[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
THE CHANGING REAL ESTATE MARKET
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JULY 25, 2006
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-112
U.S. GOVERNMENT PRINTING OFFICE
31-541 PDF WASHINGTON : 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York
VITO FOSSELLA, New York WM. LACY CLAY, Missouri
GARY G. MILLER, California STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota JOE BACA, California
TOM FEENEY, Florida JIM MATHESON, Utah
JEB HENSARLING, Texas STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida AL GREEN, Texas
RICK RENZI, Arizona EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin,
TOM PRICE, Georgia
MICHAEL G. FITZPATRICK, BERNARD SANDERS, Vermont
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
CAMPBELL, JOHN, California
Robert U. Foster, III, Staff Director
Subcommittee on Housing and Community Opportunity
ROBERT W. NEY, Ohio, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California
Chairman NYDIA M. VELAZQUEZ, New York
RICHARD H. BAKER, Louisiana JULIA CARSON, Indiana
WALTER B. JONES, Jr., North BARBARA LEE, California
Carolina MICHAEL E. CAPUANO, Massachusetts
CHRISTOPHER SHAYS, Connecticut BERNARD SANDERS, Vermont
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
GINNY BROWN-WAITE, Florida BRAD MILLER, North Carolina
KATHERINE HARRIS, Florida DAVID SCOTT, Georgia
RICK RENZI, Arizona ARTUR DAVIS, Alabama
STEVAN, PEARCE, New Mexico EMANUEL CLEAVER, Missouri
RANDY NEUGEBAUER, Texas AL GREEN, Texas
MICHAEL G. FITZPATRICK, BARNEY FRANK, Massachusetts
Pennsylvania
GEOFF DAVIS, Kentucky
CAMPBELL, JOHN, California
MICHAEL G. OXLEY, Ohio
C O N T E N T S
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Page
Hearing held on:
July 25, 2006................................................ 1
Appendix:
July 25, 2006................................................ 63
WITNESSES
Tuesday, July 25, 2006
Brobeck, Stephen, Executive Director, Consumer Federation of
America........................................................ 34
Farmer, Aaron, Broker/Realtor, Texas Discount Realty............. 36
Gorsuch-Bradbury, Kimberly, Senior Vice President, Real Estate
Networks, LendingTree, LLC..................................... 37
Kelman, Glenn, President and CEO, Redfin Corporation............. 39
Lewis, Geoffrey D., Senior Vice President and Chief Legal
Officer, RE/MAX International, Inc............................. 41
McDonald, J. Bruce, Deputy Assistant Attorney General, Antitrust
Division, Department of Justice................................ 5
Ohlhausen, Maureen K., Director, Office of Policy Planning,
Federal Trade Commission....................................... 7
Vredevoogd-Combs, Pat, 2006 President-elect, National Association
of Realtors.................................................... 43
Wood, David G., Director, Financial Markets and Community
Investment, Government Accountability Office................... 9
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 64
Ney, Hon. Robert............................................. 66
Brown-Waite, Hon. Ginny...................................... 67
Waters, Hon. Maxine.......................................... 68
Brobeck, Stephen............................................. 70
Farmer, Aaron................................................ 82
Gorsuch-Bradbury, Kimberly................................... 91
Kelman, Glenn................................................ 97
Lewis, Geoffrey D............................................ 101
McDonald, J. Bruce........................................... 108
Ohlhausen, Maureen K......................................... 117
Vredevoogd-Combs, Pat........................................ 153
Wood, David G................................................ 132
Additional Material Submitted for the Record
Statement of the American Homeowners Grassroots Alliance..... 184
Statement of Tom Kunz, Century 21 Real Estate, LLC........... 188
Statement of Alex Perriello, Cendant Real Estate Franchise
Group...................................................... 192
Statement of Real Estate Agents for Real Agency, Inc......... 197
Statement of Wayne Thorburn, Texas Real Estate Commission.... 201
From Horses to Houses, A Brief History of Agency and What
Real Estate Agency Means for you Today..................... 204
Letter to Hon. Robert Ney from California Association of
Realtors................................................... 215
Letter to Hon. Robert Ney from Cendant....................... 218
Letter to Hon. Robert Ney from Missouri Association of
Realtors................................................... 220
Letter to Hon. Randy Neugebauer from Texas Association of
Realtors................................................... 223
Who is my Client? A Realtors Guide to Compliance with the Law
of Agency.................................................. 226
Response from U.S. Department of Justice to Question
Submitted by Hon. David Scott.............................. 240
Response from Federal Trade Commission to Question Submitted
by Hon. Emanuel Cleaver.................................... 242
THE CHANGING REAL ESTATE MARKET
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Tuesday, July 25, 2006
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:08 p.m., in
room 2128, Rayburn House Office Building, Hon. Robert Ney
[chairman of the subcommittee] presiding.
Present: Representatives Ney, Miller of California, Baker,
Brown-Waite, Neugebauer, Campbell, Oxley, Waters, Lee, Miller
of North Carolina, Scott, Davis of Alabama, Cleaver, and Green.
Also present: Representatives Sherman and Watt.
Chairman Ney. The subcommittee will come to order. This
afternoon, the Subcommittee on Housing and Community
Opportunity meets to discuss the changing real estate market,
and how these changes have affected brokers and consumers
alike.
Since the advent of the Internet, changes to the real
estate market have become frequent and far reaching. The nature
of real estate transactions and the effect on home ownership
and consumers are a growing interest not only to this
subcommittee but to the financial services industry as a whole.
To understand changes to the market, we must first look at
what is known as the traditional brokerage model. Traditional
brokers offer a bundle of services that can include everything
from marketing the seller's home to preparing offers and
assisting in negotiations.
Those traditional brokers belong to a multiple listing
service or MLS, as it is called, that pools information about
homes on the market so brokers can access a wide array of
listings for their customers.
This network of brokers utilizes a commission based pricing
model where sellers pay a percentage of the sales price as a
brokerage fee.
Recent technological advances have changed the way
consumers look for real estate and have facilitated the
creation and expansion of alternatives to traditional brokers.
In recent years, the real estate industry has used the
Internet to market products and market new types of real estate
services. In spite of increasing modernization, most consumers
still choose to be represented by a traditional full service
real estate broker or agent.
The consumers who do not go with a traditional broker have
opted for alternative or discount brokers. These real estate
models offer low commissions in exchange for reduced services,
and may operate solely or primarily via the Internet.
Many different options are being offered by discount
brokers, including flat fees for services, and rebates for
buyers, which have been targeted by State laws.
Despite the emergence of Internet based or discount real
estate brokerage services, the growth of this segment of the
market has not been substantial.
Over the past few years, the real estate market has been
met with challenges to MLS practices, minimum service
requirements, and the need for competition to benefit
consumers.
For many American families, purchasing a home is often the
most complex, expensive, and sometimes scary, transaction that
they undertake.
Therefore, it is important that the subcommittee continue
to raise questions regarding competition and consumer
protections within today's real estate transaction process.
On a positive note, more people are owning homes today than
ever before. We just passed--I should note and thank Chairman
Oxley, who is present, and our ranking member, Maxine Waters
and Mr. Frank, for the FHA bill, which I think is really a
legacy bill for the chairman and this committee.
If it was not for your work, Mr. Chairman, we may not have
had the FHA down the road. I want to thank you for all of the
work you have put into that.
We have a rich history in America but it is always
incumbent upon the subcommittee and the Full Committee to
always look at the whole process of home ownership and how we
can dig into the issues and make sure that Americans have the
opportunity to own a home.
With that, I will yield to Mr. Oxley, the Chairman of the
Full Committee.
The Chairman. Thank you, Mr. Chairman. Today, we will focus
on residential real estate brokerage, a valuable service for
millions of Americans each year, and the serious problems that
we have recently learned about in the industry that can affect
one of the most important financial transactions most people
will ever undertake--buying or selling a home.
An increasing number of observers from the Government, to
consumer groups, to academics, are asking an important question
about residential real estate brokerage, that frankly, Congress
has been slow to consider.
Namely, why is it that in an industry with more than 1.3
million competitors, with home prices that vary widely, that
brokers from Portland, Oregon, to Portland, Maine, so uniformly
charge a 6 percent commission?
Moreover, why has that 6 percent fee remained the same as
home prices have soared and new technologies have made
brokerage more efficient?
Would not real competition produce varying services and
varying prices?
In March of 2005, Ranking Member Frank and I asked the GAO
to examine price competition in real estate brokerage. That
followed my request in November of 2004, the GAO report on
barriers to electronic commerce in real estate.
The GAO's report, the actions over the past 18 months by
the Department of Justice and the Federal Trade Commission, as
well as scholarly reports, explain what is happening.
Real estate brokerage is self-regulated. Licensing rules
are largely set by the brokers themselves, and real estate
exchange rules are entirely set by the brokers themselves. The
exchanges have become institutions to protect the interest of
brokers, not consumers.
Mr. Chairman, the last time we looked at an industry that
was self regulated, it was the accounting industry. We know
what happened in the accounting industry, with the bankruptcies
of Enron, WorldCom, and many others.
We let the stock exchanges in this country set their own
rules, but only with the SEC reviewing and approving those
rules.
For residential real estate markets, there is no Government
regulator to protect the public interest. There is only
regulation of the brokers, by the brokers, and for the brokers.
I generally believe that less Government regulation is a
good thing. This is because robust markets can police
themselves. Innovators with better products and lower prices
will beat companies with anti-consumer ways.
When competitors exclude innovators and restrain
competition, which is the allegation of the Department of
Justice's antitrust lawsuit against the National Association of
Realtors, then markets simply cannot work, or at least work
effectively.
Congress needs to pay attention and certainly needs to act.
On July 13th, the Federal Trade Commission announced an
enforcement action against the Austin Board of Realtors for
establishing rules that essentially froze properties out of the
market if the seller used a service that traditional brokers
did not like.
The Austin Realtors set rules saying that exclusive agency
listings, that is homes where the seller used a broker who
performed very limited services, could not be listed in
Austin's multiple listing service, or MLS, the local exchange
for homes for sale.
The settlement with the FTC nullifies the Austin Realtors'
rule.
We should wonder, is this going on elsewhere as well? That
is not all. Organized real estate brokers are pushing for State
laws to outlaw low cost minimum service brokerage, where
brokers will charge less, perhaps tens of thousands of dollars
less, and in exchange, provide less brokerage service.
Innovative brokers complain of organized discrimination in
the markets. If you are a broker who charges less, you might be
blackballed in the industry, and other brokers will not show
buyers the homes you are listing.
The Wall Street Journal reported last October on an Ohio
Realtor who had her listings pulled from the local MLS, in
essence because she charged a low flat fee rather than the full
6 percent.
A lawyer for the MLS said, ``For sale by owner listings'',
should not be in the MLS because it creates uncertainty about
whether the buyer's broker will get paid for the sale.
We, on this committee, know only too well that the NAR
wants to keep national banks from providing real estate
services and providing more competition in the industry.
What do all these examples have in common? They show
organized real estate brokers setting or using the rules to
protect higher fees or stifle competition to the detriment of
consumers and to the detriment of new brokerage models.
This is one of the most important issues we have considered
because it very directly affects millions of Americans each
year, and because consumers could be saving billions of dollars
each year.
One industry publication called, ``The REAL Trends'',
reportedly estimates consumers paid a whopping $61 billion in
real estate brokerage fees in 2004. Others estimated it as high
as $100 billion.
Just think, if real estate brokerage fees were just one
percentage point lower, consumers could save tens of billions
of dollars per year.
We, on this committee, have an obligation to make sure that
markets are fair and open, and to protect consumers.
I want to thank Chairman Ney for his leadership and for
holding this very important hearing today. This should be the
first step in our inquiry, not the last, and I yield back, Mr.
Chairman.
Chairman Ney. Thank you, Mr. Chairman. The gentleman from
Missouri, Mr. Cleaver.
Mr. Cleaver. A short comment, Mr. Chairman. I would just
like to congratulate you and Ranking Member Waters for
successfully ushering H.R. 5121 through today. It was very,
very important that legislation pass. I thank you and Ranking
Member Waters for all of the work you did on it.
Chairman Ney. Thank you. I want to thank the gentlemen for
his comments.
At this point in time, we will move on. I have for the
record, ``A Realtor's Guide to Compliance'' submitted by the
National Association of Realtors; a ``Brief History of Agency''
submitted by the real estate agents for Real Agency, Inc.;
letters from the Missouri Association of Realtors; testimony of
Alex Perriello, president and CEO, Cendant Real Estate
Franchise Group; testimony of Tom Kunz, president and CEO,
Century 21; and a letter from Cendant Corporation, real estate
agents for Real Agency, Inc., and American Homeowners
Grassroots Alliance.
