Mortgage rates — not commission lawsuits — will be the story in 2024 for publicly traded brokerages

There is no question that the headline of the year in 2023 for many publicly traded brokerages was the commission lawsuits. But in 2024, industry analysts believe mortgage rates will be the primary focus for many firms.

“I don’t think the lawsuit storyline is very relevant from the perspective of volumes and home shopping behavior,” Ryan Tomasello of KBW said. “At this stage there is obviously a wide range of potential outcomes of how the lawsuit storyline could unfold next year. I think the three most important factors driving sentiment and action next year are going to be supply, demand and mortgage rates.”

With mortgage rates trending downward in recent weeks and economists expecting them to further recede in 2024, analysts are feeling guardedly optimistic about how the publicly traded brokerages will perform in 2024.

“I think the market could be primed to be up a fair amount next year, which I think is a combination of pretty heavy cost reduction efforts and these brokerages getting a lot leaner, I think you are going to see potential for margin expansion with pretty good revenue growth,” said John Campbell of Stephens.

But not everyone shares his rosy outlook.

“Whether it is home prices coming down by some amount or the number of transactions coming down by some amount or the commission rate coming down, it all shrinks the potential revenue opportunity for everyone. It could be difficult for some folks to maintain profitability or even achieve profitability because there is some level of fixed costs to doing business, especially if home sales remain depressed and you have a situation where the commission rates come down,” Anthony Paolone, a real estate senior analyst at J.P. Morgan, said. “The firms have already done a lot to try to preserve some profits or mitigate losses by significant cost cutting initiatives. We’ve seen it at virtually all the companies, but at some point, you need a better revenue story.”

While analysts believe the commission lawsuits and overall conversation surrounding agent commissions could put pressure on commission rates, they don’t believe the impact will be felt immediately.

“I don’t see this verdict affecting the business right away, this will take time to play out through the P&L. I do expect commission pressure on the buy side, but that will come over time,” Soham Bhonsle, an analyst at BTIG, said.

Bhonsle also noted that even if commission rates go down, agents and their firms could still maintain the same level of revenue if the number of transactions they complete go up. However, there is no doubt that lower commission rates could put even more pressure on brokerage’s already thin margins.

“If you compress the commissions on the buyer side by some amount it would have an effect on the overall commission pot and that would hurt the large publicly traded companies because that would be akin to just having a drawdown in volumes overall, which we’ve seen what that does to margins and profits and it hurts,” Paolone said. “So, that has always been the concern.”

Additionally, analysts believe the steep decline of the housing market over the past 18 months and the commission lawsuits may lead many low producing or more casual agents to leave the business, allowing the top performing agents, who typically have a higher commission split with their broker, to gain more market share. An outcome like this would put additional pressure on a firm’s margins.

“Your higher performing agents, they take a higher percentage of the commission, but I think longer term if there is pressure on the buy side commission, agents aren’t going to take less, they are going to ask their broker to pay them more,” Bhonsle said. “So, if there is commission pressure, I could see the agents wanting to keep more of the commission going forward and the brokers will have to pay up if they want to keep their agents, but it won’t be good for their P&L.”

While Tomasello sees this outcome as a possibility, he believes it is more of a multi-year scenario and not something we will see play out in 2024.

“Our best guess is that any changes to the commission structure are more of a mid-year second half type of event that doesn’t really start to show in the numbers until 2025,” Tomasello said.

Although analysts are expecting these pressures to be felt industry-wide, some see the potential for certain companies to fare better than others.

“If I step back and look at the verdict and think about who is going to be able to navigate this better, and it is going to be the better agents. So, when I look at the firms and think about who has some of the best agents I see Compass right away — their agents have pretty high productivity levels,” Bhonsle said. “I think Douglas Elliman will also be okay because they primarily do luxury and that market won’t really be impacted by the verdict.”

Analysts also believe the settlement agreements reached by both Anywhere and RE/MAX in the Moehrl, Sitzer/Burnett and Nosalek commission lawsuits, which have received preliminary approval, could be a boost to the firms.

“The good news is that we can bracket the financial impact and they can absorb it, and I think that’s good news. But it doesn’t change the fact that whatever is to come out of the broader suits or any other potential lawsuits of anything that the Department of Justice may or may not do will still have an effect on everybody’s business,” Paolone said.

Although RE/MAX’s business model relies on agent count, something that the firm has struggled with recently, Paolone is particularly optimistic about the company’s odds.

“I think right now it lands us in a situation where we think that the industry pressures are going to exist but they have a strong franchise and they do support highly productive agents, so we are not expecting a significant amount of growth, but we think that they should at least be able to kind of hold the line and with their strengths, kind of offset the pressures of the business,” he said.

As the copycat commission lawsuits continue to pile up, and mortgage rate and inventory concerns still exist, 2024 will certainly be no walk in the park for brokerages, but analysts do expect it to be better.

“The difference relative to 2023 is that it’s not necessarily going to be catching a falling knife like the past year has been in terms of the decline in volumes, and so perhaps the stability allows those companies to fine some footing and stop worrying about catching that knife and taking advantage of the new normal environment in a more stabilized landscape in terms of volume,” Tomasello said.