FRONT LINES: GAO Report
BY ROBERT FREEDMAN
Competition heavy in real estate
Residential real estate is highly competitive and the industry’s embrace of the Internet is helping buyers and sellers, a study by the federal Government Accountability Office says.
The study, released in late September by Rep. Michael Oxley, R-Ohio, chair of the House Financial Services Committee, and Rep. Barney Frank, D-Mass., ranking minority member, says the Internet has increased consumers’ access to information and fostered growth of Internet-based real estate companies. It also points out that competition in the industry is based more on non-price factors, such as quality, level of service, and reputation.
“Brokers may compete by hiring more salespeople in an effort to win more sellers’ listings,” the GAO report says. “Brokers may also spend more on advertising or offer higher levels of service to attract clients.”
Another finding: The effect of state-chartered banks offering brokerage services in the 30 states where that’s allowed is minimal because of the limited interest banks have had in offering brokerage services.
NAR has been opposing efforts by nationally chartered banks to enter real estate brokerage and has been pointing to the lack of interest among state banks as evidence that there’s no market demand for banks to get into the business.
The issue of competitiveness in real estate has been in the spotlight on Capitol Hill and in the media since the U.S. Department of Justice in early September filed an antitrust lawsuit against NAR. (See “DOJ suit amended,” page 14.)
Ease of entry
The GAO report notes that strong competition in real estate is driven by the large number of companies and individual licensed practitioners in the industry: 98,000 brokerages and 1.9 million licensees.
Although some local markets are dominated by one or a few large companies, market share in most localities is divided among many small companies. In part, that’s because there are few barriers to entry. It’s relatively easy to obtain a license and capital requirements are relatively small, the study says.
That ease of entry has enabled the growth of Internet-based brokerage companies, which offer consumers alternatives to traditional brokerage. “These nontraditional models typically offer lower fees, and although they currently represent only about 2 percent of the market, they may be putting some downward pressure on fees charged by traditional brokerages,” the report says.
According to the report, a few impediments, such as the lack of a uniform sales contract, prevent consumers from using the Internet for the full range of services that traditional brokerages provide.
The GAO says the availability of listings on the Internet is a key to continued growth of Internet-based brokerages. The report acknowledges that listing information today is widely available online.
Findings confirmed
The GAO study tracks the findings of a more comprehensive study on competition by researchers at Pennsylvania State University. That study looked at 12 residential real estate markets of differing sizes.
The researchers found that competition for customers among brokerages in local markets across the country is fierce and intense. Though patterns of competitive activity vary from market to market, the study found all 12 markets are growing and competition is high in all of them. No single company dominates any of the 12 markets and the relative market share of the top companies in each of the 12 markets fluctuates. The study also found market entry of new firms and market exit of existing firms.
“What we find is that selling real estate is intensely competitive,” says Steve Sawyer of Penn State’s School of Information Sciences & Technology. “Consumers have more information, they demand more services, and they have more salespeople and business models to choose from than ever before.”
The study was released in mid-September and was funded by a grant from the National Center for Real Estate Research of the NATIONAL ASSOCIATION OF REALTORS® .
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GAO Real Estate Competition Report