Without objection, they will be made part of the record.
With that, we will go straight to the witnesses. I want to
welcome you today to the Housing Subcommittee.
First, we have Bruce McDonald, who is a Deputy Assistant
Attorney General with the Department of Justice's Antitrust
Division. Since 2003, he has been one of two deputies in charge
of civil antitrust enforcement.
Prior to his appointment in 2003, Mr. McDonald was a
partner in the antitrust group of the Houston law firm of Baker
and Botts.
Maureen Ohlhausen is Director of the Office of Policy
Planning at the Federal Trade Commission. The FTC assures a
competitive marketplace for both American consumers and
businesses by preventing unfair anticompetitive commercial
practices.
David Wood is the Director of Financial Markets and
Community Investment at the Government Accountability Office
(GAO), an independent and non-partisan agency that works for
Congress. GAO is often called, as we know, the Congressional
watchdog, because it investigates how the Federal Government
spends taxpayers' dollars and how well Executive Branch
agencies do their jobs.
I want to welcome all the members of the panel today. We
will start with Mr. McDonald.
STATEMENT OF J. BRUCE McDONALD, DEPUTY ASSISTANT ATTORNEY
GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE
Mr. McDonald. Thank you, Mr. Chairman. Mr. Chairman, and
members of the subcommittee, I am pleased to be here on behalf
of the Department of Justice's Antitrust Division, to discuss
the competitive implications of developments taking place in
real estate brokerage markets.
The Antitrust Division has a long history of pursuing
enforcement actions to protect competition and consumers in
this industry against antitrust violations. Today, we are also
working to educate State governments about potential
anticompetitive effects of State rules restricting brokerage
services.
Competition in these markets is important. Every year,
millions of Americans purchase real estate brokerage services.
Last year, over eight million homes were sold in the United
States. According to the GAO, consumers paid over $60 billion
in real estate brokerage fees in 2004.
When the brokerage industry does not function
competitively, it can be very expensive for home buyers and
sellers.
In the last few years, although the cost of providing
brokerage services has if anything decreased, consumers have
been paying more. Because commission percentages have remained
high, as home prices have climbed, the dollars paid to broker
commissions have climbed also.
From 2000 to 2004, fees paid for brokerage services grew
much more quickly than the CPI.
As Chairman Oxley pointed out, commission percentages do
not seem to vary significantly with house prices, service
quality, or geography. This is not how one would expect a
competitive market to behave.
Today, the Internet is bringing new possibilities for
increased competition to real estate brokerage services, as it
has in other industries throughout our economy. Web-based
brokers can provide online information to their clients about
homes for sale. Home buyers can learn about neighborhoods and
explore suitable homes more efficiently on their own time,
saving broker time and expense, which can translate into lower
broker fees.
By taking charge of some of the services themselves,
customers can reduce the services they need to purchase from
brokers.
At last year's joint DOJ/FTC hearings on real estate
competition, one of the topics discussed was the negative
effect that some restrictive State laws and regulations are
having on competition in brokerage markets.
Consistent with our practice in other industries, when we
learn that significantly anticompetitive State laws or
regulations are under consideration, we approach State
officials to advise that they take into account the benefits to
consumers of a more competitive approach.
We have had a number of opportunities to do this on
proposed measures affecting real estate brokerage services. One
example is State practice-of-law rules. Over the last decade,
we have advised State legislatures, courts, and bar
associations on the implications of proposals to expand the
definition of practice of law in ways that would prohibit non-
lawyers from providing routine real estate closing services.
The evidence does not suggest that excluding non-lawyers,
like most real estate brokers, from providing these services
actually protects home buyers and sellers, as real estate
lawyers have claimed.
When non-lawyers are allowed to provide these services,
consumer complaints actually do not increase. Non-lawyers
typically charge lower fees for the same services, and this
competition results in lower lawyer fees for these services as
well.
Another example is the minimum-services rules that some
brokers recently have urged their State legislature or local
real estate board to adopt, requiring that all real estate
brokers provide a specified minimum package of services.
Some consumers prefer to purchase less than the full array
of traditional brokerage services, handling certain tasks
themselves, and paying less.
In response, new broker business models have begun to offer
smaller packages of brokerage services, often on a menu basis,
in exchange for a smaller total fee.
Where this consumer choice is allowed, home sellers and
buyers have saved thousands of dollars per transaction.
Some brokers are resisting, seeking imposition of minimum-
services rules. This is portrayed as protecting consumers from
unwittingly agreeing to substandard service. We have found no
evidence of consumer confusion, so it appears that the
restrictions do not protect consumers, but just interfere with
their freedom to choose and pay for only the services they
want.
Over the last few years, the Justice Department and FTC
have advised a number of States on the competitive implications
of minimum-services proposals. Our efforts have been successful
in a number of States.
Restraints by market participants also can be harmful to
competition. Of course, they are fully subject to the antitrust
laws.
The Justice Department recently brought two enforcement
actions against restrictive real estate brokerage rules that
violated Section I of the Sherman Act.
Chairman Ney. I am sorry, Mr. McDonald. Your time has
expired, but if you would like to conclude, then we will enter
the rest for the record.
Mr. McDonald. Thank you, Mr. Chairman.
Home ownership is a cornerstone of the American dream.
Purchasing a home is the largest financial decision made by
most families. Home sellers and home buyers are harmed when
Government or private restrictions on real estate broker
competition prevents brokers from offering innovative services
or adopting new cost-saving practices.
Therefore, the Antitrust Division will continue to use both
law enforcement and competition advocacy tools to protect
competition and consumers in real estate markets.
Thank you for the opportunity to testify. I am happy to
answer any questions.
[The prepared statement of Mr. McDonald can be found on
page 108 of the appendix.]
Chairman Ney. Thank you, sir.
Ms. Ohlhausen?
STATEMENT OF MAUREEN K. OHLHAUSEN, DIRECTOR, OFFICE OF POLICY
PLANNING, FEDERAL TRADE COMMISSION
Ms. Ohlhausen. Chairman Ney, Chairman Oxley, and members of
the committee, I am pleased to present the FTC's testimony on
competition in the real estate brokerage industry. The
Commission's full testimony has been submitted for the hearing
record, and my statement, and any answers I may provide,
reflect my own views and are not necessarily those of the
Commission.
New technologies have given rise to alternative brokerage
models that offer a promise of greater competition and greater
savings for consumers. The FTC is committed to using its
enforcement advocacy and research capabilities to protect the
interests of consumers in this important market.
For buyers, the Internet has become an indispensable source
of information on properties, neighborhoods, and the home
buying process itself. For example, new alternative brokerage
models, such as virtual office Web sites, allow buyers to view
detailed MLS information online, and they often also offer a
rebate.
For sellers, the Internet has replaced the yard sign as the
most used marketing tool. Home sellers can now perform tasks
that were once the exclusive domain of brokers, likely spurring
the increased demand for non-traditional services, such as
limited-service brokerage, or a seller pays the broker a flat
fee for listing the home in the local MLS and providing some
selling aides while handling the rest of the transaction him-
or herself. This option allows the consumer to save potentially
thousands of dollars in commissions in exchange for doing more
work.
As alternative brokerage models have proliferated, however,
we have also become aware of actions by MLS' and State bodies
that make it more difficult for alternative business models to
compete against traditional brokers.
For example, the Commission recently charged the Austin
Board of Realtors with violating the antitrust laws by adopting
a rule that prevented properties with non-traditional listing
agreements from appearing on important publicly accessible Web
sites.
The Commission alleged that this conduct impeded the
provision of non-traditional brokerage services to consumers.
The Commission's consent order with the Austin Board which
settled the charges prohibits it from adopting or enforcing any
policy to deny, restrict, or interfere with the ability of its
members to enter into non-traditional listing arrangements.
Over the past 2 years, several State legislatures and real
estate commissions have considered or adopted minimum service
requirements which effectively force consumers to purchase a
set bundle of real estate brokerage services.
Because these measures are likely to harm consumers, the
FTC and DOJ have filed advocacy comments opposing their
adoption. Our comments concluded that by eliminating many
popular limited service options, these laws would reduce
consumer choice and competition among traditional brokers and
limited-service brokers.
We also noted the lack of evidence that such laws are
necessary to protect consumers. Further, at the FTC/DOJ real
estate workshop, panelists who represented both traditional
brokerages and new business models all stated that they did not
see a need for minimum service laws.
It is important to emphasize that the Austin enforcement
action and our advocacy efforts do not reflect any attempt by
the Commission to favor one form of brokerage business model
over another. Rather, the Commission's work is intended to
protect competition in the market, not particular competitors,
so that consumers can select the services that best meet their
needs.
The structure of the real estate brokerage industry appears
to exhibit some characteristics of a competitive market,
including low market concentration and low barriers to entry.
Despite these structural features, there is a perception
supported primarily by anecdotal evidence, that commission
rates remain at a super competitive level. This perception
arises from the observation that commission rates do not appear
to vary with geography, the price of the house for sale, or the
agent's experience level or quality of service.
Although relatively recent survey data indicates that
average national commission rates have fallen somewhat over the
past few years, significant increases in property values over
this period appear to have more than offset any such decreases
in commission rates.
Our experience in this industry points to several possible
factors that may explain why price competition appears to be
lacking.
First, private anticompetitive conduct that disadvantages
new business model reduces their ability to put downward
pressure on commission rates.
Second, State imposed restrictions, such as minimum service
laws and prohibitions on rebates, also limit the ability of new
business models to compete with traditional brokerage models on
price.
Third, disparagement and harassment of non-traditional
brokers may deter brokers from engaging in vigorous price
competition.
Finally, consumers appear to be uninformed about certain
facts critical to price competition, such as the negotiability
of commission rates and the duties their broker or agent owes
them.
The FTC plans to remain actively engaged in this area
through enforcement, advocacy, research, and consumer
education, and we are committed to ensuring that consumers can
enjoy the benefits of competition in real estate brokerage.
We are willing to assist your committee in any way that we
can. Thank you.
[The prepared statement of Ms. Ohlhausen can be found on
page 117 of the appendix.]
Chairman Ney. Thank you.
Mr. Wood?
STATEMENT OF DAVID G. WOOD, DIRECTOR, FINANCIAL MARKETS AND
COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Wood. Thank you, Mr. Chairman. I appreciate the
opportunity to be here today.
When preparing our report to the committee last year, we
found very quickly that our ability to examine price
competition was severely limited because there is simply no
single place where one can find comprehensive brokerage price
data.
Accordingly, our work consisted largely of reviewing the
academic literature and interviewing a variety of market
participants.
Our findings regarding price competition can be summed up
in a few key points. The first is that while real estate
brokerage has competitive attributes, a large number of players
competing for a limited number of home listings, historically,
the competition has been based more on non-price factors, such
as quality or level of service.
A principal reason for this view is that within specific
local markets, there seems to have been limited variation in
commission rates.
The lack of comprehensive data, both historically and
currently, makes it difficult to determine the extent of
variation in commission rates. However, the picture that
emerges from the limited data available is that within a given
market, a single rate has predominated.
For example, the Federal Trade Commission examined random
samples of properties sold in the late 1970's in several
cities. In Boston, 72 percent of listings had exactly the same
commission rate. In both Los Angeles and Minneapolis, it was 88
percent, and in Seattle, 90 percent.
In another example, academic researchers reported that of
the homes sold in Lincoln, Nebraska, in 1986, 88 percent had
exactly the same commission rate.
Academic studies also suggest some causes for the limited
variation in rates that was observed. For example, one study
found that lower commission rates were associated with more
expensive houses, and with houses that were vacant or renter
occupied.
Finally, as Ms. Ohlhausen noted, anecdotal data suggests
that commission rates have declined from the 6- or 7 percent
level that the FTC found in the late 1970's to a typical range
of 5- to 6 percent now.
Although the lack of data precluded empirical analysis, we
did identify several factors that might inhibit price
competition. The first of these is the cooperation among
competing brokers facilitated by the multiple listing service
or MLS.
While MLS' provide important benefits to both buyers and
sellers, practices that encourage cooperation among
participating brokers may, in effect, discourage deviations
from prevailing commission rates.
For example, MLS listings give brokers information on the
commission that will be paid for producing a successful buyer.
To ensure that brokers will show prospective buyers their
homes, sellers may be reluctant to offer anything less than the
standard prevailing commission.
