Zillow and CoStar Share Prices Shift on News of NAR Shock Settlement

March 18, 2024
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The trajectories of real estate portals in the United States may be about to diverge as the National Association of Realtors (NAR) revealed that it is seeking a $418 million settlement to various lawsuits concerning the way agents get paid.

On Friday The New York Times broke the story that the NAR's legal team had agreed to a settlement that would see big changes in the industry. The NAR then released a statement confirming that it had proposed a settlement that would resolve suits against itself and over one million of its members.

Although the proposed settlement is still subject to federal court approval and scrutiny from the US Department of Justice, if it were to be waved through it would mean...

  • The NAR agrees to pay plaintiffs $418 million over four years to resolve what could have totalled a $5 billion judgment.
  • The NAR would be absolved of responsibility along with over 1 million of its members and NAR-owned MLSs.
  • No more display of broker compensation on MLSs (expected July). Agents can still agree to cooperative compensation off an MLS.
  • Buyers' agents would have to have a written agreement with their customers (what's included in the service and how much it costs).
  • Although sellers will be able to offer buyer agent compensation, many more buyers would have to pay their own agent.

The proposed settlement does not tie up all loose ends. Brokerages with a transaction volume of over $2 billion in 2022 would not be included and it was not immediately clear if the proposed settlement covered all the many copycat legal cases that have been filed against the NAR.

There had been speculation in the industry that the NAR would ultimately seek to settle the lawsuits and free up its members to concentrate on selling houses as the US residential market is predicted to get back on its feet. However, the sudden timing of the announcement has surprised many with industry publication Inman.com reporting that just two days before the announcement, the NAR's legal team were set to tell members of plans to fight the Sitzer Burnett judgement.

The NAR will at least hope that the settlement closes a turbulent chapter in its history that has involved scandal, lawsuits and dwindling member confidence.

In October, the Seattle-based brokerage Redfin announced plans to leave the industry association and Inman.com reports that a recent poll showed that 27% of agents are considering joining a new rival trade group.


Explained: What led to the NAR proposing a settlement?

Over the last few years, several lawsuits have been brought against big US brokerages and the NAR. The issue at the crux of the suits was the way that buyers' agents get paid in property transactions.

In the US market, the seller typically pays the entirety of agent commissions which is normally about 6% of the sale price. These commissions are typically split between the seller's agent and the buyer's agent with the NAR setting the rules on how the commission is split and how that split is displayed. The suits argued that the seller has no control over how much they pay the buyer's agent and that this dynamic ultimately lead to inflated commissions and less competition.

Watch: US real estate market expert Brian Boero explains the situation and what it means for portals in a recent episode of the PPW Pod.

In November 2023 a Kansas City jury found that the NAR, along with brokerage firms HomeServicesofAmerica and Keller Willams were all guilty of colluding to inflate commission rates. This ruling, known as the Sitzer-Burnett ruling, not only meant that the guilty parties were ordered to pay $1.8 billion to the plaintiffs but also showed how other similar cases might turn out. This ultimately led the NAR to look for the settlement announced on Friday.


What might this mean for real estate portals in the US?

Many industry commentators believe that the proposed settlement will lead to a substantial number of agents leaving the market and big pressure on buy-side commissions.

While this probably spells trouble for both Zillow and Realtor.com who make most of their money from charging buyers' agents for leads, challenger portal Homes.com may benefit from the changes.

CoStar-owned Homes.com has been loudly touting its way of doing things which sees the portal use a model similar to 'freemium' portals in the rest of the world. Homes.com only monetises agents on the seller side of the transaction—listing agents get free leads, only paying if they wish to upgrade their visibility or buy extra premium services.

While Zillow's share price tumbled more than 15% on Friday after news of the NAR's proposed settlement broke, CoStar's was up 8%.

March 18, 2024
Since March 2020 Edmund's job has been to read about, write about, collect data on, analyse and generally know about real estate marketplaces and the companies that run them. Before that he worked at the aggregator Mitula Group (which became Lifull Connect) for five years.

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