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The National Association of Realtors or “NAR” just announced a $418 million settlement in a deal that is supposed to “spare” home sellers from automatic commission to the buyer’s agent. This news seemed to get lots of publicity but in reality, I believe it is much ado about nothing. First of all, home sellers don’t have to sell their homes at all, and they certainly don’t have to pay anyone to sell them. They can do a for sale by owner or “FSBO”. As most people know, this is a penny wise and pound foolish way to market a property. If you do decide to sell your home with a broker, the fees are already negotiable and I don’t know anyone who has been paying the 6% fees, which were more common many years ago. These days, most listings offer a 5% total fee and it is typically split in half with the listing agent getting 2.5% and the buyer’s agent getting 2.5%.
This settlement is supposedly going to make it easier for home sellers to only pay their listing agent, perhaps a 2.5% fee. In this situation, the expectation might be for the buyer to pay their agent. However, I believe most smart home sellers are still going to offer a 2.5% fee to the buyer’s agent because it makes financial sense to do so. For example, let’s say a home seller named Jean lists their home for a 5% total fee with it being split between the listing agent and the buyer’s agent. Now let’s say a home seller named Jane lists a similar house, perhaps even on the same street, but does not offer to pay anything to the buyer’s agent. Both Jean and Jane have their homes on the market, and all things being equal, it seems pretty obvious that Jean’s house is going to have many more showings, interest, and offers because all the agents will be financially incentivized to help sell this house, and also because buyers would prefer to buy a house where the seller is going to cover the fees to their agent rather than paying this themselves.
In this example, with Jane trying to save 2.5%, might mean her house doesn’t sell as fast or for as much. If you miss out on getting even one extra offer, because you had fewer showings and less interest from buyers’ agents and their buyers, it could make a world of difference. That’s because you might not get any offers or only one offer. When you get only one offer, the buyer has the upper hand and can often offer less than the asking price. But if you have just one extra offer or more, that makes it a potential bidding war, and bidding wars often result in properties selling for way more than the 2.5% buyer’s agent fee. So for all these reasons, I believe most sellers will continue with the system in place now.
As we all know, you get what you pay for and if you don’t want to pay the buyer’s agent fees you are going to get less interest in your property and that means fewer offers. For this reason, I think the knee-jerk selloff in real estate-related stocks is unwarranted in many cases. In addition, even if some sellers “save” themselves from paying the buyer’s agent, the buyer’s agent is going to get paid by the buyer in most cases, so there isn’t likely to be a big drop in broker commissions for this reason either.
When this lawsuit settlement was reported on March 15, 2024, the stocks in this sector traded down significantly in some cases, and others held up quite well. This news was not a surprise for anyone in the industry, but the stocks traded like this came out of left field. It seems more and more like big headlines get the immediate attention and response by short sellers and algorithmic trading also kicks in. This is what seemed to cause a knee-jerk sell-off, but towards the end of the day, one stock in particular seemed to be trying to shake off the news. Let’s take a look at a few of the stocks in this sector:
Zillow Group, Inc. (ZG) provides many online real estate services. Lots of homeowners check their home values on this site and the word Zillow is a verb these days, as people say they “Zillowed” a home to check the value. This stock was down around 13%, the day the news came out. I think part of the reason it took such a big hit is because it had recently almost doubled in value. In November 2023, it was trading in the $33 range but surged to nearly $60 within just a couple of months. So this stock was probably due for a pullback after such an extreme move higher.
The other reason this stock probably took a big hit is because of valuation. It offers growth potential, but you are paying for it. Analysts expect Zillow to earn $1.51 per share in 2024, and $2.09 per share in 2025. Even after a big drop to $46 per share, that puts the price-to-earnings ratio at around 30 times. Not cheap, but this stock will probably always have a premium compared to other stocks in this sector because it is now considered an asset-light business model and primarily as a growth stock.
As the chart below shows, Zillow shares had a huge run between November and December. This stock has now given back a big portion of those gains and it might consolidate around this level for a bit before seeing a rebound. I think this stock is interesting as a long-term holding and I plan to be accumulating on this pullback or on any further weakness, but only in small amounts to be sure it has stabilized. I view Zillow as a buy in the short term and a strong buy in the long term, especially on any further weakness.
StockCharts.com
Redfin Corporation (RDFN) shares held up better than Zillow, as it was down about 5% on March 15. Redfin is a discount brokerage company, and it is a popular site for consumers to track new listings. While the discount concept seems attractive, this company continues to struggle to make money. Analysts expect Redfin to post a loss of $1.36 per share for 2024, and post another loss of nearly $1 per share for 2025. This stock seems too speculative and the business model does not look attractive to me, so I have no interest in investing my money in this name.