A second factor is certain State laws, as Chairman Oxley
and the previous witnesses have noted.
Finally, a third factor is the lack of consumer pressure
generally. For many consumers, selling a property is an
infrequent event. They may be unaware of alternatives to a
traditional broker charging a standard commission. However,
this is one factor that is likely being affected by the
Internet. Some three-quarters of home buyers now use the
Internet during the home buying process.
The Internet has helped provide both buyers and sellers
with much information that previously was available only by
contacting a real estate broker.
In addition to permitting buyers to easily search for homes
on their own, the Internet has facilitated options for
consumers, such as fee for service brokerage, and alternatives
to MLS listings.
However, some factors may inhibit using the Internet for
accomplishing the full range of activities associated with a
real estate transaction. For example, even with the
availability of virtual tours, consumers still like to visit
properties firsthand.
Also, as we noted in our report, a key factor is the extent
to which properties listed in an MLS continue to be widely
available online.
Mr. Chairman, that concludes my prepared statement. I will
be happy to answer any questions you have.
[The prepared statement of Mr. Wood can be found on page
132 of the appendix.]
Chairman Ney. Thank you. I am going to begin questions and
yield my time at this point to Chairman Oxley.
Before I do, I want to ask, just for clarification. Ms.
Ohlhausen, you have a statement prepared. It says, ``Prepared
Statement of the Federal Trade Commission.'' Did you say in the
beginning that your comments are your personal comments?
Ms. Ohlhausen. My oral remarks are my own. The statement
that has been submitted is the official statement of the
Federal Trade Commission.
Chairman Ney. The questions?
Ms. Ohlhausen. Any answers are again my views.
Chairman Ney. Thank you. Chairman Oxley?
The Chairman. Thank you, Mr. Chairman.
Mr. McDonald, can you explain, if you can, what regulatory
structure for real estate law now exists? What kind of a
regulatory structure do we have going forward with real estate
sales and commissions?
Mr. McDonald. Mr. Chairman, I do not hold myself as an
expert on the regulatory structures in the various States that
govern real estate transactions or real estate brokerage.
I think I can say generally that real estate brokers are
governed almost solely by State laws, including State real
estate broker commissions, and in many of those States, the
broker commissions are by law or rule required to be real
estate brokers, or some percentage of the board are required to
be real estate brokers.
In most States, the real estate commission is set at a
market rate and is not specifically controlled by regulation.
The Chairman. What about the Justice Department and efforts
at Antitrust? Is this an effort to try to induce competition in
the real estate industry? What was the purpose behind the
Justice Department's antitrust activities regarding real
estate?
Mr. McDonald. Mr. Chairman, we have engaged in two general
kinds of activities. One, competition advocacy, in which we
encourage State decision makers to not pass laws or regulations
that restrict competition in providing brokerage services. One
example is the minimum-services rules that you mentioned.
Our other set of efforts are enforcement actions. We have
brought two in recent years, although we have a history over
the decades of bringing enforcement actions in this area.
One of those recent enforcement actions was against the
Kentucky Real Estate Commission, which had passed a rule that
prohibited brokers from giving rebates of commissions to their
customers.
More recently, we brought an action against the National
Association of Realtors, which imposed a set of rules
applicable to its local multiple listing services nationwide
that allowed brokers to discriminate against fellow brokers who
communicate with their customers on the Internet.
These rules discouraged competition from new business
models that take advantage of Internet technology and they are
anticompetitive and violate the antitrust laws.
The Chairman. What is the current status of the Kentucky
case and the NAR?
Mr. McDonald. Mr. Chairman, the Kentucky Real Estate
Commission abandoned the rule and settled the case shortly
after we brought it.
The action against the National Association of Realtors is
pending in Federal court in Chicago.
The Chairman. In the Kentucky case, does that have any
meaning outside of the Commonwealth of Kentucky or is that
simply a settlement that would only apply to the Kentucky
situation or set of facts?
Mr. McDonald. Mr. Chairman, that settlement applies
directly only in Kentucky. We did see after that case was
brought and it was settled that two other State real estate
commissions that had similar rules abandoned them.
The Chairman. The Kentucky settlement was considered a
template for those?
Mr. McDonald. Mr. Chairman, I think the Kentucky settlement
set an example of the consequences of having such rules.
The Chairman. The suit that the Justice Department brought
against NAR, if the outcome is favorable to the Justice
Department, would that precedent then apply nationwide?
Mr. McDonald. Mr. Chairman, the rules that NAR has
promulgated do apply nationwide. If the Government's lawsuit is
successful, those rules would not apply anywhere.
The Chairman. Thank you.
Ms. Ohlhausen, regarding the Austin Board of Realtors' case
with the Federal Trade Commission, as I understand it, that
agreement nullifies the Austin Realtors' rule, which basically
would not allow all but full service Realtors to list with the
MLS; is that correct?
Ms. Ohlhausen. That is correct. What the rule did was it
prevented the MLS from sending the data for the non-traditional
listings to popular, publicly accessible Web sites. They could
still have their listings in the MLS, but a lot fewer people
saw them.
The Chairman. Will that ruling or that decision have any
application outside of Texas?
Ms. Ohlhausen. We are investigating other similar rules. We
have other cases in the pipeline. If other MLS' have a similar
rule, that is something we would be interested in pursuing.
The Chairman. That was a settlement, was it not?
Ms. Ohlhausen. That is correct.
The Chairman. You are saying, essentially, even though it
is the Federal Trade Commission, those settlements or
agreements have to be done State by State?
Ms. Ohlhausen. Yes. It would be individual MLS', by
individual MLS.
The Chairman. Mr. Wood, you had indicated, I think, in your
initial statement, that you had difficulty obtaining price
competition figures in your study. Is that correct?
Mr. Wood. We had difficulty getting price data. Ideally,
what we would have liked to have been able to obtain would be
brokerage commission data across markets, across time. There is
no one source that you can go to to get that data.
The Chairman. There is no database and no transparency?
Mr. Wood. These are private entities. It is their data.
They are certainly under no obligation to provide it to GAO. In
the timeframe that we were working in last year, we did not
seek to survey MLS' or try to obtain data from them because we
saw what a giant task that would be.
The Chairman. The European market, the commissions seem to
be much lower, half lower than they are in the United States.
Are any of you familiar with the European model and what those
commissions are?
Mr. Wood. I only know from reviewing some of the academic
literature. There are one or two articles that look at
international brokerage. Basically, the conclusion is that this
is an area that needs more study.
I believe there are differences in the commission rates,
but there also may be differences in the brokerage models, the
types of services that are provided.
Trying to control for all those differences is not
something I am sure has been done.
The Chairman. Mr. McDonald, the effort by the Justice
Department heretofore has been on an antitrust enforcement
basis; is that correct?
Mr. McDonald. That is correct, Mr. Chairman.
The Chairman. Are there any other tools available to the
Justice Department besides the antitrust issue that is being
considered or could be considered?
Mr. McDonald. Mr. Chairman, that is an interesting
question. As I sit here today, I am not aware of any.
The Chairman. I have no further questions. Thank you, Mr.
Chairman.
Chairman Ney. Thank you, Mr. Chairman. Our ranking member,
the gentlelady from California.
Ms. Waters. Thank you very much, Mr. Chairman. I was just
sitting here going over some of the statements, and recalling
my experiences with buying houses and the last experience that
I had purchasing property.
I could not have imagined going through that experience
without my real estate agent, and all of the complications of
the transaction.
I suppose the general question that I have is what kind of
problems do you think the average home buyer would encounter
if, in fact, they did not have the kind of real estate services
that have served us well over the years?
As I think back through my last experience, and I am
thinking about any number of concerns, that I would not have
known how to address had it not been for the real estate
services that I was receiving.
How do you think an average person would fare without the
traditional real estate services that are available to us?
Anybody can answer that question.
Mr. McDonald. Ranking Member Waters, your question
implicates the issue that we have discussed on whether States
should impose minimum services requirements on brokers.
As we have mentioned, new business models have developed in
which brokers have responded to consumer demand for the
provision of limited services.
Certainly, there are home buyers and sellers who for
whatever reason do want the full range of brokerage services,
everything from listing and marketing the house to
communicating buy and sell offers, to being represented at
closing, the services that traditional full service brokers
provide.
There are also many consumers who, whether it is because
they are taking advantage of the Internet or because they are
especially comfortable with the home purchase transaction, are
comfortable with purchasing only a few services from a broker,
and handling the rest of the services themselves.
The point of our criticism of minimum services legislation
is that minimum services rules take that choice away from some
consumers. With or without minimum services legislation, the
home buyer or seller who wants a full range of services can get
it. We are trying to preserve the competitive option for
consumers who want to buy less than the full range of services,
to buy fewer services, handle the rest themselves, and pay
less.
Ms. Waters. Mr. Chairman, I will listen to the responses
from questions that will be generated from other members. I am
a little partial in all of this because of all of the stories
that I have heard year in and year out about what home buyers,
in particular, encounter in this very, very complicated and
competitive business.
Let me just hear what they are answering to other questions
that are coming up.
Chairman Ney. I have a question, and then we will move on
to the gentlelady from California, Ms. Lee.
The question I have is for Mr. McDonald. The Department of
Justice has not supported State measures that have sought to
mandate the minimum service requirements for real estate
professionals. What is the methodology of that, of opposing the
State measures that seek to mandate minimum service?
Mr. McDonald. Mr. Chairman, from our pro-competition
perspective, in general, Government regulation where it is not
necessary can have a market distorting effect.
As it relates to minimum services rules, those rules limit
the ability of limited-service brokers to sell to customers
less than the full array of brokerage services. It prevents
consumers who would like to purchase less than the full array
of brokerage services from doing so.
The option that competition brings is to have various
different kinds of brokerage business models, various different
kinds of options available to consumers. Some consumers who
want more services can buy more services and pay more.
Consumers who want fewer services can buy fewer services and
pay less. That increases competition throughout the market.
Minimum service legislation prevents that consumer choice.
Chairman Ney. It is not a matter of the Federal versus the
States. It is a matter of minimum services applied by the
States would not create as much competition?
Mr. McDonald. That is correct, Mr. Chairman. It undercuts
competition.
Chairman Ney. Thank you. I had a question, and if anybody
else wants to answer these questions, please feel free.
On the statement from the GAO, do you not believe there is
an over saturation of real estate brokers and agents in the
market? Is that what GAO has thought?
Mr. Wood. I do not know that we would characterize it as an
over saturation. I think you will see in the testimony from NAR
that their membership has certainly grown in recent years.
The lack of data that we have found extends to any kind of
measure for the demand for brokerage services. Even though
clearly housing prices have gone up, more agents have come to
work, we do not have a good measure of the actual demand for
broker services.
There is some interesting research in this area. For
example, some researchers have looked at this question of agent
productivity and found that generally when prices go up, if
commission rates stay the same, the number of dollars, of
course, is going up, and that tends to attract more people into
the business.
Chairman Ney. I guess I should ask it this way. If there
was an over saturation of real estate brokers and agents, would
that or would that not help because you have more agents, more
competition, or does it not run that way?
Mr. Wood. The picture that emerged from our research was
that there is indeed a lot of competition. There is competition
to get listings and so forth. It is just that on the basis of
the available evidence, which is limited, there does not seem
to be much price competition.
Chairman Ney. One question I had actually for all three of
you, if you want to answer, do you consider the MLS a public
utility, or a private hybrid?
Ms. Ohlhausen. I will answer first since we just sued the
Austin Board of Realtors, which is an MLS. We have not treated
that as a public utility. Instead, it is an association among
private competitors, which is a traditional subject of the
antitrust laws, agreements among horizontal private
competitors.
Chairman Ney. Mr. McDonald?
Mr. McDonald. We agree, it's a joint venture among
competitors.
Chairman Ney. Mr. Wood?
Mr. Wood. I think GAO has no opinion and would leave it to
the experts.
Chairman Ney. Good answer. In my small remaining time, has
there been any discussion amongst any of you in what you have
done to look at this issue about total transparency of the MLS?
Total transparency, including internal listings? I am going in
the direction that you put some private things on there, you do
not want somebody in your house because you have a small child,
at certain times of the day?
Mr. McDonald. Mr. Chairman, I am familiar with that issue.
There is some information in the MLS database that is by rule
available only to brokers, and not to the public. A very good
example is the example we discussed with NAR, information that
the children are home alone at a certain time in the
afternoons, so buying brokers should not bring potential buyers
around.
