Zillow, Redfin drop after realtor group agrees to cut commissions

Shares of realtor stocks, including Zillow (Z) and Redfin (RDFN), declined on Friday morning following a report that a real estate trade group agreed to a landmark deal that will eliminate a foundation of the industry.

NEWS: The National Association of Realtors has announced an agreement to settle the wave of commission lawsuits brought by home sellers, Debra Kamin of The New York Times reports, citing a copy the paper obtained of the agreement. Under the terms of the agreement, the organization, which has set the guidelines for home sales for decades, will pay $418M in damages and eliminate its rules on commissions.

The deal, which lawyers anticipate will be filed within weeks, but still requires the approval of a federal court, would end a multitude of legal claims from home sellers who argued that the rules forced them to pay excessive fees.

WHAT IT MEANS: Without the traditional 6% sales commission rate guaranteed, real estate agents will now most likely have to lower their commissions as they compete for business. Economists estimate commissions could now be reduced by 30%, driving down home prices across the board, the Times says, adding that the opening of a free market for Realtor compensation could mirror the shake-up that occurred in the travel industry with the emergence of online broker sites such as Expedia (EXPE) and Kayak, which is owned by Booking Holdings (BKNG).

“The forces of competition will be let loose,”  said Benjamin Brown, co-chairman of the antitrust practice at Cohen Milstein and one of the lawyers who hammered out the settlement. “You’ll see some new pricing models, and some new and creative ways to provide services to home buyers. It’ll be a really exciting time for the industry.”

PRICE ACTION: In morning trading, shares of Zillow are down nearly 8% to $50.87 and Redfin fell 4% to $6.06. Meanwhile, Compass declined over 7% to $3.17.