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Saturday, June 17, 2006

Real Estate Brokerage Markets

Should real estate brokerage markets be regulated by the government to make them more competitive?

Commission Accomplished, by Robert E. Litan, Commentary, NY Times: As the housing market cools, buyers and sellers should be more sensitive than ever to the real estate brokerage fees they pay. Although average commissions have fallen over the last decade, the typical seller pays more than 5 percent of the sales price in broker fees...

The industry is doing its to best to hang onto its revenues ... in the face of growing competition from discount and online brokers. At the urging of traditional local brokers, states have passed statutes preventing the use of customer rebates and outlawing cut-rate, limited-service packages, which many home sellers would rather have.

Now such protectionist tactics are beginning to attract the government's attention. In late 2005, the Justice Department sued the National Association of Realtors for ... enabling brokers to withhold their listings from other brokers' Web sites. And next month, hearings on the changing real estate market will be held by the House Financial Services Committee, whose chairman ... has criticized anticompetitive practices.

But if Congress wants a more competitive real estate market, it should start by rectifying the industry's fundamental problem: brokers themselves set the market's rules, with no effective oversight to protect home buyers and sellers. ...

[I]f you want to sell or buy a house, you generally need to go through multiple listing services ... The ... services nationwide are typically operated by the dominant local brokers in a given city under rules set by the National Association of Realtors. Each is run separately. If you don't go through a licensed Realtor in that city, you don't get access to the listings. ... [E]ven more important ... is how the ... "markets" are supervised. ... there is no state or federal oversight of the listing services — the industry association runs the show. ...

[T]he National Association of Realtors... operates one of the most powerful political action committees in the country. ... At the same time, the association sets the industry rules that govern — or impair — other brokers' online activities. Congress should fix this clear structural conflict of interest by empowering the Federal Trade Commission ... to oversee the National Association of Realtors. The enabling legislation also should instruct the commission to ensure that real estate markets are competitive.

For starters, this legislation should make clear that multiple listing services must provide all properly licensed brokers access to the marketplace on equal terms. Moreover, ... this legislation should enable the Federal Trade Commission to monitor and pre-empt [state] laws that are intended more to protect Realtors from new competition than to protect consumers from possible abuses by discount real estate agents.

Like a stock exchange, multiple listing services make markets more efficient, but only if they don't discourage entry by new competitors. ...

I think these markets could be made more competitive. If so, then the question is if government intervention is needed, or if the market will take care of the problem itself. This August 2005 GAO report helps on this question. This is from the summary of the report:

Factors That May Affect Price Competition, GAO: Why GAO Did This Study ...Because commission rates have remained relatively uniform—regardless of market conditions, home prices, or the effort required to sell a home— some economists have questioned the extent of price competition in the residential real estate brokerage industry. Further, while the Internet offers time and cost savings to the process of searching for homes, Internet-oriented brokerage firms account for only a small share of the brokerage market. Finally, there has been ongoing debate about the potential competitive effects of bank involvement in real estate brokerage. GAO was asked to discuss (1) factors affecting price competition in the residential real estate brokerage industry, [and] (2) the status of the use of the Internet in residential real estate brokerage and potential barriers to its increased use...

What GAO Found The residential real estate brokerage industry has competitive attributes, but its competition appears to be based more on nonprice variables—such as quality, reputation, or level of service—than on brokerage fees, according to a review of the academic literature and interviews with industry analysts and participants. One potential cause of the industry’s apparent lack of price variation is the use of multiple listing services (MLS), which facilitates cooperation among brokers in a way that can benefit consumers but may also discourage participating brokers from deviating from conventional commission rates. For instance, an MLS listing gives brokers information on the commission that will be paid to the broker who brings the buyer to that property. This practice potentially creates a disincentive for home sellers or their brokers to offer less than the prevailing rate, since buyers’ brokers may show high-commission properties first. Some state laws and regulations may also affect price competition, such as those prohibiting brokers from giving clients rebates on commissions...

The Internet has changed the way consumers look for real estate and has facilitated the creation and expansion of alternatives to traditional brokers. A variety of Web sites allows consumers to access property information that once was available only by contacting brokers directly. The Internet also has fostered the growth of nontraditional residential real estate brokerage models, including discount brokers and broker referral services. However, industry participants and analysts cited several obstacles to more widespread use of the Internet in real estate transactions, including restrictions on listing information on Web sites, some traditional brokers’ resistance to cooperating with nontraditional firms, and certain state laws and regulations. ...

Removing barriers faced by alternatives to traditional brokers and traditional listing services seems like a good place to begin bringing more competition into these markets. With that done, I don't think much more would be necessary.

    Posted by on Saturday, June 17, 2006 at 02:40 AM in Economics, Housing, Policy, Regulation | Permalink  TrackBack (0)  Comments (12)


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