One of the questions has been, by putting listing
information on the Web, do you create a risk that private or
secure information might get exposed to the public?
A properly designed Web site will not do that in the same
way that a brick and mortar broker, a traditional broker, who
is providing information on paper to his or her customers will
not provide that information.
Chairman Ney. It is technological?
Mr. McDonald. Right.
Chairman Ney. Thank you. My time has expired. The
gentlelady from California, Ms. Lee.
Ms. Lee. Thank you, Mr. Chairman. Good afternoon.
Let me ask you, Mr. McDonald, with regard to this question,
with regard to States. Have any States reported that consumers
have been led to believe they would receive the full broker
services when in fact they had to do the actual service
themselves? Has there been any type of false advertising?
Mr. McDonald. Congresswoman, we have not found any evidence
of significant complaints by consumers who thought they were
purchasing a full-service package of brokerage services but
instead, were misled and were actually purchasing only a
limited-service package.
Ms. Lee. Good. Let me ask you on the Internet piece of
this, of course, we all recognize that the Internet has really
dramatically lowered the costs of services and the way
consumers purchase goods and services and the transaction costs
go down ultimately.
What happens to those individuals who do not have access to
the Internet? Low income individuals. The digital divide is
still alive and well in America.
I am concerned whenever we see--this is the way of the
world now. Do we lose people if they do not have access to the
Internet in terms of their access to the type of services they
should be able to benefit from, just as those who have access
to the Internet?
Mr. McDonald. Congresswoman Lee, that is a question that
certainly goes far beyond the issues that we are discussing
today on real estate, and it is something that I know Congress
has addressed in a number of ways.
What I can offer you in the real estate situation--
Ms. Lee. I am talking about in terms of the real estate
situation, with regard to the services, the basic services that
are allowed in terms of MLS services.
Mr. McDonald. Yes, ma'am. The fact that real estate listing
information is available on the Internet has not led to it
being unavailable off the Internet, with a brick-and-mortar
broker, one can still get information about houses for sale on
paper or in a conversation on the telephone.
In a market in which there is increased competition from
new broker business models, such as brokers who use the
Internet to communicate efficiently and cost-effectively with
their customers, that increases competition across the entire
market. One would expect that all brokers, those who use the
Internet and those who do not, should, in a market that works
competitively, work harder to provide better quality and lower
cost services. That benefits all consumers, those with access
to the Internet and those without.
Ms. Lee. Good. You do not really see a problem there at
all, in terms of the type of discounts or broker models or
services that are provided. That is a good thing.
In so many instances, for example, where job listings are
posted only on the Internet, you are told go to the Internet,
go to our Web site, and we will let you know what jobs are out
there. That is the only way that those notices are posted.
You are saying with regard to real estate services, the
traditional services still are available through non-Internet,
non-computer technology approaches?
Mr. McDonald. That is correct, Congresswoman.
Ms. Lee. Thank you very much. Thank you, Mr. Chairman.
Chairman Ney. Mr. Campbell?
Mr. Campbell. Thank you, Mr. Chairman.
Mr. Wood, you referenced some statistics in various markets
from 1978 and 1986, more than 20 years old. You have no more
recent statistics than that?
Mr. Wood. The most recent empirical data that we could find
in the study was from Baton Rouge, Louisiana, and that data
series was from like 1987 to 1993. There is just a real
scarcity of current data.
Mr. Campbell. That data really is not applicable today. The
Internet--
Mr. Wood. Right. It is very likely, as I think we stated in
our report, that commission rates overall seem to have
declined. There is anecdotal evidence that they have declined.
One of the factors that might be responsible for that is, in
fact, the Internet.
However, we also heard from a number of market participants
that the phenomenon of a single rate predominating still
exists, but we just do not have empirical data to show that.
Mr. Campbell. That was my next question. You then cited
that commissions had been in the 6- to 7 percent range and now
they are in the 5- to 6 percent range. Where are you getting
that?
Mr. Wood. The historical data, the studies that we found
with actual empirical data, including the FTC's study, which
was the most comprehensive, rates of exactly 6 percent and 7
percent were the ones that were most commonly found.
The more recent data comes from an industry source, REAL
Trends, which derives the data differently. They take basically
an average. They compute an average based on reported sales
from the largest brokerages.
Mr. Campbell. Is your data--the things you have cited, is
it residential only, or are you including commercial?
Mr. Wood. No. We focused on residential only.
Mr. Campbell. Why is that?
Mr. Wood. That is what we were asked to focus on.
Mr. Campbell. Mr. McDonald or Ms. Ohlhausen, has your focus
in this regard been only residential or residential and
commercial?
Ms. Ohlhausen. We focused on residential for the consumer,
consumer protection, competition side of things.
Mr. Campbell. Mr. McDonald?
Mr. McDonald. Likewise, Congressman, residential only. I
believe that is a fairly distinct market from commercial real
estate brokerage.
Mr. Campbell. I know in California, at least, if you
include multi-family residential as commercial, I think you
have more than a third of all property values in commercial.
If we are looking at how a market behaves and how
competition behaves, would there really be much distinction?
Might not looking at commercial be of some value, at least as a
comparison or benchmark? It is still multiple buyers, multiple
sellers, and multiple property.
Ms. Ohlhausen. I think we would have to examine more
closely the different characteristics of the marketplace. For
example, in residential real estate brokerage, it tends to be
for the buyer or for the seller an infrequent transaction. In
the commercial area, it might be very different. It might be
something that is done much, much more often.
Mr. Campbell. Mr. McDonald, absent State law, which you
have addressed, both you and Ms. Ohlhausen have talked about
some situations where perhaps State law was anticompetitive or
appeared to be anticompetitive, in most real estate markets,
there are thousands of agents and dozens of brokers or
brokerage firms, which arguably you would say wow, that is
about as competitive as it can get, so there has to be some
structure.
If something is not competitive, there has to be a
structure in place that is impeding that competition. If it is
State law, then it is State law.
Other than that--I think I heard it in your testimony. I
would just like to hear, do you disagree with that statement,
and if not, what are those vehicles through which competition
is impeded?
Mr. McDonald. Congressman Campbell, putting aside State
regulation, yes, there are some characteristics of residential
real estate brokerage markets that would make you think those
markets would behave more competitively, and some of those are
discussed in some detail in the FTC testimony and in the GAO
report.
Of course, there are in most localities a large number of
brokers. The brokerages are relatively not large. The markets
are unconcentrated.
Despite that, we see aspects of the market that do not
behave competitively, and we have discussed some of those. The
best example is the fees that home sellers and buyers pay for
brokerage services, which are commission-based, and do not seem
to fluctuate based on what the consumer is getting, based on
the quality of the service, based on the geography, and based
on different parts of the country, as Chairman Oxley pointed
out.
That suggests, in terms of price competition, that these
markets are not behaving competitively. That is one of the
reasons, I believe, the GAO was asked to do its report, and one
of the reasons that the FTC and the DOJ jointly held hearings
on real estate competition last year and are preparing a report
on that. The markets do not seem to behave competitively, and
we want to know why.
Mr. Campbell. I see my time has expired, Mr. Chairman. I
guess that is my question, if multiple competitors, why not?
What gets in the way? Thank you.
Chairman Ney. The gentleman from Georgia, Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman.
Mr. McDonald, you are the Deputy Assistant Attorney General
for which area?
Mr. McDonald. Congressman Scott, I am a Deputy Assistant
Attorney General in the DOJ's Antitrust Division.
Mr. Scott. You are familiar with cut rate fees. Do you have
concerns that cut rate fees would cause a race to the bottom
for real estate services where there would be more focus on
selling larger transactions, and where lower income buyers will
receive little service?
Mr. McDonald. Congressman Scott, that is not a great
concern of mine for a couple of reasons. One, even though some
brokers are seeking to discount their fees, on average, the
fees remain high. Two, there are, today at least, many, many
real estate brokers and not that many high-dollar transactions.
There are plenty of brokers for all the work that needs to be
done.
Speaking more generally, in competitive markets, the price
that a provider of services, like a provider of brokerage
services, receives is balanced according to supply and demand.
You would expect that so long as there is demand for brokerage
services involving transactions to sell expensive homes or
inexpensive homes, the market still would provide for services
up and down the spectrum.
Mr. Scott. Has the Department of Justice conducted any type
of survey that would determine what services home buyers
typically want?
Mr. McDonald. Congressman Scott, we have not conducted a
survey, per se. We have examined that question and have found
that in the past, traditionally that is, home buyers and
sellers have purchased a full array of services, everything
from listing the home in the multiple listing service database,
to marketing the home, to showing prospective buyers around the
home, to exchanging of offers, offers to sell, and representing
the customer at closing.
Today, we find that many home sellers and buyers would like
to purchase fewer services and pay the broker less. That is one
of the competitive options that we believe it is important to
protect.
Mr. Scott. Given the limited resources of the Department of
Justice, would you not think that the Department of Justice
would not help home owners more by spending their limited
resources on discriminatory practices?
There probably is no more pointed area of commerce and
transaction in our society today where discrimination is so
rampant and obvious. Redlining, you name it, as well as
predatory lending practices.
Would you not think that given the limited resources of the
Department of Justice, there needs to be more focus on
remedying the discrimination that exists in housing and real
estate transactions, and the targeted, predatory lending
discrimination? These are targeted areas. We know where they
are. They are there.
What is the Department of Justice doing in those areas?
Mr. McDonald. Congressman Scott, I am not especially well
versed in this area, which is the responsibility of the Civil
Rights Division. I do know generally that the Civil Rights
Division believes that sort of discrimination is a problem and
they are addressing it.
From an antitrust perspective, our view is the more that we
can promote competitive options, and the more that we can
prevent private restraints on competition, the better off are
consumers of all sorts.
Mr. Scott. Finally, I want to ask this question. A home
buyer has several real estate service options, including
looking at homes listed as for sale by the owner, and going to
open houses, and working directly with a listing agent.
Do you know what percentage of real estate transactions
occur without a licensed buyer's agent?
Mr. McDonald. Congressman Scott, I do not have that number.
Mr. Scott. Is there any way of getting that number? I think
it would be very important to have that number. Is there any
way of assessing that number?
Mr. McDonald. I am afraid I do not know the answer to that
question either, but certainly I will look into it and respond
appropriately.
Chairman Ney. The gentleman's time has expired.
Mr. Scott. Thank you, Mr. Chairman.
Chairman Ney. If you could look into that and get the
answer for Mr. Scott.
Mr. Scott. And provide it for the committee, too.
Mr. McDonald. Yes.
Chairman Ney. The gentleman from Texas, Mr. Neugebauer.
Mr. Neugebauer. Thank you, Mr. Chairman.
Mr. McDonald, are you an attorney?
Mr. McDonald. Yes, Congressman, I am.
Mr. Neugebauer. Are there any other people on the panel who
are attorneys, also?
Ms. Ohlhausen. I am, as well.
Mr. Neugebauer. Would you say that real estate services is
a professional service? Mr. McDonald?
Mr. McDonald. I have no reason to disagree with that,
Congressman.
Ms. Ohlhausen. I agree, as well.
Mr. Neugebauer. One of the things about buying a home, it
is probably the largest single investment that a lot of people
make.
Would you say attorneys' fees over the last 40 or 50 years
have gone up or down?
Mr. McDonald. Congressman, I have not seen real dollar
numbers, but I would not be surprised if they have gone up.
Ms. Ohlhausen. I think Mr. McDonald's intuition is correct.
Mr. Neugebauer. Would you say professional services over
the last 30 or 40 years in engineering have probably gone up?
Mr. McDonald. Congressman, I am sorry. I do not have a feel
for that.
Mr. Neugebauer. I think most people would think that those
services have gone up. Yet, in fact, the data that Mr. Wood
shows is, in fact, that the amount of percentage commission has
actually gone down.
If this is professional services, we have a history here
where attorneys' fees are going up, and the engineering fees
are going up. In fact, the professional services delivered by
professional real estate individuals have actually not gone up,
over a fairly inflationary period of 40 to 50 years.
Would you say that is a true assumption?
Mr. McDonald. Congressman, I think in terms of gauging
competition in these markets, you are looking at the right
dimension of competition, the price of the fees paid to brokers
for brokerage services that they provide.
It is correct that the percentage commission has dropped
slightly in the last few years from the traditional 6 or so
percent to something between five- and five-and-a-half percent.
Even though the commission percentage has dropped, because
the price of homes has increased, the actual dollars paid to
brokers for the services they provide have increased. That is
not explained by an increase in the cost of providing those
services or increase in the number of services provided or an
increase in the value of those services, per se.
