Shares of real estate digital brokerage platforms Redfin(NASDAQ: RDFN), Opendoor(NASDAQ: OPEN), and Zillow Group(NASDAQ: Z) were all down heavily today, plunging 5.7%, 9%, and 7%, respectively, on the day.
The fall across the digital brokerages was likely due to the same factor. Today, a federal jury found the National Association of Realtors (NAR) and other large Midwestern residential brokerages liable for conspiring to keep commissions high, awarding the plaintiffs $1.785 billion in damages.
These three companies were not named in the lawsuit and are thought to be digitally savvy disruptors to the traditional brokerage industry. Still, if large brokerages are forced to cut commissions, that would potentially make them more competitive with these three stocks.
Conspiring to keep commissions high
In this case, which came from a federal court in Missouri, the defendants were the NAR, as well as Midwestern brokerages Keller Williams and Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) HomeServices of America. In addition, there was a second lawsuit against two other brokerages -- although not the three above -- which was settled for a smaller amount earlier this year.
Unfortunately for the defendants, it's also possible the antitrust judge could potentially triple the damages if the judge deems it justified under antitrust rules. Furthermore, plaintiffs in the case have also asked the judge to order changes to how brokerages operate. Of note, the plaintiffs said they would appeal, but that process could take years.
So is this sell-off in these stocks more fear-based than anything else? After all, none of these three companies were directly named in the lawsuit.
Still, if there are broader changes to industry-wide practices, each could be affected. While Opendoor does buy houses directly from sellers, thereby speeding up and streamlining the process, its commission rate of about 5%, in addition to closing costs, is close to the national average brokerage fee of 5.8%.
Redfin's marketplace model does drive down costs, as it typically charges a 1% to 1.5% listing fee, but that's without the buyer's fee that typically runs another 2.5%, which the seller pays as well. Still, if other traditional brokerages have to lower their commission rates, that would make them more competitive and lessen the "spread" relative to Redfin.
Meanwhile, though Zillow doesn't charge direct commissions on sales, it makes money by charging real estate agents for "buyer leads." Therefore, if real estate agency revenues go down, that could put more pressure on Zillow's customers. For instance, Zillow actually partners with Opendoor and other preferred agents.
A tough housing market just got tougher
These three stocks have already been reeling from the frozen housing market, brought on by the rapid rise in mortgage rates on top of higher home prices, which has been freezing out many would-be buyers. Zillow remains down over 80% from its 2021 highs, while Redfin and Opendoor, which are more direct comps for brokerages, are each down more than 90%.
Unfortunately, the tough stretch has continued recently, as long-term Treasury bond yields have shot up from the low-3% range earlier this year to nearly 5%, and mortgages tend to be priced off these long-term debt instruments.
On top of significantly lower transaction volume, now these companies may have to deal with pressure on their commission rates as well, adding insult to injury. While we still don't know the ultimate impact of the lawsuit verdict on these three companies specifically, either in the short- or long-term, it appears impatient investors are selling first and asking questions later.
For those contrarian investors looking to bet on a lower path for interest rates in the future, these stocks may be worth a look. But if we are truly in a higher-for-longer interest rate environment, and as political pressure comes on the brokerage industry to lower fees on top of expensive housing prices, the hoped-for turnaround may not happen -- at least not for a long time.
10 stocks we like better than Opendoor Technologies
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Opendoor Technologies wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of October 30, 2023
Billy Duberstein has positions in Berkshire Hathaway. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Opendoor Technologies, Redfin, and Zillow Group. The Motley Fool recommends the following options: short November 2023 $12 calls on Redfin. The Motley Fool has a disclosure policy.
