Feature: Is real estate anticompetitive?

FEATURE:The Great Debates

Is real estate anticompetitive?

BY ROBERT FREEDMAN

Note: During 2006, REALTOR® Magazine will explore some of the “great debates” in organized real estate. This month: charges that the residential brokerage industry is unfair to new players in the business. Later in the year, we’ll explore the future of MLS, the movement to expand private property rights, and the flow of mortgage capital.

When Michael Moore launched his residential brokerage four years ago in Greenville, S.C., his aim was to capitalize on the efficiencies of the Internet.

His company, Open House Realty, followed a business plan that has come to be known as “MLS-entry-only.” He’d list a seller’s home in the MLS and handle a few other small matters but leave sellers to handle a significant amount of the responsibility for marketing and closing on the sale of their home.

The model didn’t fare well, and not because he couldn’t attract business. Sellers liked the idea of saving big on commissions while still tapping the marketing power of the MLS.

Nor was the problem with other brokerages. Yes, his model generated resistance; some associates at other brokerages balked at showing his listings out of a reluctance to work directly with sellers. But this reluctance was rare, Moore says, and not completely unexpected.

The weakness with Moore’s business model lay in the customers themselves. Few understood how much effort it takes to sell a house. Few had the experience, skill, or time to get the deal to closing. Moore spent much of his time educating customers, and that was too time-intensive to make the model cost-effective.

“MLS-entry-only works for people who bring a lot of experience and knowledge to the sale,” Moore says, “not for people who are just looking to save money.”

Moore abandoned the MLS-entry-only model after about a year. His brokerage is now a hybrid that offers four levels of service, with the fee based on the amount of hand-holding.

The company has grown to 63 associates from 18 at the end of 2004 and competes fiercely with about a dozen other brokerages, he says, including two offering flat-fee pricing, two MLS-entry-only, a national brand franchisee that offers menu-pricing as an option, and several franchised and independent traditional brokers.

“For our market, I think what we have is pretty good competition,” says Moore.

New players challenge rules

Whether alternative-model operators like Moore—or other new models, such as national Internet-based referral services—can successfully compete with traditional brokers is a question looming large today.

At issue is whether competition in the industry is leading to better service and lower costs—the twin benchmarks of a healthy competitive environment—or whether some brokers, using their leverage with state lawmakers and their control over MLS rules, are molding the playing field in their favor by hampering new players’ ability to tap the efficiencies of the Internet.

The U.S. Justice Department claims the latter and has filed a lawsuit against the NATIONAL ASSOCIATION OF REALTORS® in federal district court in Chicago. Justice attorneys claim the association’s policy governing display of MLS data on Internet sites is unlawfully anticompetitive, hurting those companies engaged in Internet-based brokerage activities. At issue is not whether brokers offering Internet-accessible services can access MLS listings—they can as long as they participate in the MLS—but whether other MLS participants must be required to let their listings be used online by these entities and other competitors vying for Internet shoppers’ attention.

Separately, members of Congress have looked into real estate brokerage competition. Early last year, Reps. Michael Oxley, R-Ohio, and Barney Frank, D-Mass., the majority and minority leaders, respectively, of the House Financial Services Committee, ordered the Government Accountability Office, a congressional investigative agency, to do a study on price and other forms of competition in real estate. Oxley is a longtime supporter of letting national banks into real estate brokerage and management, which he says is needed for competitive reasons. He has blocked attempts to bring the widely supported Consumer Choice in Real Estate bill to a vote in the House. The NAR-backed bill would prohibit a proposed rule from the U.S. Treasury Department that would classify real estate as a financial service, giving big banks an entrée into the business.

In late October, the Federal Trade Commission and Justice Department hosted a public workshop in Washington, D.C., on the issue of competition in real estate. Since then, two nonprofit organizations—the American Antitrust Institute and the Consumer Federation of America—have also held workshops where competitiveness in residential real estate topped the agenda.