That is one of the reasons we are looking at these markets,
to try to determine why they are not behaving more
competitively.
Mr. Neugebauer. The reason they have not is because in
those other instances, for engineers and attorneys, physicians,
and those kinds of people, they have covered the cost of their
increased costs of doing business because their product is
defined by a different unit. They have had to raise the hourly
rate.
Attorneys, when I got out of school, were getting $25 to
$50 an hour, and now they charge $500, $600, $1,000 an hour.
They are doing that because obviously there is a market for
their services, and secondly, the cost of doing business in
1972, when I got out of Texas Tech University, and the cost of
doing business today in 2006, is remarkably different.
Would you say that is a true assumption? The cost of doing
business is more today than in 1972?
Mr. McDonald. Congressman, I could not possibly disagree
that is true. I am not familiar with--I have not seen any close
comparison of the cost of doing business for lawyers and real
estate brokers.
Mr. Neugebauer. Call some of your buddies who have been in
private practice for a while and ask them what they were
billing their hours out when they came out of school and what
they are today.
I think the issue here is that there are discount
brokerages available in just about every market in this country
today. Evidently, the market place, people that are making the
largest single investment decision, are not choosing as much
for those people that want to list your house for $500 and that
is all they are going to pay you.
In fact, every one of these Realtors, they are individual
business people. They are independent contractors, as defined
by the Internal Revenue Service.
Each one of those has a cost of doing business. Some have
chosen to be a consolidator of information. That is a prevalent
situation in the Web business. I have all this information, I
will assemble it for you, and I will make it available to you,
and I will charge you a fee for that.
Some people when they are making an investment decision
want to know about the soil conditions of that particular home.
Is this house in a special assessment district? What is the
history of this neighborhood as far as re-sale? Some people who
are spending that kind of money want that kind of information.
Then we have the State legislatures that have increasingly
every time they meet, and sometimes frequently, have increased
the amount of risk that it takes for independent business
people, because of more and more consumer protectionism.
In fact, passed laws that you are, in fact, opposing in
saying when somebody is representing an individual or on one
side of the transaction or the other of making this very large
purchase, we want to make sure that they are getting the right
information so they do not make a poor decision.
I think the marketplace is very clear and transparent here.
You can pick up the phone book or a newspaper, and if you want
discount real estate services in this country, they are
available to you.
Chairman Ney. Your time has expired.
Mr. Neugebauer. Thank you.
Chairman Ney. Mr. Cleaver?
Mr. Cleaver. Thank you, Mr. Chairman.
I received a letter from the Missouri Association of
Realtors. They raised an issue. I could have answered the
question about the legal fees rising. I am not a lawyer. I have
some empirical evidence. That is not what I wanted to ask.
The question I received from the Missouri Association of
Realtors, they raise an issue that they received complaints
when a licensee abandons a listing. They would take the
listing, place it in the MLS, and then walk away, leaving
others to sell the property.
Is that something that is prevalent? Is it something that
is growing? Is that something you have ever heard of?
Ms. Ohlhausen. We have asked a number of States about that.
Thus far, we have not heard from State officials that this is a
prevalent problem. I do not know the background of that letter.
I do not know if that involved the limited-service broker or
not. Perhaps it did.
In our inquiries thus far, we have not gotten systematic
evidence that there seems to be a lot of consumer harm, a lot
of these problems occurring in the markets where limited-
service brokerage is permitted.
Mr. Cleaver. Thank you. I am going to ask the Missouri
Association of Realtors if they would provide some detailed
information, if they have it available.
I would like, if possible, to submit it to you some time
after the hearing. If this is something that is growing,
certainly it is something that the Federal Trade Commission
would need to know about.
Ms. Ohlhausen. Yes. We certainly would be happy to receive
that.
Mr. Cleaver. My final question is based on what has
happened in the Gulf Coast area, have there been any particular
problems or practices that have developed in the aftermath of
Katrina and Rita, and as survivors begin rebuilding and
redeveloping?
What kind of activities are going on in that area? There is
a lot of anecdotal information that comes to us about all kinds
of practices going on, where poor people are having their
property essentially stolen. The real estate agents come in and
offer a small amount of money for homes, to people who are
desperate to sell.
What is the activity in the Gulf Coast Region?
Ms. Ohlhausen. I would say I have not heard those reports
personally. I would say that the FTC is always concerned about
any kind of fraud that is going on.
Certainly, if there seems to be some sort of fraud
happening, we would definitely welcome receiving that
information.
Mr. Cleaver. Ranking Member Waters--we had a hearing a few
months back where residents came to Washington from the region.
Sometimes, in the midst of a lot of pain, which they are in,
many of them are not getting the proper insurance response,
``proper'', defined by me, then it becomes easier to see
conspiracy and rip off's.
I do not know if we had those people here, that they could
say this happened on February 3rd, and this is the agent who
did this. I do not know. My curiosity was whether or not
complaints were coming your way as a result of the massive
displacement and people now trying to go back and rebuild or
people who have been displaced from their properties.
Ms. Ohlhausen. I know the FTC has been involved with
Katrina recovery efforts, and has been involved in trying to
ameliorate any kind of fraud problems that are going on down
there.
I just do not know whether there have been any particular
associations with real estate kinds of transactions.
Our Bureau of Consumer Protection has been very heavily
involved, as I said, with fraud. They have done it after a
number of hurricanes in certain areas.
Mr. Cleaver. Do you have any knowledge of what they found
thus far?
Ms. Ohlhausen. I could certainly ask them and get back to
you with that.
Mr. Cleaver. I would appreciate that. Thank you. Thank you,
Mr. Chairman.
Chairman Ney. Thank you. The gentlelady from Florida, Ms.
Ginny Brown-Waite. I am sorry, if you could suspend for a
second, the gentleman from Texas.
Mr. Neugebauer. I failed to ask for unanimous consent. I
have two documents to submit for the record. One from the Texas
Association of Realtors, another is a white paper by Mr. Wayne
Thornburn on, ``Public and Private Restraints to Alternative
Business Models for Consumers.''
Chairman Ney. I thank the gentleman. Without objection.
The gentlelady from Florida, Ms. Brown-Waite.
Ms. Brown-Waite. I thank the gentleman. I also would ask
for unanimous consent to be able to submit my remarks, my
opening remarks, for the record.
Chairman Ney. Without objection.
Ms. Brown-Waite. Thank you, Mr. Chairman.
Recently in the newspapers in Florida, there was a headline
that said something like Florida home buyers pay much more for
title insurance than in any other State.
I would just like to ask Mr. McDonald, Ms. Ohlhausen, and
Mr. Wood, representing DOJ, FTC, and GAO, have you all ever
been concerned about say mortgage insurance, PMI, title
insurance costs?
Ms. Ohlhausen. There is a slight complication with the FTC
because under our jurisdiction, under the McCarran-Ferguson
Act, there are certain protections for insurance. A number of
years ago, we did prosecute a suit called Tycor Title
Insurance, that had to do with competition in this market. It
is a market where we have had some involvement.
Mr. McDonald. Congresswoman, I am not familiar with any
recent allegations of anticompetitive conduct in title
insurance markets in Florida, but would be interested if you
have some information on that.
Ms. Brown-Waite. I think you can just do a Google search of
the ``title insurance, Florida.'' I think you will certainly be
able to find it.
Mr. Wood?
Mr. Wood. We do have some work currently underway looking
at title insurance. I am not familiar with the details because
I am not personally involved. I would be glad to find out and
supply it for the record when we expect a report on that.
Ms. Brown-Waite. The reason I asked is I hear from people
about these issues. I was a State senator for 10 years. Now, I
have been in Congress for 4 years. I have not heard complaints
about Realtors. What I have heard complaints about is the fact
that people who sign up with a discount or one cost broker end
up going to the closing without anyone there. The discount
broker person expects just his or her commission check to be
mailed to them.
When questions come up at a closing, Realtors, let's say
one of the parties is represented by a Realtor, who shows up at
the closing, and the other one is represented by a discount
company, the concern is that the person who is the Realtor is
there answering questions that the discount broker who is
getting a commission certainly should be there to answer.
They are the kinds of concerns that I hear from
constituents. Just this past week, actually, on talk radio, one
of the financial advice shows, was saying exactly this same
phenomenon, that it is a very dangerous thing when both of the
parties do not have a real estate person at the closing. People
are finding this out sometimes not until the closing, that you
are going to be there by yourself.
There seems to be some concern over that. I do not know
about the other members, but I am not hearing complaints about
the regular ``Realtors.''
As the housing market, and if the housing market nationwide
cools off, I think you will see people saying, ``Okay, I have
my house listed for $200,000. I am only going to get $150,000.
If I am taking this lower amount to sell my house, Mr. or Ms.
Realtor, you are going to have to take a lower amount.''
Would all of you agree that may very well be a phenomenon,
as the housing market cools off from that which it was maybe a
year ago?
Mr. McDonald. Congresswoman, that is what one would expect
in a market that behaves competitively. One of the curiosities
that we have tried to report in this hearing is that we have
not seen such price competition in real estate brokerage.
If I may speak to your earlier question, it is a question
we have considered, the consequences of the two parties to a
real estate transaction appearing at closing and only one of
them is represented by a real estate broker because the other
has hired a limited-service broker, purchased fewer services,
not including appearance at the closing, and was able to pay a
lower fee.
Certainly, it can put the other broker in an awkward
position of being asked advice by a person to whom that broker
does not owe any fiduciary duty.
The two approaches to that could be either to ban limited-
service brokers, that is to require that every broker provide
the full array of services, including appearing at closing,
which of course, increases the broker's costs, increases the
price that all consumers pay, and takes away from consumers the
limited choice option.
The other way to approach that is through regulation that
requires full disclosure to the person buying a limited package
of brokerage services, so that the consumer is not under the
impression that he or she is going to have a broker at the
closing when in fact he or she has contracted not to have a
broker at the closing.
Ms. Brown-Waite. I think that is exactly the problem.
Mr. McDonald. Congresswoman, if that is a problem, then
full-disclosure regulations seems, from a competitive
perspective, to be the right way to approach it. It leaves the
competitive option open for all consumers, but addresses this
disclosure question for those who need it.
We have not found evidence that a significant number of
consumers buying limited-service options have faced this
problem, but if there are reports of additional problems out
there, we would like to know.
Chairman Ney. Time has expired. The gentleman from Texas,
Mr. Green.
Mr. Green. Thank you, Mr. Chairman. I thank the ranking
member as well, and the members of the panel for the
information you have imparted.
Let me ask you about the Austin case, if I may, the
restraint of trade action that was placed against the Austin
Board of Realtors.
In that case, there seems to be an indication that the
discount brokers were excluded from the MLS listings. Is that
true?
Ms. Ohlhausen. The traditional, the exclusive right to sell
listings and exclusive agency listings, which are typically
associated with non-traditional services, were both allowed
into the MLS database. What the rule that we objected to did
was it prohibited the MLS from sending the information about
the non-traditional listings, of the data on it, to a number of
publicly accessible Web sites, where there was a lot of
exposure for these properties.
Everything was allowed into the MLS, but only the
traditional listings got this important Internet kind of
exposure through the MLS.
Mr. Green. Who produces the MLS?
Ms. Ohlhausen. The MLS is a private association of real
estate agents in certain areas.
Mr. Green. Is there a proprietary right in the product, the
work product?
Ms. Ohlhausen. I believe there is, but I am not an expert
on that in particular.
Mr. Green. Mr. McDonald?
Mr. McDonald. The question has been raised whether Realtors
have a copyright in the listing information, and from an
antitrust law perspective, that actually does not matter.
The MLS is a joint venture among brokers. They all
contributed their listing information, copyrighted or not, to
that joint venture. Because the joint venture is necessary to
compete in that market, they are not free to exclude other
competitors because of the way they compete.
Mr. Green. We have talked about consequences, and sometimes
it is difficult to talk about unintended consequences. In
making this change, are we putting ourselves at risk of having
some unintended consequences that might be adverse to the best
interest of the consumer?
Ms. Ohlhausen. By the, ``change,'' do you mean limited-
service brokerage, or do you mean the Austin--
Mr. Green. By putting consumers in a position where
notwithstanding full disclosure, they find themselves at
closings without the aid, use and benefit of a broker, where
they find themselves without the use and benefit of the advice
that a broker gives along the way that can be of great
importance in making a decision about the whole process of home
purchase.
Is there not a possibility of some unintended consequences
developing as we eliminate the advice that is being conferred
right now?
