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.
Executive Director Stephen Brobeck spoke for CFA at the hearing and his testimony
was titled "Residential Real Estate Brokerage Services: A Cockamamie
System that Restricts Competition and Consumer Choice.
as defined by the American Heritage Dictionary, is (1) trifling, nearly valueless;
(2) ludicrous, nonsensical. Brobeck explained cockamamie, from a consumer perspective,
is a pretty apt adjective for a system that is indeed "ridiculous and
nonsensical." In what other product markets in the United States, he asked
are prices and related services rarely advertised and even difficult to learn?
Most prices high and uniform? Limited services providers unavailable because
of restrictive state laws? Further, he said, there is even discrimination against
sellers who try to complete on price and/or service and roadblocks to obtaining
key product information on-line.
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
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
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.