Zillow or CoStar? NAR settlement terms could determine a winner

Stock performance

In the hours after the bombshell news of the settlement, residential real estate stocks went on a roller-coaster ride.

Like all of the publicly traded brokerages, Zillow Group saw its stock prices slide, dropping 13.4% on the day of the NAR settlement announcement. The only firm to break from the pack was CoStar Group, whose stock rose 8% on the day of the NAR settlement announcement.

This discrepancy in stock performance was the latest in the ongoing battle between Zillow and Homes.com for residential listing portal supremacy.

Analysts and industry experts attributed the differing stock performances to the business-model discrepancies between Zillow and Homes.com. Zillow is mostly known for its practice of selling buyer agent leads through its Premier Agent program, while Homes.com has touted its “your listing, your lead” model, which focuses on seller agents.

In a note issued March 15, after the news of NAR’s settlement broke, analysts at investment bank KBW wrote that the companies they expect to be “most negatively impacted include those with buyer agent commission-driven models.”

“While structural changes could ultimately prove to be a positive for real estate portals broadly, we think CoStar’s (CSGP) Homes.com is best positioned relative to the legacy portals (Zillow, Realtor.com) that face near-term disruption risk with a potential business model transition,” KBW analysts added.

In prior notes, KBW had also referred to CoStar as the “top beneficiary” of a change to the buyer agent landscape.

In October 2023, prior to the start of the Sitzer/Burnett commission lawsuit trial, CoStar CEO Andy Florance told HousingWire that the only way companies like Zillow and Realtor.com could continue to see success with their buy-side lead model was if the NAR’s Participation Rule remained in place.

“If the selling broker wasn’t required to cooperate with this contractually hired buyer broker that came through a lead call center, they wouldn’t cooperate,” Florance said. “If the buyer broker commission rule goes away, that revenue model for the portals goes away for sure.

“We went the route of not leveraging the buyer broker rules from day one because we thought it was a better business model. We think it produces a better agent experience, and we think it is a more durable business model and a more profitable business model.”

CoStar and Florance did not wish to share further thoughts on the news of NAR’s settlement agreement.

Differing opinions

While Florance and the analysts at KBW may believe CoStar and Homes.com may come out on top, other industry analysts and experts believe the competition may not be as cut and dry as some have predicted.

RealTrends Consulting co-founder and industry veteran Steve Murray believes that the terms of NAR’s settlement, which state that commissions or offers of cooperative compensation are no longer allowed to be disclosed on the MLS, will be good for all of the listing portals.

“If I am marketing for a seller that wants to offer a co-broker commission, undoubtedly I am going to still be on Homes.com, Zillow and Realtor.com,” Murray said.

Soham Bhonsle, an analyst at BTIG, shared similar thoughts: “If you are arguing that the MLS is going to go away all of a sudden or that the sell-side agent is basically going to do both sides of the transaction now because buyer’s agents are going away, I still don’t see how that is making the stock do what it is doing. Because in this scenario, Zillow stands to win too. If they both become the de facto MLS, that gives the power to all the portals.”

Despite his optimism about Zillow, Bhonsle acknowledged that depending on how the real estate industry responds to the terms of NAR’s settlement — which is still waiting on final court approval — the behemoth may have to make some changes to its business practices.

“There is no question there is going to be this handoff between where Zillow’s business model is today and where is need to get to,“ he said, “but I’d be amazed if they’re not already building a similar product to Homes.com to get that listing business, so they’ll compete. But it is hard for me to see what is really changing here and what could drive all the demand to Homes.com.”

As Bhonsle suggested, Zillow has already been working to diversify its business, including the provision of solutions tailored to seller agents. In June 2023, the firm launched Listing Showcase by ShowingTime+, an AI-powered “super listing” that is designed to allow listing agents to present their brand and properties in a distinctive manner.

Stephens analyst John Campbell said that this is the part of Zillow’s business that investors should be focused on.

“If you tell me that commission rates are going to be compressed to the point of where it is troubling, there are other parts of the business that are going to get enhanced, like paid listings or a paid inclusion model, or what it is doing with sell-side monetization with Listing Showcase,” Campbell said.

Enhanced transparency

While Campbell believes Zillow will continue to build out it tools and offerings for sell-side agents, he also feels that they will be able to leverage their buy-side business model for future success. Under the terms of NAR’s settlement agreement, agents must have buyer representation agreements in place to work with buyers.

“Zillow and some of the other portals are sending out hundreds of millions leads a year, and last year there were only 4 million transactions, which means that there are probably a lot of low-intent consumers who never transact, and also someone could be a lead 10 times for 10 different agents, but they only buy one home,” Campbell said.

“That is going to change with buyer representation agreements — that lead flow is going to come down a lot, but the conversion rates are going to go up and that will cause the price of those leads to go up.”

Additionally, Zillow has been rolling out changes to its Premier Agent program in select markets since April 2022. In these markets, Zillow narrowed its pool of Premier Agents and it only charges agents for leads if the transaction successfully closes.

“For those who have followed Zillow as long as we have (over 15 years now), we have seen multiple evolutions of both Zillow’s and the real estate market’s business models, but one thing has remained constant – Zillow has always had a strong tech presence with agents,” Daniel L. Kurnos, an analyst at Benchmark Co., wrote in a March 18 note.

“If the business model were to evolve again, we think it would be reasonable to assume that Zillow would produce yet another set of tools that could, at a minimum, help with retention in a worst-case scenario, or further grow wallet share in a best-case scenario, especially if the MLSs themselves can no longer be utilized to the same extent.”

For its part, Zillow said it is too soon to tell how the changes caused by the terms of NAR’s potential settlement will impact the market.

“It remains clear that buyers and sellers each deserve independent representation, with agent fees that are fair, transparent and negotiable,” a Zillow spokesperson wrote in an email. “More transparency in real estate is a good thing — it’s Zillow’s founding principle and something we’ve always championed.

“To that end, we also believe everyone should be empowered with easy, free, equal access to all available home listings and information, including how agent commissions are paid. We will continue to advocate for the best interests of consumers, which we believe also benefits agents and the industry as a whole.”

Realtor.com did not wish to contribute to this article, noting that it does not comment on third-party settlements.

“Realtor.com welcomes consumer transparency and remains committed to supporting agents on both sides of the transaction,” a company spokesperson wrote in an email. “We believe consumers need both listing and buyers agents, and that both sides are important for advising and protecting consumers’ interests.“