For real estate professionals, the business practice changes outlined in the National Association of Realtors’ (NAR) nationwide commission lawsuit settlement agreement —which are set to go into effect on Aug. 17 — are top of mind. But when it comes to the financial performance of their brokerages, industry analysts don’t believe the changes will be the end-all, be-all.
“It is really interesting because you have both these cyclical macro elements that are front and center right now with the Federal Reserve finally getting on the cycle of cutting rates. And that, you could argue, could be a tailwind for the industry over the next few quarters if that spurs more buying activity with more inventory coming online and buyers getting off the sidelines,” said Ryan Tomasello, an analyst at Keefe Bruyette & Woods.
“But is that enough to outshine, outweigh any of these air pockets or hiccups that come out of the implementation of these practice changes over the next few months?” Tomasello asked. ”In my view, macro and interest rates are in the driver’s seat, but the lawsuits and the structural changes coming out of them are a very close second, and it is might be hard to parse through the individual headwinds and benefits from those two different opposing forces in the next few quarters.”
While analysts do not believe the business practice changes will be the defining factor in how the publicly traded brokerages they cover will perform financially, this doesn’t mean they aren’t keeping an eye on things.
“The main thing we are watching for is any kind of meaningful slowdown in transactions or something along those lines that we can ascribe to the business practice changes,” said John Campbell, an analyst at Stephens.
In addition to looking into the possibility of a slowdown in home sale transactions, some analysts are also anticipating a drop in buy-side commission rates, which would put pressure on firms’ profit margins.
“We now assume buyside commission rates move down 30-40% to 1.5- 1.75% (from about 2.4%) while keeping the sell-side commission rate at about 2.4%,” Anthony Paolone, an analyst at J.P. Morgan, wrote in a note on July 24. “There remains a good deal of uncertainty around the timeline of changes unfolding and what market practices will ultimately look like.”
Campbell agrees that commissions may drop, but not to the extent Paolone is predicting.
“I think we will see a little bit more do-it-yourself among buyers, and I think on the surface level, there will be more compression on buy-side economics,” Campbell said, ”But the thing to note here is that some people are saying it will drop 30% or 40%, and I don’t see that.”
In Soham Bhonsle’s view, buy-side agent commission compression will be curtailed because the industry will lose the vast majority of its low-performing or part-time agents. This will leave the professional, high-performing agents to take care of the buyers who wish to have representation. Since these agents are the cream of the crop, they will continue to demand higher levels of compensation for their expertise, experience and services.
“The most productive and the best agents will be able to express and provide their value proposition the better than the others,” said Bhonsle, an analyst for BTIG.
Campbell adds that commission compression on a deal-by-deal basis may be offset by the fact that the top-performing agents could pick up deals from the agents who leave the industry.
Although having fewer agents may cut into brokerages’ revenues if their model depends on agent count, Campbell said the good news for the industry is that top agents are currently scattered among the brokerages. But an advantage could potentially be given to brokerages that put concerted effort into helping their agents be more efficient and productive.
“There are brokerages out there that help their agents be more efficient, and I would say Redfin is probably one of the best at really transforming efficiencies,” Campbell said.
“But at most firms, agents are 1099 independent contractors, and they have to take care of their own technology and expenses, so I think the clear winners are going to be anybody who has any kind of technology that helps drive more leads to their agents.”
At the end of the day, however, analysts — just like the agents and brokerages preparing for the changes — are not 100% sure of what will happen come Aug. 17.
“Anybody who says they know exactly how things will play out is lying,” Campbell said. “I just got back from a conference where I had countless conversations with people, and I wouldn’t go so far as to say that people are fumbling through the dark trying to find their way. I do think the industry has tirelessly adapted itself in preparation for these changes, but no one know exactly what is to come.”
Bohnsle agrees. “I don’t know if commissions are just going to start coming down right away — I think this will take time to play out,” he said. “Some brokerages will come out with different pricing models, and I think as that filters through we’ll see some effects.
“I am not expecting anything this quarter, but we’ll be keeping an eye on the last quarter of this year and the first half of next year, and especially as we get into the spring selling season.”
