As promised, we are continuing an account of a hearing conducted recently by
the Subcommittee on Housing and Community Opportunity of the House Banking Committee.
The hearing, entitled The Changing Real Estate Market purportedly sought
to investigate competition in the real estate industry particularly
as it relates to the accessibility of various Multiple Listing Services,
any discrimination against reduced service real estate agencies, and, as subcommittee
chairman Michael G. Oxley (R-OH) put it, regulation of the industry "of the
brokers, by the brokers, for the brokers."
There were three parties testifying on behalf of the government, the Department of Justice, represented by J. Bruce McDonald, Deputy Assistant Attorney General; the Federal Trade Commission in the person of Maureen K. Ohlhausen, Director, Office of Policy Planning; and David G. Wood, Director, Financial Markets and Community Investment, Government Accountability Office. While all three government representatives cited similar concerns, Mr. McDonald was much harder on the NAR and other industry figures than the others.
Mr. McDonald started his presentation by quoting Government Accountability Office (GAO) figures for 2004 that consumers paid about $61 billion in real estate brokerage fees. "When this important industry does not function competitively," he said, "it can be very expensive for home buyers and sellers."
He further stated that the "Internet has brought extraordinary new opportunities for increased competition," referencing web-based business models that have emerged in travel, lodging, stock, and insurance industries as well as book and music sales. These, he said, were good for business, resulting in increased choice, lower prices, and savings in consumer time and effort.
New business models can offer the same kinds of benefits for buyers and sellers of real estate in competition with "brick and mortar" offices. Home buyers can now research neighborhoods and houses from personal computers at a time and place of their choosing, saving brokers time they would spend searching through home listings or showing homes the buyer had not explored more fully in advance. Thus, he stated, when the buyer takes charge of some of the services traditionally provided by an agent, he should expect to pay less in broker fees for those reduced services.
Instead, he said, consumers are paying more. As home prices have climbed, the dollars paid for real estate services have also increased because commission percentages have remained high; fees paid for brokerage services, he said, grew by roughly 50 percent from 2000 to 2004. But, where local laws allow agents to provide a minimum package of services as opposed to a package, homes sellers and buyers have been able to save thousands of dollars on individual home sales.
McDonald charged that brokers are encouraging state legislatures, legislatures, and local real estate boards to impose restrictions that prevent agents from offering less than a specified list of "minimum services" allegedly as a mechanism to protect consumers from substandard service.
Ms.Ohlhausen, while citing some of the same concerns about competition and referencing enforcement actions by FTC and DOJ against real estate entities (convincing the Oklahoma Legislature to amend proposed minimum services criteria so as to allow more room for consumer choice; settlement of a case in Kentucky that now allows brokers to offer rebates to consumers) did concede that there are few barriers to competition in real estate on the entry level.
First, there are approximately 2.53 million licensed real estate agents and 98,000 brokerage firms that operate over 200,000 local offices across the country. Second, she said, the industry is highly fragmented "with low market concentrations and a predominance of relatively small brokerage firms." Third, there is readily available information for consumers regarding houses for sale as well as the home-buying and selling process and there appear to be low barriers to entry, expansion, and exit in the real estate brokerage industry.
However, she said, there is a perceived lack of price competition because commissions do not appear to vary across geography, the price of houses, the experience of the agent, and the quality of service provided by that agent.
Both she and Mr. Wood of the GAO noted that competition among real estate professionals center more around non-price variables such as quality, experience, and reputation than on commission rates. Mr. Wood said that, according to NAR figures, the median price of a single family homes increased 74 percent between 1998 and 2005, overall inflation grew 16 percent but average commissions declined from 5.5 percent to 5 percent.
Mr. Wood said that, while multiple listing services provide important benefits to consumers by aggregating sales data and facilitating brokers' efforts to bring buyers and sellers together, the cooperative nature of the system can discourage brokers from competing with one another on price. Participating in the local MLS is considered essential to doing business so agencies may have an incentive to comply with MLS policies and customs.
He admitted that, while MLS may have engaged in what could be called "price fixing" in the past, this was effectively eliminated by Supreme Court rulings in 1950 and the 1970s and the MLS system no longer recommends commission rates but listings do indicate the commission available to cooperating agents thus "brokers have a greater incentive - all else being equal - to first show prospective buyers homes that offer other brokers the prevailing commission rate." He also charged that traditional brokers may discourage price competition by resisting cooperation with brokers and firms whose business models depart from charging convention rates.
An editorial comment (you were warned that there would be some): while Mr. McDonald was energetic in his attack on the real estate industry and issued a press release about his testimony shortly thereafter, the other two government witnesses were, to turn an old adage around, praising with faint damns. One gets the feeling from reading the testimony, which could only be minimally excerpted here, that they were uncomfortable with much of what they were supposed to be saying.
Next to weigh in was the private sector - three witnesses from firms engaged in heavily Internet oriented businesses. We will present their arguments next, followed by the two witnesses who were there to present a defense of NAR and the Multiple Listing Services as competitive industries. In the meantime, here is the link if you want to read all of the testimony.