A report released Tuesday by the U.S. Federal Trade Commission and U.S. Department of Justice concludes that real estate brokers, state legislators and state regulators have impeded competition in the real estate industry, and recommends a repeal of existing laws, rules and regulations that limit consumer choices.
While surveys suggest that real estate commission rates — based on a percentage of a home’s selling price — have dropped during a rapid run-up in home prices from 2001-05, “real commission fees rose about 25 percent” during that period.
Because commission fees “do not tend to vary in proportion to changing home prices,” they are considered to be “relatively inflexible,” the report states, and the agencies recommend that regulators pursue a detailed study of commission rate and fee practices to better measure price competition in the industry.
The president for the National Association of Realtors trade group said in response that the industry is “fiercely competitive,” noting that there are about 1.3 million Realtors nationwide, and the association has worked for the past quarter-century to educate its members about antitrust laws.
The 72-page “Competition in the Real Estate Brokerage Industry” report is based on a workshop on industry competition that the agencies held in October 2005, a collection of about 400 public comments associated with that workshop, and other literature and studies.
“Our review suggests that although the real estate industry has undergone a number of substantial changes in recent years — in particular as a result of technological advances such as the Internet — competition in the industry has been hindered as a result of actions taken by some real estate brokers, acting through MLSs and (the National Association of Realtors), state legislatures, and real estate commissions.
In addition, consumers likely would benefit significantly from additional knowledge about the range of options available in brokerage services and fees,” the report concludes.
Deborah Platt Majoras, FTC chairwoman, said in a statement, “The FTC is committed to working with the industry and policymakers to ensure that competition is not inhibited and that consumers are well-informed about this important marketplace. Home ownership is the American dream, and real estate brokers have helped to achieve that dream for many. But when anticompetitive practices stand in the way, consumers lose.”
Thomas O. Barnett, assistant attorney general for the Justice Department’s Antitrust Division, said, the report is intended to “help inform Americans about their real estate brokerage options and alert state legislatures and real estate commissions about the danger of enacting laws and regulations that harm competition.”
The federal agencies recommend that state “legislators and industry regulators should consider repealing existing laws, rules and regulations, such as minimum-service and anti-rebate provisions, that limit choice and reduce the ability of new brokerage models to compete and that do not appear to provide any consumer benefits that would justify such restrictions. They should also avoid enacting such laws, rules, and regulations in the future.”
Both agencies have written letters in opposition to a variety of so-called state minimum-service measures, backed by Realtor trade groups, that set a list of specified services that real estate licensees must provide to clients, at least for some types of representation agreements. And the Justice Department has launched several investigations and taken legal action to oppose state-imposed limits on the ability of real estate professionals to offer real estate rebates to consumers.
In addition, the Justice Department is engaged in an antitrust lawsuit filed against the National Association of Realtors real estate trade group in 2005, and the Federal Trade Commission is in the midst of an antitrust lawsuit filed last year against a multiple listing service in Michigan, though the report on industry competition “does not draw on any non-public information gathered during investigations conducted by the FTC or DOJ or obtained through litigation brought by the agencies,” the agencies stated.
Pat V. Combs, 2007 president of the National Association of Realtors, said in a statement, “The real estate industry is dynamic, entrepreneurial and fiercely competitive. For the past 25 years, the association has conducted membership education and training programs to ensure compliance with antitrust law. The Internet is making real estate even more competitive and transparent to consumers.”
While transaction-level data is not publicly available for real estate commission rates and fees, the report concludes that “commission rates and fees move in tandem with housing prices,” based on “broad national aggregate data.”
While an FTC study in 1983 “provided valuable information about how real estate brokers competed in the late 1970s and early 1980s, a new study examining how transaction-level commission rates and fees vary based on such factors as market conditions, housing prices and regulation would provide a better understanding of the current state of competition in the real estate brokerage industry,” the agencies recommend.
The report references a workshop presentation by Chang-Tai Hsieh, an associate professor of economics at University of California, Berkeley, who said that booming real estate markets tend to boost the number of agents.
This phenomenon, which Hsieh referred to as the “tragedy of commission,” leads to more agents spending more resources chasing transactions, and ultimately can result in fewer transactions per agents even in an environment with escalating sales.
“The ‘tragedy’ of relatively inflexible commission rates, according to Hsieh, is not just that consumers receive more services and fewer commission fee reductions than many consumers might prefer, but that the agents themselves are no better off,” the report states.
The FTC, DOJ and other real estate industry regulators should work to promote consumer understanding of the range of options available to them when hiring a real estate broker, the report also recommends.
“Some consumers may not be aware of the range of alternatives available to them when hiring a real estate broker, including the types of business models available and the negotiability of fees, for both home buyers and sellers, and/or may not understand the duties owed by their broker.” The information could help enhance competition, according to the recommendations.
Albert Hepp, president of the American Real Estate Broker Alliance, a group of flat-fee real estate brokers who advocate for free market competition and consumers’ right to choose from a range of real estate service offerings, said he expected the federal agencies to make “a stronger call to eliminate minimum-required-service legislation and rebate prohibitions in states.”
He added, “I think the report could have gone further and called for true, consumer-oriented state regulation of real estate. For example, the FTC could have pushed for the reform of state real estate commissions as the Consumer Federation of America did in (its) report, which recommends that the majority of members of the real estate commissions should be consumers and not a supermajority of the most established and politically connected brokers.
“I hope that this report is a wake-up call to State Legislators to reconsider how they should be serving their constituents and not the special interest groups. Consumers need protection but not from flat-fee brokers. They need protection from unfair competition in the marketplace which restricts their choices.”
Also, Hepp said he agrees with the report’s recommendation that the FTC and DOJ should continue to monitor the real estate industry for anticompetitive behavior.
Michael McShane, a partner with the Audet & Partners law firm in San Francisco, who works with antitrust lawsuits, said the federal report will hopefully move the industry “toward a more realistic approach to selling houses” in the form of improved price competition, and said that industry commission practices do not “pass the sniff test” in his opinion.
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