Sunday July 20, 2008

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Consumer Group Calls For Regulation of MLS As A Public Utility

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At the hearings on the "Changing Face of Real Estate" conducted in late July by a subcommittee of the House Banking Services Committee it was pretty clear that one of the presenters, the Consumer Federation of American, had what is frequently referred to as "an agenda."

Could it also have had a point?

On its web site CFA says that it represents about 300 nonprofit organizations from throughout the nation with a combined membership of over 50 million people and bills itself as an advocacy, research, education, and service organization.

Mr. Brobeck stated that over 30 million houses and condos had changed hands over the past five years; to a large extent through sales assisted by real estate agents. In 2005 alone consumers spent $60 billion on brokerage services. Yet, he maintained, consumers poorly understand these services. Just the concept of "agency" is very complicated and different states have different approaches to sorting it out.

CFA maintains that competition and consumer choice is restricted and that information on pricing of these services is not readily available. "None of the dominant firms...advertise commission rates or ancillary fees. There is no other important consumer service in America where it is so difficult to learn about costs."

Brobeck suggested that the big firms have succeeded in maintaining high, uniform prices within different geographic areas - a rate that is usually 6 to 7 percent; sometimes as low as 4 percent in really high-priced markets. "Even at only 5 percent, the $15,000 commission charged on the sale of a $300,000 home represents a higher price than that charged for many new cars or even sophisticated medical procedures."

These big firms, he said, have maintained high and fairly uniform prices by adhering to a tacit agreement to conceal price information and to discriminate against providers who offer lower prices for these services by using a pricing system where home sellers pay the entire commission but listing brokers "split" commissions with successful agents representing buyers. This split is "poorly disclosed to sellers and not disclosed to buyers" but is generally on a 50-50 basis. If a listing broker offers a split below this level there is a risk that traditional brokers working with buyers will avoid this property because they not only want the highest possible split but also do not want to support agents offering lower rates.

In a rational system he said sellers and buyers would each pay for the services they receive and there would be no hidden commission splits. Until this happens, agents should be required to clearly disclose the existence of these splits to both sellers and buyers.

The CFA stance is that a similar situation exists in terms of real estate services. The dominant brokers "not only claim to offer 'full service' but have argued that only brokers offering full services should be permitted to do business." In many cases, they maintain, these agents actually offer less than "full service," because they do not aggressively advertise listings or try to restrict showings to in-house listings. Furthermore, he said, they have persuaded many state legislatures to pass minimum services laws that restrict service competition. He cited a requirement where agents must maintain physical offices rather than virtual ones and others that require agents to accompany buyers on home visits.

Returning to what was really the hot-button issue of the hearings he called for information on Internet listings (i.e. MLS listings) to be easily accessible so that customers can shop on their own rather than feeling that they must utilize the services of a broker to gain access to complete information... To the argument of traditional brokers who control listing services that they created them and should be able to control them he responded that home sellers who pay the commissions should be provided the widest possible exposure for the home they wish to sell and home buyers, who effectively pay a portion of these commissions through higher home prices should have easy access to the information. In his strongest statement he said "because the MLS s and Realtor.com so dominate listing services, they function as a near-monopoly and should be regulated as a public utility."

In what may have been his most inflammatory remarks, Brobeck took on the qualifications and professionalism of real estate agents and the regulations that control that industry. We will give the details later in the week.