“Consumers know that in some markets home prices have doubled in the last five years, and they’re pretty sure the costs of selling a home haven’t doubled, too,” says Steve DelBianco, executive director of the NetChoice Coalition in Washington, D.C. “Buyers and sellers expect Internet technology to improve service and drive efficiencies and competition that should eventually lead to lower commissions.”

DelBianco’s group represents big Internet-based businesses, including eBay, America Online, and Yahoo.

What DelBianco and other critics fail to acknowledge is that commissions are individually negotiated. In fact, little hard data exists to say what consumers are paying, on average, for real estate brokerage services. News reports have pointed to figures from RealTrends, a real estate news and consulting company, showing an average commission rate of 5.1 percent among the country’s largest 500 brokerages in 2003, the last year the company made its data available publicly. But there’s hardly consensus, even among discount brokers, that commissions are as high as the three-year-old RealTrends report suggests. “I charge 4 percent,” says Joseph Connor Jr., GRI, broker-owner of Atlantic Real Estate Associates in Bethany Beach, Del., and a board member of the Association of Real Estate License Law Officials. “I compete with people who charge more than I do and people who charge less than I do. There’s a lot of pressure on commission rates, and you see that in the huge variety of models that’s open to consumers today.”

An NAR-commissioned study released in mid-2005 suggests competition has never been greater. Based on a sampling of 12 residential real estate markets of differing sizes, researchers at Pennsylvania State University concluded that competition is strikingly high in all of the markets, with no single company dominating any of the markets. At the same time, there are constant changes in relative market share of the top companies in each of the 12 markets.

“What we find is that selling real estate is intensely competitive,” says Professor Steve Sawyer of Penn State’s School of Information Sciences & Technology. “Consumers have more information, they demand more services, and they have more agents and business models to choose from than ever.”

Still, the NetChoice Coalition and the Internet players it represents continue to beat the drum against organized real estate, saying it maintains high fees by stacking the rules against alternative models. These companies have been among the most vocal supporters of the Justice Department’s lawsuit.

Among other things, the lawsuit takes aim at NAR’s “opt out” rules, which enable brokers who participate in an MLS to decide not to allow their listings to appear on other brokers’ sites.

The provision exists to ensure that brokers who win the competition to obtain a listing have some degree of control over where that listing appears online, says NAR General Counsel Laurie Janik.

“The [NAR Internet Listing Display] policy treats all MLS participants equally yet respects the rights of property owners and their listing brokers to market a property as they see fit,” says 2006 NAR President Thomas M. Stevens.

Critics see it differently. “The rising generation of home sellers will think it’s outrageous that their listing agent is restricting the Web sites where their home can be seen by the broadest possible audience of prospective buyers,” says DelBianco.

But whether brokers have the authority to withhold their listings from display and whether they’ll exercise that right are quite different matters, counters NAR’s Janik. The MLS exists to expose listings to other brokers, not necessarily to provide competitors with rich content for their Web sites, she says.

“Although it’s not likely that many brokers will choose to limit the online exposure of their listings by exercising their right to opt out, the display of those listings on competitors’ Web sites goes beyond the defined purpose of the MLS,” Janik says. “Brokers should not be mandated to consent to such display as a condition of participating in the MLS.” In addition, the rules ensure sellers’ wishes are accommodated: Sellers ultimately can determine whether their listing will appear on other brokers’ Web sites, regardless of their listing broker’s general policy, and DOJ is not challenging this aspect of the policy.

NAR is willing to fight for the opt-out, Janik says, because giving brokers and their clients the ability to determine how their listings will be marketed is crucial to maintaining the MLS’s cooperative spirit.

A popular target

In part, the intense interest in real estate competition stems from the industry’s success. With sales of new and existing homes, including town houses and co-ops, topping 7 million units annually for the past three years, generating trillions in dollar volume and tens of billions in commissions, residential real estate is an economic 600-pound gorilla.

