Tuesday October 7, 2008

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CFA Hits Real Estate Industry On Low Entry Barriers and Lack Of Oversight

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The Consumer Federation of America had a lot of critical things to say about the real estate industry in general and the National Association of Realtors (NAR) in particular when Executive Director Steve Brobeck, testified before a subcommittee of the House Financial Services Committee in late July. Brobeck spoke about lack of competitiveness but nothing was as sharply worded as his comments about the training and qualifications of those working in the industry or about those who regulate them.

Brobeck quoted NAR's assertion that the real estate industry is indeed competitive because there are so many licensed real estate agents.

Brobeck states that having so many licensed providers is, from an economist's point of view, a hugely inefficient marketplace Why there are so many is because of what he called extremely low barriers to entry; for example, training sessions that can be completed in one long weekend or more typically two weeks. With such modest requirements he expressed dismay that new licensees are able to charge the same rate as experienced ones.

The CFA maintains that NAR has absolutely no interest in changing this system (of encouraging more persons to obtain licenses and become active Realtors) because it generates about $100 million each year in membership fees. He quoted a broker who had written him "only last week" who said that NAR membership fees were $84 per head and that NAR had 1.3 million members. "NAR," the broker said "has nothing to gain and much to lose by raising standards and it will use its powerful lobbying force to ensure that efforts to do so are defeated."

[An editorial comment: NAR dues, whether they are currently more or less than $84 per year, are only a portion of the fees that agents pay to state and local associations as well as NAR to maintain a status of a Realtor. These membership fees are required for any agent working for a firm that is affiliated with NAR and usually does not include other fees to place or access listings with local multiple listing services or what can be hefty fees to use lockboxes.]

Brobeck stated that NAR is supported by major real estate firms because these firms have to only pay their salespersons through commissions so they benefit from having large pools of salespersons even if not all are terribly productive.

Moving on to regulation of the industry, Brobeck stated that, in most states, residential real estate services are overseen by a real estate commission or board which regulates licensing but that most of these commissions/boards are "dominated by practicing brokers."

Per CFA, this is no accident. According to a study it released the week before this testimony, more than two-thirds of commissioners sitting on these regulatory bodies are required by statute to be active, licensed real estate licensees. CFA further found that nearly four-fifths of all commissioners earn a living through real estate transactions and 70 percent are real estate brokers or salespersons. More than 25 percent of commissioners worked for one of the four major brokerage firms and another 10 percent worked for large regional firms that are dominant in their local markets.

This industry control of regulation harms consumers through both what they do and what they fail to do. Consumer complaints may not be sufficiently addressed or staffing levels are not adequate to do so. Few states rigorously enforce agency or other disclosure laws. On the other hand, CFA maintains that some commissions have actively pursued measures to restrict competition by actively supporting minimum service laws.

CFA called upon states to prohibit practicing brokers from serving as commissioners; to be a member of such a regulatory entity an agent must agree to surrender his license for the duration of his services. Alternatively, active agents could serve on advisory committees to boards composed of fulltime professionals as is done with public utilities and insurance.

On the federal level CFA congratulated the Department of Justice, the Federal Trade Commission and the Government Accountability Office for the roles they have played in "trying to prevent dominant brokers and their trade association from increasingly restricting competition." CFA further called on Congress to authorize the FTC as the most logical agency to take responsibility for protecting Internet-business models that might be threatened by non-competitive business practices.

So, gentle readers, what is your take? Are the barriers to entry into the practice of real estate too low? If yes, who does this most advantage and who does it hurt? And when it comes to regulation of the industry, who or what should be in charge?