Ms. Ohlhausen. There would certainly be a possibility that
consumers could be injured, but what we have found is in the
markets where limited-service brokerage has been allowed, we
have not seen evidence or been presented with evidence that
consumers who choose this option are being harmed.
Mr. Green. Have we seen any evidence or do we have
empirical data to support the notion that the Realtors are
being complained against to the extent that they merit this
additional competition?
I have not heard you respond to the notion that the
gentlelady from Florida raised about complaints against
Realtors. Do you have complaints against them that have been
quantified such that we can conclude that their services are
not up to standard?
Ms. Ohlhausen. Our inquiries have not approached it in that
way. What we have seen is that regardless of the current
competitiveness of the market, we are concerned when a new
business model, particularly one that offers a lower cost, is
being kept out of the market, that would reduce competition.
It is not necessarily that we are saying--we are certainly
inquiring about the level of competitiveness currently in the
market, but our concern is when a competitive business model is
being foreclosed from the market and consumers are being denied
that choice, without any indication that having that choice
harms consumers.
Mr. Green. What about the quality of the competitiveness? I
think competition is great. By the way, I want to see the
prices down. My concern is the quality of service that is going
to be imparted.
Have you looked at the quality of the service in the new
model? Have you quantified any opinions about the quality of
service?
Ms. Ohlhausen. We have not measured the quality of service
directly. Instead, what we have tried to discern is whether
consumers are being harmed by choosing this lower package of
services. Certainly, we believe that the higher level of
services should also still be available in the market, that it
should not be that the market is all one thing or the other, it
should really reflect the diversity of consumer needs in the
marketplace.
Mr. Green. Given that we have some other examples, and I
will try to be nebulous, but at least give you some ideas of
what I am talking about, where consumers have big businesses
that move in, they drive prices down. They drive other
businesses out of business, and then the prices go up.
Competition can sometimes eliminate competition to the
extent that what you really need is no longer available to you.
Are we concerned about those unintended consequences?
Chairman Ney. Time has expired. If you would like to answer
the question, go ahead.
Ms. Ohlhausen. What I would say is to the extent that you
are concerned about something like predatory pricing or
something, that is something that the antitrust laws are
equipped to address.
Mr. Green. Mr. McDonald, do you have a response?
Mr. McDonald. Congressman, we have not seen any evidence
that discount brokers have significantly changed the quality of
service provided by brokers in any locality.
I will add that our enforcement actions are not in response
to complaints about the quality of services provided by any
type of broker, but instead, are in response to restraints on
competition by new broker models. It is competition to provide
different kinds of services, perhaps even different quality of
service. We are trying to protect that competition, so
consumers can purchase the range of services or the quality of
service they choose and can pay a price appropriate for that.
Mr. Green. Thank you.
Chairman Ney. Our ranking member has some time she is
reclaiming.
Ms. Waters. Mr. Chairman, I may be asking the wrong
question here, but all of this is a non-issue now; is that
right? The suit was settled; is that right?
Ms. Ohlhausen. The Austin case?
Ms. Waters. Yes.
Ms. Ohlhausen. Yes, that was settled in Austin. We do have
other cases that we are looking at, in other MLS'.
Ms. Waters. In what way? As I understand it, when the suit
was first filed, it was over a policy basically that no longer
exists, and then there was just one other issue having to do
with the listings in these MLS' that got resolved.
What else is left?
Mr. McDonald. Ranking Member Waters, in the U.S. vs.
National Association of Realtors' lawsuit, there are two sets
of rules at issue. The first set of rules is the one that the
National Association of Realtors had in place previous to our
action.
Ms. Waters. I know that. When you filed, it no longer
existed. You went onto the second problem that you saw, which
got worked out?
Mr. McDonald. On the morning that we filed the action, NAR
revised its rules, didn't eliminate its rules, but revised
them. Our amended complaint addresses both the original rules
and the revised rules. Neither set of rules in our view
complies with the antitrust laws. Both, we think, violate the
antitrust laws.
The problem has not gone away because, as to the first set
of rules, there are some local MLS' that did adopt them, and
those are in place, and as to the second set of rules, those, I
believe, are in abeyance but, but for the lawsuit, would be put
in place.
Ms. Waters. Having said all that, the lawsuit was settled?
Mr. McDonald. To be clear, the Austin lawsuit was settled,
and that deals with--
Ms. Waters. What is pending now?
Mr. McDonald. The lawsuit that is pending in the Federal
District Court in Chicago is the Justice Department's suit
challenging the National Association of Realtors' rules, which
apply nationwide. That has not been settled.
Ms. Waters. Is it calendared? Where is it?
Mr. McDonald. It is in a pre-trial stage. There is a motion
to dismiss that the National Association of Realtors has filed
that is briefed and ready for decision by the Federal judge.
Ms. Waters. As I understand it and what you are telling us
is the case that you just dealt with, that dealt with that
area, that jurisdiction, and now you want to make sure that the
rules that were adopted by the National Association of Realtors
are applicable to all this country; is that right?
Mr. McDonald. Ranking Member Waters, you are correct that
the Austin lawsuit, which the Federal Trade Commission brought,
dealt only with Austin, with a particular kind of rule that
applied only in Austin.
The Department of Justice's lawsuit--sorry, we have two
agencies here working on the same kind of matters--the
Department of Justice's lawsuit addresses a slightly different
kind of rules that apply nationwide.
The Austin matter has been resolved. The nationwide matter
has not been resolved.
Ms. Waters. It seems to me that the settlement of the
Austin lawsuit indicates that the Realtors have been very
cooperative in working with you.
Was there some discussion and an attempt to walk through
whatever rules you are concerned about nationally prior to
going back to court?
Mr. McDonald. Preceding the Department of Justice's filing
the lawsuit against the National Association of Realtors, there
were extensive settlement discussions that did not lead to a
satisfactory result.
Ms. Waters. Because you did not get the results that you
desired, you went back into court, and it is not about the
rules, it is about settlements that you were not able to get?
Mr. McDonald. In the National Association of Realtors'
matter, NAR did not agree to change its rules in a way that we
thought would bring those rules into compliance with the
Federal antitrust laws. Therefore, we proceeded to file that
lawsuit.
In the Austin matter, which came up after, I believe, the
National Association of Realtors' lawsuit was filed, in the
Austin matter, the Federal Trade Commission investigated a
different kind of rule, and announced a challenge to that rule.
Announced it would bring a lawsuit, did so, and the Austin
Board of Realtors backed down.
Ms. Waters. Mr. Chairman, I do not know, because I was a
little late in coming, whether or not they have described to
you exactly what it is they are challenging at this point.
Have you heard that today? Has anybody heard exactly what
it is they are challenging with the Realtors nationally?
What is it you do not like about what they are doing?
Mr. McDonald. Ranking Member Waters, let me explain that
and refer you, if I do not give you enough detail, to my
prepared testimony.
The National Association of Realtors' rules authorize
broker members of the local MLS', traditional brokers, to
discriminate against their fellow brokers who communicate with
their customers using the Internet, Web-based brokers.
Ms. Waters. That has all been solved. I just want to know
what it is that you are going after now nationally. You solved
the local issue with Austin; is that right?
Mr. McDonald. Forgive me. I was not clear. The National
Association of Realtors' rule--put aside the Austin rule. It
was a different kind of rule that was challenged.
The National Association of Realtors' rule applies
nationwide. It applies nationwide in that it requires that each
local MLS adopt that rule. The rule allows a broker to withhold
his customer's listings from the Web site of competing brokers.
Ms. Waters. Mr. Chairman, it seems to me that the same kind
of work that was done with the National Association of Realtors
relative to Austin has not been done to resolve whatever the
Justice Department and others--questions they may have.
I just do not quite understand what it is they are saying.
They are saying in essence that the National Association of
Realtors disagreed to do this in any other jurisdiction other
than Austin. Is that what you are saying?
Mr. McDonald. That is not what I am saying, Congresswoman.
The National Association of Realtors' rules that are challenged
in the Department of Justice's lawsuit are a different kind of
rules than the rule that was imposed by the Austin Board of
Realtors in Austin.
Ms. Waters. I asked you to tell me what it was, and you
still have not told me what the difference is.
Mr. McDonald. In Austin, if I understand it correctly, the
local Board of Realtors prevented certain kinds of brokers from
putting their listing information on some public Web sites.
Ms. Waters. I got that.
Mr. McDonald. That is the Austin action. The National
Association of Realtors' rule allows brokers, members of the
MLS, to withhold their listing information, to withhold it from
the Web sites of competing brokers. That undercuts competition
from brokers who use Web sites to communicate with their
customers, limits competition from that new business model, and
we believe violates the antitrust laws.
That rule, NAR has not agreed to--
Ms. Waters. I thought there was some kind of opt-out
agreement that everybody basically agreed to, to say that if
the Web site does not want to participate, they do not have to
participate, they cannot use the other person's listing, and
they can opt out. I thought that was worked out.
Mr. McDonald. You are correct that the rule that I
described is called an ``opt out.'' You and I are talking about
the same rule. It is an agreement among competitors, which is
part of what makes it unlawful. There has not been an agreement
to eliminate those rules. Therefore, our lawsuit--
Ms. Waters. What you are arguing about now is the opt out
so-called agreement between the Realtors and the Web site
owners?
Mr. McDonald. The opt-out rule is not an agreement between
the brokers and the Web site owners. It is a rule imposed by
the NAR, a trade association, which itself is an organization
of competitors, it is a rule that might be favored by
traditional brokers and opposed by brokers who use Web sites to
communicate with their customers.
Ms. Waters. You still see it as an antitrust issue?
Mr. McDonald. That is correct.
Ms. Waters. They are working with it okay, it is all right
with everybody but you?
Mr. McDonald. I think it is probably okay with the National
Association of Realtors.
Ms. Waters. Nobody is asking you to do this. You just think
it is not quite what you would like to see; is that right?
Mr. McDonald. It is not our view that we get to decide what
kinds of competitors get to participate in the market, and what
kind do not. It is our view that this rule, which undercuts
competition from one kind of competitor, is anticompetitive and
does violate the antitrust laws.
Ms. Waters. It seems to me you are the only one unhappy.
Chairman Ney. Time has expired.
Ms. Waters. Thank you.
Chairman Ney. Chairman Baker?
Mr. Baker. I thank the chairman for the time and for
calling this hearing.
Mr. McDonald, I want to come back at it one more time. I
know you are enjoying this immensely.
Is the view by your agency, as best I can understand it,
that parties ought to be free to contract on terms they
negotiate for services that are described by terms of the
contract, for whatever price may be deemed appropriate by both
consenting parties?
Mr. McDonald. As a general matter, that is correct,
Congressman.
Mr. Baker. Where you find people who are prescribing the
terms that say on the one side, all house painters in America
get together and say if you are going to give a quote on
painting any portion of a house, the quote must be for painting
the entire house; is that correct?
That would be a collaborative violation of free market
principles?
Mr. McDonald. And very likely an antitrust violation.
Mr. Baker. If I wanted to hire a guy to paint my front
porch, and I assume it will cost $200, and he says the price is
$1,000, and I am going to paint the whole house. I am then
constrained if I want the porch fixed. I have to pay for this
entire service whether I want it or not.
What I have heard members say or represent, I believe, is
that those who are on the lower rungs of the financial ladder,
who may not have resources, would be better protected if they
have a full service agent, because that enables them to pay
more of the money they do not have.
Is that the argument?
Mr. McDonald. That is the way I see it, Congressman.
Mr. Baker. Let me see if I can understand the way the
market is working. If I want to sell my home and I am going to
refer--because I know they are going to come up in a little bit
and you are going to be absent, I suspect, to the Realtors'
testimony, which I think goes at issue with the pending
litigation--on page one, the statement is, ``NAR welcomes all
professionals engaged in various aspects of the real estate
industry.'' That is a terrific statement.
On page 14, there is an accusation NAR rebuts saying, ``NAR
discriminates against non-traditional discount limited-service
brokerages. Such assertions are absolutely not true.'' That is
on page 14. I think that is a terrific statement.
On page 17, the real estate industry is recognized as,
``The most enthusiastic users of the Web.'' Again, a great
statement of technology utilization.
On page 19, running over to 20, there is the statement
that, ``All real estate professionals have access to the MLS.''
That is terrific.
``In some cases, it may be limited to those who hold
membership in the Realtor association.'' That is
understandable, perhaps.