As the chart below shows, Redfin shares also had a big run from the lows it hit in November. At that time it was in the $4 range and it surged to around $11 per share within a few weeks. This stock could have a big relief rally or short-covering rally from the $6 level it now trades at, but I think there are better and safer options out there and I don’t like the lack of profits.
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RE/MAX Holdings, Inc. (RMAX) is my favorite stock in this sector. In fact, just days ago I made it my top turnaround stock for 2024 and wrote about it in this article. This stock sold off on March 15, 2024, as well, but it recouped much of the loss and closed down just $0.25 per share, which was only 3%, making it the strongest performer on a very weak day for the whole sector. I think the market did not sell this stock off like the others because the valuation is already in deep value territory and this company has a very solid history of being profitable. As my recent article points out, analysts expect $1.40 per share in earnings for 2024, and RE/MAX easily earned around $2 per share or more in the past few years, and it earned $1.36 per share in 2023, which was a tough year for real estate transactions. The stock is now trading for just over 5x earnings estimates.
I believe RE/MAX also has a superior business model that derives revenues from multiple sources including franchise fees that each office pays annually, which are not impacted by transactional volume or commission rates. It also has franchisees outside of the United States which adds geographical diversification and this segment of the business is seeing growth.
As shown in the chart below, (just like the other stocks in this sector), this stock made a big run from the November lows of about $8, as it surged within just weeks to around $13 per share. It is now back to trading near the $8 level and I believe this is a big buying opportunity. I also believe that the strength this stock exhibited relative to its peers on March 15, is very bullish. I am accumulating this stock at current levels and I think it will make another run higher, especially when the market starts to anticipate rate cuts that could create a big pick-up in real estate transactions. This stock was trading for $18 in August 2023, and it traded in the $30 to $40 range before the Fed started raising rates. I think it can get back to the $2 per share earnings range by 2026, and push the stock back to those prior levels and possibly much higher.
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Compass, Inc. (COMP) is a real estate brokerage firm. This stock closed down over 14% on March 15, 2024, making it one of the worst performers. I think this was the case because this stock appears speculative and the company has a history of posting losses and could continue to do so based on earnings estimates. I am not bullish on this stock and I see other opportunities in this sector as being far more attractive.
As the chart below shows, this stock participated in the sector rally as it went from the lows in November of just under $2, and then doubled in value within a few weeks to around $4. It is now trading near $3 per share and could be a big mover again when the Fed lowers rates, but I view it as too risky for my comfort level.
StockCharts.com
In Summary
I don’t think this settlement will impact the sector as much as the headlines seem to be projecting. The current system is ingrained, and it also makes financial sense. I believe the National Association of Realtors knows this and it could have continued with the lawsuit and appeals, but they chose not to because it is probably going to be business as usual for the vast majority of home sellers and home buyers. This settlement removes a cloud over the industry and a major overhang on the stocks in this sector. As I said previously, buyer’s agents are going to get paid one way or another so I think this is much ado about nothing. Plus, businesses have a way of adapting to new rules and regulations. I think a 5% commission is very reasonable and if sellers feel better about it, they have always been able to sell a home on their own or use other options to pay just around 2% using discount services. However, most home sellers are savvy and know that you get what you pay for.
I think this is going to end up being more bark than bite and it might be distracting some investors from a major potential investment opportunity. Late last year these stocks all experienced a massive rally. The big reason for this seems to have been due to the expectation that the Federal Reserve was done raising rates and the next step was for a decline in rates. Recent inflation reports have been stronger than hoped for, and that might make the Fed delay rate cuts. This explains the recent pullback in this sector. However, the start of a new rate cut cycle might only be delayed by a month or two, and as the price action showed us not long ago, all of these stocks are likely to see another major rally when rate cuts become more clear to investors. Lower rates will likely unfreeze the housing market and create a surge in activity, especially since there is probably pent-up demand from buyers and sellers who have been waiting for lower rates.
This pent-up demand already appears to be showing up as the Spring home selling season is just starting to heat up. Redfin just reported that new listings have surged by 13% from a year ago, and this is the biggest increase in nearly three years. This is very bullish for all of the stocks in this very beaten-down sector. It shows the potential for a boom in real estate activity when the Fed starts cutting rates. The turn in this sector will likely come fast and hard. As in most contrarian investment opportunities, I believe many investors will miss the opportunity to buy the cycle lows and forgo the significant upside that comes in the next upcycle. I plan to continue accumulating RE/MAX which I view as being best-of-breed in terms of name-brand recognition, profitability, and valuation. I might also buy more shares of Zillow. The big rally this sector enjoyed in December is a hint of what is to come later this year.
No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
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This article was originally published by a seekingalpha.com . Read the Original article here. .