Although market activity is showing signs of cooling—NAR forecasts existing- and new-home sales to slow an average 4.3 percent this year—the industry remains enormous, accounting for some 16 percent of the total gross U.S. domestic product.

“It’s reasonable to expect a lot of scrutiny when you’re so large a presence in the economy,” says NAR Chief Economist David Lereah.

The gains in real estate have made it a magnet for companies that think the time is right for the Internet to do to real estate brokerages what it did to travel agencies and stock brokerages: replace high-priced commissions with discount fees for routine transactions.

Stock brokerages naturally resisted change at first, says Lawrence White, a professor at New York University, who spoke at the American Antitrust Institute workshop in late 2005. But once they came to accept it, consumers benefited, and that would happen in real estate, too, he predicts.

That would be all well and good if there were such thing as a routine transaction in real estate. But industry leaders say buying or selling a few shares of stock online will never equate with buying or selling a home. “Our business is selling the biggest investment consumers ever make,” says Stevens. “There will remain a need for that human element in the transaction. That’s what people outside the industry don’t quite understand.”

Former NAR President Cathy Whatley drove home that message at the FTC workshop in October. “Selling a home isn’t a one-day event but a complicated process that can take months,” she said. “It needs to be managed carefully to get to closing.”

Fair play

Critics don’t deny a need for human interaction. But they do cry foul whenever they perceive an attempt to stifle new business models. The latest protest comes as a result of efforts in some states to gain enactment of minimum service laws (see “States mandate baseline service”).

The Justice Department, in its lawsuit filed in September, says allowing brokers to keep their listings off of other brokers’ sites restrains Internet-based brokerage activity. The department claims that Internet brokerages may not be disadvantaged by denying them the opportunity to display the full inventory of MLS data to customers online. Thus, any restrictions in the data they can display “prevents a broker from providing over the Internet the same MLS information that brick-and-mortar brokers can provide in their office.”

NAR has long argued that its rules treat all brokerages the same and that access to listing data has never been greater. “Consumers have more points of access to real estate information from MLSs than they have ever had before,” says Stevens.

NAR has sought dismissal of the suit on the grounds that antitrust laws proscribe collective conduct, and its policies do nothing more than permit brokers to decide unilaterally, as they can with any advertising medium, how they want their listings used by others. When brokers opt out, it means their listings can’t appear on any competitor’s Web site; opting out also precludes them from displaying competitors’ listings.

The association believes its view will prevail. “Listings are the work product of brokers and their associates and only brokers, in consultation with their clients, should decide how these listings will be used,” says Stevens. “If the federal government were to compel brokers to allow the display of their listings anywhere on the Internet, the spirit of trust that animates the MLS would be broken, and brokers could and would leave it. The MLS isn’t a public utility but a cooperative venture among brokers whose associates work very hard to acquire the listings.”

With its many different fronts, the debate over real estate’s competitiveness won’t end with a decision on the DOJ lawsuit. But with the strong growth in alternative models in many markets—and the continuing interest in real estate by entrepreneurs operating Internet-based real estate activities—brokers who call real estate one of the most competitive industries in the country have a lot of evidence to point to.

Competitively structured industry

A number of policymakers, analysts, and media observers have drawn attention to claims that the industry is not competitive. They suggest that there could be collusion among practitioners, companies, and others involved in the industry to control access to information, artificially set commission rates, and block entry into the business. Rather than just “say it isn’t so,” NAR economists took a close look at the facts. They analyzed the structure of the real estate marketplace and developed a well-documented explanation demonstrating that, contrary to what the critics say, real estate is the model of competition.

