many industry watchers expect it to become less standard for sellers to offer compensation to buyers’ agents. But some are forecasting more radical changes, such as sellers being banned from compensating buyers’ agents.

Robert Reffkin, chief executive of brokerage Compass Inc., pointed to Northwest MLS, a broker-owned multiple-listing service in Washington state, which stopped requiring sellers to make a minimum offer of compensation in 2019.

That change hasn’t pushed commissions down in Washington state, Reffkin said during an earnings call this month. “There’s no evidence to date that commissions will be under pressure,” he said.

Northwest MLS said it hasn’t analyzed compensation in listings. 

Two companies, Anywhere and Re/Max, settled before last month’s trial and agreed to pay almost $140 million combined. The firms, which admitted no wrongdoing, agreed to some changes including not requiring their agents to belong to NAR. The settlements still need to be approved by the court. 

“Apart from payment of the settlement amount, we do not expect the terms of the proposed settlement to have a material impact on results of operations and cash flows,” said former Re/Max CEO Stephen Joyce during an earnings call.

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Re/Max suspended its quarterly dividend because of the settlement and the slow housing market, Joyce said. Re/Max said Monday that Erik Carlson, who was most recently CEO of DISH Network, is the new chief executive at Re/Max.

Another brokerage chief executive, Redfin’s Glenn Kelman, said the industry upheaval could be more significant. Redfin has long advocated for lower commissions.

“The Missouri verdict and other court cases may lead to a revolution in our industry, not just reform,” he said during an earnings call this month. “All year, and probably last year too, commissions have been significantly compressing. That will continue.”

If buyers become largely responsible for paying their own agents, some might opt not to use agents altogether, which would mean less business for the real-estate agents that primarily work with buyers.

A decline in buyers’ agents could harm real-estate listing companies such as Zillow and Realtor.com, which sell leads to buyers’ agents. Zillow and Realtor.com aren’t defendants in the continuing commissions lawsuits. (News Corp, owner of The Wall Street Journal, operates Realtor.com under license from NAR.)

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“I think the industry will move quickly toward these more transparent and negotiable rules that we have begun to see in several markets,” said Rich Barton, Zillow’s CEO, during an earnings call. But he said he doesn’t expect representation for buyers to go away. “Consumers really want and need and deserve representation,” he said.

While some investors have been following the lawsuits for years, others are scrambling to get up to speed, analysts said. 

“There’s still a significant degree of uncertainty, and I would underline significant,” said John Campbell, managing director of equity research at Stephens. “If you are alive in this industry today, and you are a leader, I feel like you have to be focused on this.”