As I read those statements and put them together, it would
seem to me that if a real estate broker was an Internet
operative business, advertising limited service at a low price,
was a member of the Realtor organization, there should be no
impairment with that individual Realtor having access to the
MLS.
Have you found that to be the case?
Mr. McDonald. Congressman, I could not agree more that
there should be no impediment to that Realtor having full
access to the MLS. Our lawsuit challenges a rule that limits
the Realtor's access, in that the Realtor may not be allowed to
post on his Web site all of the listings that are in the MLS.
Mr. Baker. I got it. My point is if you read the statement
here and the testimony about to be given, it would create the
view that anyone engaging in any entrepreneurial method of
lawfully selling real estate, who is a licensed Realtor, who
abides by the rules of the State jurisdiction in which they are
licensed, should have access to the MLS.
What I hear you saying is, well, that may be the case, but
we will enable the local broker by operation of national
Realtor rule to preclude Mr. Campbell's listings from being
given to me for whatever reason he may deem. One of the
precursors might be that I am an Internet user and he may not
share his listings with Internet users.
In another instance, I may be a discount broker. He may not
do business with discount brokers.
Is that a fair assessment of the facts?
Mr. McDonald. That is a fair assessment, and our lawsuit
challenges one of those situations.
Mr. Baker. If one is to get into the real estate business
and offer a product with lower service charge, with a clear
understanding up front of what those services are, then it is
really left up to the individual broker organization and the
business community in which he resides to determine who is in
the club and who is not.
Mr. McDonald. Subject to violations of the antitrust laws,
that is correct.
Mr. Baker. What you are trying to do is enable people to
enter into agreements for services they choose from a licensed
professional in the trade who may have a different way of doing
business than the full service organization?
Mr. McDonald. I could not have said it better myself,
Congressman.
Mr. Baker. Thank you. I yield back my time.
Chairman Ney. Mr. Sherman?
Mr. Sherman. Thank you, Mr. Chairman, for letting me
participate in these hearings. Given the weather outside, I
thought I was in Sacramento, California. Given the issues here,
I wonder whether I am in the State legislature.
I kind of wonder what the Federal/Congressional role is
here, given the fact that professional regulation, whether it
is taxidermists or lawyers or real estate agents, is
traditionally done at the State level. Consumer protection is
primarily done at the State level.
Real estate is the least interstate of all commerce. In
fact, everything we deal with in life, except real estate, has
probably gone across the State border before we bought it.
One of the methods that I have seen professions use to try
to deal with competition is to try to limit entrance, limit
licensing. There are those who accused the American Medical
Association many years ago of trying to limit the number of
doctors in the country, limit entry to the field.
Perhaps the gentleman from Justice could indicate, is there
any evidence that the Realtors have tried to limit the number
of Realtors in the country or denied a license to those who
demonstrated their qualifications? Do we have a shortage of
Realtors that is driving up the price?
Mr. McDonald. Congressman, I am not aware of efforts to
limit the number of licensed brokers in the country. Our
concern relates more to restraints on the ability of brokers
who want to use new business models to compete.
Mr. Sherman. The first rule of creating competition is to
have enough sellers, and this is a country where we have maybe
only two or three companies selling data about the
creditworthiness of individuals. We have only four big
accounting firms. We have about 1.3 million Realtors. At least,
we have a lot of competitors out there.
I have been a bit concerned about the argument that somehow
it is wrong for Realtors to petition State legislatures to make
their arguments in favor of minimum services.
Is there any reason to think that the State legislatures
are somehow gullible, and we here in the Federal legislature
are perceptive and brilliant, and for that reason, we should
protect State legislatures from the lobbyists of the National
Realtors Association or its State affiliates?
Ms. Ohlhausen. None of our advocacy comments have been
directed at the right or the ability of Realtors to lobby State
legislatures.
Mr. Sherman. It is not an anticompetitive practice to go to
a State capitol and argue in favor of a minimum service law?
Ms. Ohlhausen. To a State legislature, no, it is not. It is
protected by an antitrust doctrine called the Noerr Doctrine.
Mr. Sherman. Not to mention the First Amendment and the
right to petition.
Ms. Ohlhausen. The Noerr Doctrine is an application of the
First Amendment.
Mr. Sherman. It is a close call whether if I were in a
State legislature, I would be in favor of minimum service
requirements or not, when I think of myself as a buyer, I have
done a lot of real estate transactions, and I would just as
soon not pay for services I do not need, and yet at the same
time, I would be concerned that the very most vulnerable in our
society are the ones who might pick the cheapest broker and be
most in need of professional services.
Is your work at all concerned with the fact that in some
States, you have to have an attorney involved in the
transaction, whereas, in California, it seems to be working out
well to have escrow agents and title insurance companies, not
only is it considerably cheaper than in States requiring an
attorney, but also in my State, you get a guarantee that your
title search was done right, and even if they non-negligently
made a mistake, they pay you.
Here on the East Coast, if your careful attorney fails to
be able to detect that there is an easement running across your
living room, then you have an easement running across your
living room.
Are you folks focused at all on whether the Federal
Government should tell the States that it is wrong to require
an attorney?
Ms. Ohlhausen. What we have done is a number of competition
advocacies, pointing out to States the competitive effects of
requiring an attorney at all real estate closings, and the lack
of empirical evidence that States where non-attorney closings
are allowed have greater amounts of consumer harm from non-
attorney closings.
Mr. Sherman. You share your expertise with State
legislatures, but generally, leave it to them to decide what
their State laws on real estate and real estate transactions
would be?
Ms. Ohlhausen. That is correct.
Mr. Sherman. One of the things that makes it difficult to
have a discount in real estate sales is that you are doing
business, in effect, not only with your own broker, but with
the buyer's broker as well.
I would think you would just negotiate--one of the things
that would concern me is that I could find a broker who would
do it for 3- or 4 percent, but which buyer's broker is going to
come and look at my home if they are only promised 1- or 2
percent commission?
If I am a buyer, am I allowed to pay my broker and say,
look, I want to go see all the homes that are for sale by
owner, I want to go see all the homes that are for sale by
discount brokers that only pay you 1- or 2 percent, and I will
pay you the rest?
Is there any law that prohibits that?
Chairman Ney. Time has expired, but if you would like to
quickly answer.
Ms. Ohlhausen. I am not aware of any law that would
prohibit that.
Mr. Sherman. Thank you.
Chairman Ney. With that, we will conclude the first panel.
One question, and I do not want to prolong this, we have a
second panel, but did the inception of the Internet have
anything to do with looking at this differently than the old
days where the Realtor had the notebook binder and you had to
go look at the property? Did the Internet give any different
look towards this idea or not of looking into this?
Mr. McDonald. Mr. Chairman, the Internet is probably the
single most important factor in creating new opportunities for
competition, as we have discussed, because it does allow quick
and efficient communication of information about homes for sale
to customers.
I think it is the confluence of events that has raised
these issues, the introduction of Internet technology and the
increase in home sale prices.
Chairman Ney. Thank you very much. I want to thank the
panel, all of you, for your time. I think it was very
interesting testimony. Thank you.
We will take a 5 minute recess.
[Brief recess]
Chairman Ney. Thank you. We will move onto panel two. If
you have never testified in Congress, and because at 5:00 p.m.,
we have H.R. 5121, the FHA bill up on the Floor, when the
yellow light comes on, you have about 45 seconds. When the red
light comes on, then your testimony will be finished.
Without objection, all of your statements will be entered
into the record, and we will have 5 minutes of questions.
We have Stephen Brobeck, executive director of the Consumer
Federation of America. The membership includes 300 non-profit
organizations. On their behalf, the Federation promotes
beneficial Government policies affecting the Nation's
consumers.
Aaron Farmer joins us today from Austin, Texas, where he
founded Texas Discount Realty. Texas Discount Realty offers a
flat fee real estate listing service while employing broker
agents in five major Texas cities.
Kimberly Gorsuch-Bradbury is senior vice president for Real
Estate Networks at LendingTree, a net loan provider, located in
Charlotte, North Carolina. She is also responsible--I think we
are going to have a statement in a second here--for developing
the company's online real estate loan business, including the
Internet site realestate.com.
Glenn Kelman is the chief executive officer at Redfin
Corporation located in Seattle, Washington. Redfin is an
Internet brokerage business providing online services for real
estate consumers.
Geoffrey Lewis is a senior vice president and chief legal
officer at RE/MAX International, headquartered in Greenwood
Village; they have all those hot air balloons all over the
place. The RE/MAX franchise network is a global real estate
system of franchisee owned and operated offices.
Pat Vredevoogd-Combs is the 2006 president-elect of the
National Association of Realtors, a trade organization
representing more than one million members involved in the
residential and commercial real estate industry.
Ms. Vredevoogd-Combs is a broker/owner of AJS Realty, a
residential real estate company in Grand Rapids, Michigan.
We will defer to Mr. Watt.
Mr. Watt. I am not even on the subcommittee, Mr. Chairman.
I appreciate you allowing me to welcome Ms. Gorsuch-Bradbury,
one of my constituents from the Charlotte area to the
committee, and I am looking forward to hearing her testimony,
and I thank her for being here.
Chairman Ney. Thank you, Mr. Watt.
We will begin with Mr. Brobeck.
STATEMENT OF STEPHEN BROBECK, EXECUTIVE DIRECTOR, CONSUMER
FEDERATION OF AMERICA
Mr. Brobeck. Chairman Ney, Ranking Member Waters, and
members of the subcommittee, the Consumer Federation of America
appreciates the opportunity to share our views on residential
real estate brokerage services, and these views also represent
those of the American Homeowners Grassroots Alliance.
From a consumer perspective, this real estate brokerage
system seems cockamamie. For most firms, information about
prices and services is not readily available. Their prices, in
fact, are high and nearly uniform. Brokers offering lower
prices and limited services are few and far between in most
markets.
Only one comprehensive source of information about houses
for sale is available, but buyers are limited in the
information available to them from the source, especially if
they do not work with a broker.
Moreover, complaints about brokerage services are
increasing, yet there is no independent regulation of the $60
billion plus industry. Practicing brokers control almost all
State real estate commissions and boards, as a study we
released last week demonstrates.
There is a relatively simple explanation for a system that
seems cockamamie to consumers. Working through their trade
association, many traditional brokers have tried with much
success to control prices and services. In most areas, they try
to maintain commission rates of either 6- or 7 percent. When
they fail, it is mainly because home sellers are increasingly
refusing to pay a $24,000 or $28,000 commission on the sale of
a $400,000 home.
These traditional brokers have also succeeded in
restricting or even banning limited service or discount brokers
in some areas. They do so in three ways.
First, they have persuaded a number of State legislatures
to pass anti-rebate and/or minimum service laws.
Second, through multiple listing services, they restrict
information about homes for sale, not only to consumers, but
also to non-traditional brokers.
Third and most importantly, through informal mechanisms,
they discriminate against non-traditional brokers, especially
those that discount, rebate, or charge fixed fees.
The correct term for an industry that effectively controls
prices and services is a ``cartel.''
Since State regulators have been captured by industry, it
is fortunate that the Department of Justice, the Federal Trade
Commission, and the Government Accountability Office, have
taken the initiative to try to ensure greater real competition
and consumer choice in this marketplace.
We urge Congress to give these Federal agencies even
stronger mandates, authority, and financial support to ensure
freer real estate brokerage markets.
As a first step, Congress could direct one of these
agencies, and our preference is the Federal Trade Commission,
to study industry practices carefully. In its 2005 report, the
GAO noted that, ``There is no comprehensive data on brokerage
fees.''
Both Congress and these agencies would benefit greatly if
they had available the results of a study that focused
particular attention on prices and multiple listing services.
Our written testimony suggests specific types of
information that would be useful to collect.
Mr. Chairman, that concludes my oral statement.
[The prepared statement of Mr. Brobeck can be found on page
70 of the appendix.]
Chairman Ney. Thank you.
Mr. Farmer?
STATEMENT OF AARON FARMER, BROKER/REALTOR, TEXAS DISCOUNT
REALTY
Mr. Farmer. My name is Aaron Farmer, and I am a Realtor and
broker at Texas Discount Realty in Austin, Texas.
In September of 2002, the Texas Real Estate Commission
said, through its filings in the Texas Register, that as a real
estate broker, I should charge a full commission, instead of
offering a menu of services at reduced fees, and being the
first State to pass what is now known as the ``minimum services
rule.''
I filed suit against this rule, aimed at eliminating
limited-services listings, and it was eventually overturned.