Among the evidence for this competitive structure is the large number of brokerages—NAR puts the number around 200,000—and the absence of any significant market concentration by top companies. Other attributes that signal a competitive industry:

Ease of entry. Residential real estate brokerage closely resembles a perfectly competitive industry. It’s structured with production at the lowest possible cost, with consumers benefiting from competitively determined prices.
Many players. There are approximately 2.5 million real estate professionals licensed by the states, most as self-employed independent contractors. The sheer number of independent real estate service providers means that there’s continuous market testing of new business models and innovations.
Multiple options. Real estate brokerages operate using a wide variety of business models ranging from limited service brokerages to full service providers.
Negotiable fees. Commissions and the associates’ share of the commission are set by market forces to attract clients and attract and retain the best associates. The sheer number of real estate practitioners and the number of new licensees entering the industry each year does not allow for anticompetitive behavior.
Little concentration. The top 100 real estate companies hold only a 17 percent share of residential real estate deals. Most associates are affiliated with independent companies.
Low license law requirements. To assure certain minimal standards and consumer protection, all states have adopted licensing requirements for brokers and salespeople, but the requirements do not appear to place discernible barriers to new entrants.

Source: NAR Research

States mandate baseline service

One of the most contentious issues in the competitiveness debate is the drive by state associations of REALTORS® to get minimum service rules enacted. The laws, which have been enacted in eight states and are being considered in at least two others, typically require some baseline level of service from real estate practitioners, such as presenting offers and assisting clients with negotiations.

Supporters say they provide critical consumer protection in the real estate transaction, which is growing in complexity and typically involves people’s most valuable asset. Supporters also point to the awkward situation cooperating associates face when they’re working with listings of MLS-entry-only brokers. In these deals, they say, its common for the seller to look to them for guidance. That can increase their liability if something goes wrong. “It’s double duty and double risk without receiving double compensation,” says Jerry Stoffer, ABR®, CRS®, broker-associate with RE/MAX 200 Realty in Winter Park, Fla.

In some states buyer reps can run afoul of agency law by negotiating directly with sellers. In Texas, for example, buyer reps can negotiate with sellers only if they’re unrepresented. That’s not the case if the sellers are working with an MLS-entry-only broker. Just listing the home in the MLS confers on the seller represented status.

No national push

The NATIONAL ASSOCIATION OF REALTORS® hasn’t been involved in the push for minimum service laws and has taken no official position on them. Still, critics point to the laws as evidence of anticompetitiveness, saying they illustrate traditional brokers’ efforts to protect the so-called “full-service” brokerage model. But proponents say requiring baseline service isn’t the same as requiring full service—and the laws don’t prevent brokers from discounting. Jim Goldsmith, general counsel of the Pennsylvania Association of REALTORS®, wrote that “nothing in the [Pennsylvania] law is designed to deter the practice of generating business by offering reduced fees. The minimum standards provision of the law was designed, however, to assure that consumers receive a modicum of support in a highly technical field that is growing ever more complicated.”

Agency vs. marketing

The Federal Trade Commission and the U.S. Department of Justice have challenged the laws in letters they’ve written to states. They say one of brokers’ main arguments in favor of the laws—that customers need to be assured of adequate representation—can be addressed simply by good disclosure. A “disclosure requirement would ensure that the client understands exactly what he or she has or has not purchased and what other services might be available that might meet his or her needs,” the FTC and DOJ said in a joint statement.

But supporters of the laws say disclosure isn’t sufficient because, among other reasons, it’s not just sellers who are at risk if they undertake a transaction that they’re not experienced enough to manage. Buyers risk getting hurt if the deal falls through because of the seller’s inexperience.

Disclosure in lieu of minimum service laws also misses the distinction between agency and marketing, says Wayne Thorburn, administrator of the Texas Real Estate Commission. The MLS is a cooperative set up among licensees, who are subject to state agency laws. To have sellers sign a disclosure saying their MLS-entry-only agent won’t do anything other than list the property in the MLS is to pretend agency laws don’t exist, he says. “If the Feds really want to look out for consumers, they’d be concerned about truth in advertising,” says Thorburn. “[MLS-entry-only brokers] say you can get an agent for a few hundred dollars, but what you’re really getting is a marketer.”