The real estate industry, the National Association of Realtors (NAR) in particular,
has been fighting charges of anti-competitiveness for years. In 2001 the Federal
Reserve and the Department of the Treasury published a proposed rule as an antidote
to this perceived problem. It recommended that financial subsidiaries of federally
chartered and regulated banks and holding companies be allowed to sell real
estate. NAR has fought that long and hard and Congress has blocked implementation
of the rule year-to-year ever since. Recently there have been successive rounds
of sniping between NAR and the Justice Department (including a recent DOJ instigated
law suit) about NAR's rules controlling the use of data from the nationwide
network of multiple listing services. Congressional Representatives
Michael Oxley and Barney Frank have also been hotly pursing theories about non-competitiveness
in the industry.
Now the NAR has fired back. The huge industry trade association recently released the results of a study entitled "Structure, Conduct, and Performance of the Real Estate Brokerage Industry".
In spite of that yawner of a title, the report, prepared by NAR's Research Division, contains a wealth of information, not only seeking to refute allegations about the non-competitiveness of the business, but providing information comparing real estate with the banking industry and a wealth of facts about the sheer number of people involved in real estate; who does what, who makes the money, and where it goes.
NAR attacks any charges of anti competitiveness from a number of angles, citing the large number of agents and brokers, the independent contractor status of 99 percent of them, the differing levels of service available from office to office; and the low entry requirements of the industry.
The study goes as far as to state that residential real estate "closely resembles a perfectly competitive industry structure" producing services at the lowest possible cost and allowing consumers to benefit from competitively determined prices.
The report states that there are approximately 2.5 million licensed real estate agents in the U.S.; overwhelmingly non-salaried independent contractors actively competing with other agents - both within and outside of their own offices - for listings and for buyers. As a paycheck depends upon a sale, agents tend to be highly competitive and have little incentive to "help" other agents.
Therefore, "any collusion to set commission rates at the agent level is impossible." Commissions charged consumers vary depending on the scope of services an agent or an office provides, the competitive nature of the market and the sheer number of brokers competing for agents and for clients. While managing brokers set commission guidelines for their office, there is generally leeway for individual brokers to negotiate their personal commissions within those guidelines.
Real estate agents have different experience, training, and talents and there are often as many different business plans within an office as there are agents and each agent is free to negotiate the services they provide their clients. This leads to a high level of customer service and of innovation.
Real estate agents have an additional incentive to please their customers. Consumers pick their agents through referrals from friends or from prior experience with the agent. Repeat and referral business are critical to an agent's success and those only come through providing good service at a reasonable price.
Competition takes place on another level. Managing brokers are under intense economic pressure (and in the case of corporate owned offices, career pressure from top management) to snare the top producing agents within a market. Thus agents have the ability to negotiate the share or split from each sale that they receive from the managing broker or move on to other offices that are eager for their services. A higher split gives an agent more freedom to negotiate his share of the commission in favor of a client. In the same competitive vein, many agents hold or are eligible to obtain broker's licenses and thus have the ability to move out and establish offices of their own if they are unhappy with a work situation.
The professional real estate industry also faces competition from the non-professional segment. Last year, the NAR reports, 14 percent of home sales were "for-sale-by-owner" or FSBO sales. Because the option to FSBO is out there, an agent must earn his customer's business "during every step of the housing transaction." Thus the homeowner becomes a major source of competition and an additional motivation to provide outstanding service.
The number of real estate firm types was cited as another impetus to competitiveness. Offices can be one-person operations or wholly owned by major corporations. In between lie franchises, large local offices, and regional chains, and each has its own business model, a different level of fees and/or fixed expenses, and appeals to a different type of customer. Furthermore, the report states, competition among firms for market share is fierce. Any possible collusion among firms to artificially inflate commission rates is virtually impossible. "If a few local brokers were to collude on the commission rate or agent split, there would be less negotiating room in their dealings with clients (who) would then gravitate to other firms".
Even in those local markets where one or two firms hold most of the market share, there are forces at work that exert competitive pressures. One is the portability of the client base. Clients have no fixed assets such as stocks to limit their movement to a more competitive firm and agents are free to move to another firm as well, usually trundling their clients along with them.
Therefore, if there were collusion to set high commission rates, firms would lose their best agents who found themselves at a competitive disadvantage in the marketplace because of high commissions or an artificially high franchise fee. "Top producing agents able to charge lower commissions will out-perform the agents working within an artificially high cost structure."
Multiple listing services, rather than being anti-competitive as has been claimed by the Department of Justice, are touted by the report as leveling the playing field because most agents and offices share their property listings with others in their market through MLS. Thus a customer can work with an agent in a small firm, a large firm, or a nationally affiliated firm and each can access information about homes for sale in that market area. Thus a customer can pick an agent or an office best meeting their other requirements without worrying about missing a listing. At the same time, sellers can be assured that their homes are receiving maximum exposure even if they prefer to work with a very small firm.
The NAR study draws some interesting parallels between real estate and banking. We will talks about these in a subsequent article.