The good times in residential real estate commissions are about to end. Consequently, investors should consider investing in those stocks benefiting from real estate commission changes.
You might be asking: What is happening? On Oct. 31, a Missouri jury rendered a $1.8 billion verdict against some of the most prominent residential real estate sales players:
“[A] jury found the National Association of Realtors, and the largest national real-estate broker franchisors, including Berkshire Hathaway’s HomeServices, had conspired to artificially inflate the home-sale commissions paid to real estate agents,” Fortune reported.
“The jury ordered NAR and others to pay nearly $1.8 billion in damages to a class of more than 250,000 home sellers. Under antitrust law, that figure can be tripled to over $5 billion, at the court’s discretion.”
According to Fortune, Americans pay approximately $100 billion annually in real estate commissions. The verdict could lower these costs by $30 billion in the future.
Naturally, the big players will appeal the verdict, so it could take years to trickle down to the home buyer. However, one thing is abundantly clear: the status quo in residential real estate is about to get altered permanently, one way or another.
Here are three stocks to buy that’ll benefit from lower commissions on real estate sales.
eXp World Holdings (EXPI)
eXp World Holdings (NASDAQ:EXPI) is a holding company for three businesses: eXp Realty, Virbela, and Success Enterprises. The largest of the trio is eXp Realty, which operates a cloud-based real estate brokerage model in 24 markets worldwide, including the U.S., where it has more than 89,000 agents.
The company’s cloud-based business model with no brick-and-mortar fixed costs enables eXp Realty to attract agents with lower acquisition costs. In the most recent quarter, EXPI grew its agent base by 5% over Q3 2022.
Because eXp Realty returns more than 90% of the commission to agents instead of 70% for a traditional brokerage, a lower commission won’t hurt the eXp Realty agent as much as the traditional agent working for a traditional broker.
To keep its performing agents with the company, eXP Realty has a revenue share program to incentivize them to stay. For example, if you bring an agent to eXp Realty, you’ll get 3.5% of the agent’s future gross commissions. The revenue share program goes seven levels deep in a format similar to multi-level marketing (MLM).
Despite lower revenue in Q3 2023, it still managed to increase its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by 53% in the quarter.
As recently as February 2021, EXPI stock traded near $80. Overbought at $80, it’s oversold at under $13.
Zillow Group (Z)
It’s been a while since I discussed Zillow Group (NASDAQ:Z), the tech-focused real estate company with the most visited website in the U.S. Through brands such as Zillow Rentals, Trulia, and others, it helps consumers get through the home-buying process in one piece. It also uses its technology and software to help those working in the real estate industry better meet their clients’ needs.
Zillow was one of my success stories from 2020. It gained more than 166% in 10.5 months. Eventually, it plateaued around $200 in February 2021 and now trades for about a fifth of the value.
Zillow’s shares fell on the Oct. 31 news.
According to Jefferies analyst John Conaltuoni, possible changes to the commission-sharing system that currently exists could force agents representing buyers to seek compensation directly from buyers instead of from the seller. Ultimately, this puts the use of agents at risk given how expensive home buying already is.
While it’s hard to know what will happen and how it will affect Zillow’s business, I think the company’s technology and services will remain in demand from home buyers and those working in the industry. However, it might look a little different five years from now. It’s not the first time the company’s had to pivot. It ought to be okay.
Rocket Companies (RKT)
My last pick is a nod to lower closing costs. Rocket Companies (NYSE:RKT) originates, closes, sells, and services residential mortgages, frequently packaging and selling them to investors in the secondary market.
Should interest rates start falling in 2024, lower brokerage commissions and reduced interest costs could be a significant revenue and profit accelerant. In the latest quarter, Rocket’s adjusted revenue was $1.0 billion, just under 13% higher than a year earlier, on a 13.2% reduction in closed loan origination volume. Its adjusted EBITDA was $73 million, up considerably from a $160 million loss in Q3 2022.
The company’s ONE+ program provides low-to-moderate-income Americans with a home loan requiring a 1% down payment. Not surprisingly, the program’s closing volume and loan units have tripled since it started in May.
As for the company’s ongoing cost-cutting initiatives, it expects to find $200 million in annual cost savings in 2023. This is at the high end of its original goal of $150 million to $200 million.
One interesting line item on its income statement is Other Income. In Q3 2023, it was $236.3 million, 43.6% higher than a year earlier. Leading the way is subscription revenue from its Rocket Money app — $46.4 million, up 42.3% from a year earlier. That represents 20% of its revenue. As it continues to build out Rocket Money, that percentage will grow considerably.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
