A Landmark Verdict Could Change How Much You Pay For Your Next House

A recent verdict could change the way buyers and sellers interact with the housing market.

A federal jury in Missouri ruled Tuesday that the National Association of Realtors and other major real estate companies were guilty of conspiring to keep commission rates high in the real estate industry.

With mortgage rates nearing 8% and the market almost at a standstill, the decision is causing a stir across the real estate sector. However, it could benefit consumers by lowering commission costs.

What Happened: For decades, sales commissions for several brokerage-led industries, including stockbrokers and travel agents, have come down extensively or hit zero due to technological disruption. Yet, sales commissions for the real estate market continue to float between 5% and 6% — a rate that the federal jury deemed artificially inflated.

High commissions for real estate agents affect consumers. After all, the price of those commissions is passed down to the final price of a house. Sales brokers' fees are typically divided with the buyer's brokers.

After a two-week trial, the NAR, along with HomeServices of America, and Keller Williams were charged with $1.78 billion in damages to home sellers, for collusion to artificially inflate commissions.

HomeServices of America is the largest real estate company in the U.S. by number of closed transactions and is a subsidiary of Warren Buffet's Berkshire Hathaway BRK.

Under the current system, which can be challenged depending on the trials' final outcome, sellers are forced to pay high commissions to buyer's brokers, although technology now allows buyers to do much of the searches themselves. The plaintiffs included claims from over 260,000 home sellers in Missouri, Kansas and Illinois, who were unhappy with having to pay buyer broker's commissions, according to Reuters.

A NAR spokesperson said the group plans to appeal the decision in an effort to reduce damages. However, if the court chooses to apply anti-trust laws to the decision, the damages for the losing parties could reach north of $5 billion.

Other major players in the real estate industry were also defendants in the lawsuit, but were not included in the verdict since they settled before the trial. Re/Max Holdings RMAX paid $55 million, while Anywhere Real Estate HOUS — parent company of Century 21 and Coldwell Banker — paid $83.5 million.

Also Read: The Housing Market Has Become A ‘National Crisis’ According To One Investor

Why It Matters: The verdict may shift the way home buyers and sellers interact with each other. It may also tweak the roles that agents play in their transactions.

Today, multiple-listing services, which essentially work as a broker exchange for buyers and sellers, demand sellers to set in advance the amount they will pay a buyer's agent if the sale goes through, in order to publish their listing in the platform. This dynamic is regulated by the NAR.

That was a key issue in the lawsuit, where plaintiffs argued that the system in place keeps commissions high and makes it harder for buyers and sellers to negotiate prices. Commission prices are set by brokerages and do not necessarily reflect the prices that the market would pay for that service if able to choose.

The current system creates a misaligned incentive structure. Sellers who pay more commissions get more agents to show their property to buyers, while buyers' agents choose to show their clients properties based on the commission they will receive instead of focusing on finding the best product for their client.

An analyst from investment bank Keefe, Bruyette & Woods, told the Wall Street Journal 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."

While no changes have been made so far, the federal judge leading the case could impose changes in how the brokerages set commissions, or directly push brokerages to change their model in fear of facing further liabilities.

If the rules are changed and sellers are barred from paying buyers' broker fees, then many buyers might choose to not go through an agent to buy their home, as they would have to pay for their fee themselves.

The whole way in which buyers' agents work might then change, offering specific services like negotiating prices or inspecting houses, instead of a fixed fee stemming from the entire transaction.

Stocks Affected: This week's verdict rattled the market for real estate services, including many publicly traded players focused on providing agent services.

Tech real-estate marketplace company Zillow ZG is down 9.7% since its closing price on Monday, a day before the jury's decision became known.

Compass Inc COMP which employs approximately 28,000 agents, is down 7.6% since market close on Monday.

Redfin Corp RDFN lost as much as 12% between Monday and Tuesday, but has corrected its losses throughout Wednesday and Thursday and is now up 2.2% since Monday at closing time.

Re/Max Holdings is down 1.16% since the market close on Monday.

Vanguard Real Estate Index Fund ETF VNQ was not hard hit by the news. The fund is up almost 6% since the market close on Monday. Charles Schwab US REIT ETF SCHH and Real Estate Select Sector SPDR Fund XLRE are up roughly 6% since that date.

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