Again in 2005, Texas became one of 10 States to now pass a
minimum-services law, over strong objections from FTC and DOJ,
and despite the fact that there has never been a single
consumer complaint in Texas about limited-services listings.
My business still takes limited-services listings as part
of our unbundled menu of services listing model. While it is
still possible to do limited-services listings, the goal of the
law, to effectively rebundle the listings, has been somewhat
effective. Complying with minimum-services laws takes us much
more time and energy than it did in the past.
It has also forced many of my agents who perform limited-
service listings to re-think the way they handle this type of
listing. Most of my agents will now only offer limited-services
listings to experienced investors and/or home owners.
The uncertainty of the effects of this new law over the
last 3-plus years has forced me and many other brokers to
change the way we operate, what we charge, and how we plan or
do not plan for the future of our business.
As any businessperson will tell you, uncertainty is bad for
business. Uncertainty in the marketplace also creates barriers
to innovation. While the barriers created by changes in MLS
rules, changes to data sharing rules and State sanctioned
minimum service laws are well documented; many barriers are
felt at a more basic level.
All too often, alternative or innovative brokers encounter
discrimination, ridicule, and harassment from traditional
agents, who are resentful about new competition, new
businesses, and new businesses which may have different pricing
models, are more technology based, or just have different
attitudes and business cultures than their companies have.
I have personally heard traditional agents telling
potential customers that our company would be going out of
business soon, or that what we are doing is against the law,
which is false, of course.
Traditional agents have told sellers that other agents
would not show their home if they listed with us. We have yard
signs stolen from front yards, and recently, had a whole
billboard ripped out of the ground.
I have even seen a traditional agent ridicule one of my
agents at a Realtor tour event for being a discount agent and
offering reduced fees.
The closest thing I have to a smoking gun to this type of
activity is an e-mail sent to one of our agents recently, after
he was asked to stop advertising in the Waxahachie Texas Daily
Newspaper's HOMES Magazine. Waxahachie is a suburb of Dallas.
The whole e-mail is attached to my written comments as
Exhibit 2. The following is an excerpt of the e-mail from the
sales department of this newspaper, and I quote:
``I was told by several real estate agents in Ellis County
that they would not advertise with HOMES Magazine if we let
Texas Discount Realty advertise. I was also told by several
agents that our competitors would never let Texas Discount
Realty advertise in their products.''
These actions of conspiracy and discrimination have
prompted my agent to ask if he could operate under a different
name and even explore leaving my brokerage altogether.
Fear of these types of bully tactics has the effect of
preventing other brokers and agents who might otherwise
consider trying an innovative model from doing so, thus,
stifling innovation.
In an effort to combat some of these barriers to entry, I
have become a founding member of the American Real Estate
Broker Alliance, or AREBA. AREBA can be found at areba.org, and
is a national alliance of flat fee limited-services real estate
brokers and agents formed in 2006 who advocate innovation, free
market competition, full disclosure, informed consent, and
consumers' rights to choose their level of desired brokerage
services.
AREBA believes anticompetitive practices which discriminate
against my members must be prohibited.
In conclusion, I would like to applaud the actions taken by
the FTC and the DOJ to fight barriers to innovation in the real
estate industry. However, I would urge them to take an even
closer look and study the bullying that sometimes goes on by
agents at companies, which tend to create barriers to
innovation on a State and even local level.
Until the attitudes and actions of local brokers and agents
change, barriers to innovation will continue to exist.
I would like to thank the committee for asking me to
testify today. Thank you.
[The prepared statement of Mr. Farmer can be found on page
82 of the appendix.]
Chairman Ney. Thank you. Your experience of the stolen
signs and ripped down billboards--welcome to the world of
Congressional campaigns. It is what happens to us--in about 100
days, especially to the incumbents. We do not do that, but they
do it to us.
Ms. Bradbury?
STATEMENT OF KIMBERLY GORSUCH-BRADBURY, SENIOR VICE PRESIDENT,
REAL ESTATE NETWORKS, LENDINGTREE, LLC
Ms. Gorsuch-Bradbury. Good afternoon, Chairman Ney, Ranking
Member Waters, and members of the subcommittee.
My name is Kimberly Gorsuch-Bradbury, and I am a senior
vice president of Real Estate Networks at LendingTree. We
appreciate this opportunity to share our views of the changing
real estate market.
LendingTree was founded on the idea that better choice and
competition can empower both consumers and lenders. We have
built relationships with over 300 lenders around the country,
with large lenders, such as Citibank and BankOne, but also with
many, many smaller lenders who built their businesses around
LendingTree.
Here is how it works. A borrower fills out one simple form
and almost instantly gets up to four offers from lenders. The
consumer uses this information to comparison shop and negotiate
the best deal.
While the value to consumers is clear, a key to our success
is that it is also valuable to our lender partners. Our
partners have funded well over $140 billion in loans through
LendingTree since its inception.
We have applied a similar approach to real estate
brokerage, enabling choice and competition. We operate
RealEstate.com, where we have built a network of over 500 local
real estate brokers and 12,000 real estate agents across the
country.
Consumers can use our Web site to learn about homes for
sale, get an automated home price check, learn about the
process of buying or selling a home, and much, much more.
Our goal is to provide consumers with the information,
tools and resources they need to be smart and confident buyers,
but when the consumer is ready, we also connect them with a
local professional on our network.
We firmly believe that the real estate professional is
essential. Many consumers want professional assistance for such
an important transaction.
Switching gears, today, I would like to talk about two
challenges facing our industry. The first relates to fee for
service brokerages, which many of the other witnesses have
spoken about. These companies offer real estate services that
are unbundled. Some of them allow a consumer to choose services
from a menu, giving them the flexibility to purchase just the
services they need.
For instance, a consumer may ask for a broker to place
their home in a multiple listing service, but handle the rest
of the transaction on her own, or she might ask for help in
pricing the home and handling open houses, but select a lawyer
to handle price negotiation and contracting.
The point is that the services are flexible and she has a
choice.
While this innovation should be applauded, last year, we
saw many States considering new licensing laws that impaired
these new brokerages. Unfortunately, around 10 States have
adopted new licensing laws that force all brokers to follow the
traditional model of providing full service brokerage.
That is like saying when a consumer goes to McDonald's for
a coke, the law requires them to buy the burger and the fries.
We believe Government should encourage new competition from
innovators and not limit it.
A second challenge to innovation comes from the anti-rebate
laws. One of the ways that many brokers, including
RealEstate.com, attract consumers is by offering a rebate on
close transactions. This effectively lowers the cost of
brokerage for the consumer. Since inception, we have provided
nearly $60 million in savings through rebates.
Of course, consumers are delighted with this result, but
importantly, it also works for our partners.
Since the year 2000, our brokers have closed almost 40,000
sales with our assistance, and that is a lot of transactions.
As you heard from prior witnesses, the competition
authorities view anti-rebate laws as barriers to competition.
Consumer advocates report no complaints or problems in the 39
States that allow rebates, and yet 11 States still block or
limit them.
Prohibiting rebates means millions of dollars in lost
savings for consumers. For example, in New Jersey alone,
consumers could have saved nearly $200 million last year if
rebates were permitted. That is a lot of money.
In summary, real estate brokerage is a business of enormous
importance to both consumers and the economy. Moreover, it is a
business in which innovation offers great promise. Removing
barriers such as those described today will result in a more
efficient and more productive housing market.
We thank the committee for examining competition in real
estate, and we hope that your continued efforts will lead to a
freer marketplace, with fewer competitive obstacles, where
innovation can flourish.
Thank you for the privilege of testifying today, and I will
be happy to answer your questions.
[The prepared statement of Ms. Gorsuch-Bradbury can be
found on page 91 of the appendix.]
Chairman Ney. Thank you.
Mr. Kelman?
STATEMENT OF GLENN KELMAN, PRESIDENT AND CEO, REDFIN
CORPORATION
Mr. Kelman. Good afternoon, Chairman Ney, Ranking Member
Waters, and members of the subcommittee. Thank you for inviting
me to testify.
I am Glenn Kelman, president and CEO of Redfin, America's
first online national broker of real estate.
I am here today to ask that Congress ensure Internet
innovators get equal access to listing data, and that it
regulate State laws designed to limit consumer choice.
In 2004, Redfin was the first company to show real estate
listings on an online map, like MapQuest. In 2006, we launched
Redfin Direct, a service to allow home buyers to buy a home
online. Clients find properties to tour on our Web site, draft
an offer via our online forms, and rely on us to handle the
negotiations.
The average client saves $10,000 because we refund two-
thirds of our commission.
As one of the first online brokerages for buyers and
sellers, we have a unique perspective on how the industry is
stifling innovation. A brokerage that does not employ field
agents is a radically new service at a radically new price, and
it has engendered resistance on a radically new scale.
Competing agents have threatened us with violence and tried
to intimidate our clients, concocting grade school legal mumbo
jumbo about the perils of Internet service.
We expected a combative reception, but it is the industry's
impunity that has come as a shock.
We have drafted complaints to the State commission, only to
realize that the commissioners ran the brokerages we were
complaining about. We posted photos of agents who were blocking
our customers to a Web site that we called the Hall of Shame,
only to have Realtors apply to join.
The industry has failed to regulate itself.
Despite all this, we have represented clients on hundreds
of offers over the past 6 months. Our client satisfaction rate
is 98 percent. We have been featured in the Wall Street
Journal, the New York Times, Business Week, and on National
Public Radio.
We are on pace to refund nearly $1 million in commissions
in our first 6 months.
This begs the question, if Redfin is so great, why has
there not been a Redfin before, a national e-trade of real
estate?
The Realtors would have you believe it is because real
estate consumers do not want e-commerce, but the truth is
different. I came to Redfin as an experienced entrepreneur,
having co-founded a software company raising six rounds of
financing and taking it public.
Funding Redfin should have been very easy. It was not.
Everyone in Silicon Valley knows that Realtors control the
listing services, the MLS, and that many States have
effectively outlawed online brokerages.
Investors who put $6 million into a Web site in Sweden that
lets you dress up a Barbie doll will not touch online real
estate.
The only reason we could raise money was because of our
friends in the first panel, the Department of Justice. We cited
that ruling over and over again, and it became the basis for
investors to believe that for the first time, you really could
have an online brokerage.
We feel that without Congressional action, the Department
of Justice will at some point shift its attention elsewhere,
and real estate innovators like Redfin will be left high and
dry, without access to the listings because the Realtors have
cut us off.
Listing services stifle innovation not just in business
models, but in how Web sites share data. I do not think we have
focused on this enough today. You can find out more on the
Internet about an eBay beanie baby than you can about a $1
million home.
Multiple listing services have told us we cannot allow
public commentary on a listing. We cannot let people search by
time on market. We cannot display for sale by owner listings
alongside commission properties, and that we have to register
our users.
Rules like this are a thousand tiny shackles on Internet
businesses. Imagine if Amazon got legal threats when a customer
published a ho-hum book review. Imagine if Google had to
register its users before they could perform a search on some
types of data.
The Internet would be a gigantic marketing brochure rather
than a useful consumer tool, and it would be a less powerful
engine for economic growth.
This is exactly what is happening in online real estate
today.
Redfin must ask that Congress act to give brokerages of all
types equal and unfettered access to listing data, and
authorize the Federal Trade Commission to regulate States'
minimum service and anti-rebate laws, so consumers can make
their own choices about commissions.
No other proposal before Congress could save American
families more money, and none would do more to improve real
estate service.
If you let innovators innovate without fear of losing
listing access, service will be much better than any of us in
this room can say or imagine.
Thank you for letting me testify. It has been an honor.
[The prepared statement of Mr. Kelman can be found on page
97 of the appendix.]
Chairman Ney. Thank you.
Mr. Lewis?
STATEMENT OF GEOFFREY D. LEWIS, SENIOR VICE PRESIDENT AND CHIEF
LEGAL OFFICER, RE/MAX INTERNATIONAL, INC.
Mr. Lewis. Chairman Ney, Ranking Member Waters, and members
of the subcommittee, my name is Geoff Lewis, and I am senior
vice president of RE/MAX International. Thank you for allowing
me to testify today on behalf of RE/MAX.
RE/MAX International is not engaged in the brokerage
business, and we do not belong to any MLS. We are a franchiser
of real estate brokerages. Neither I nor RE/MAX International
claim to speak on behalf of our independent brokers or agents.
Let me address the issue of commission rates. It is often
overlooked that full service agents work on a success basis. If
the seller does not sell his house, he pays nothing, and the
agent gets a zero percent commission. If a buyer does not buy a
house, the agent gets a zero percent commission.
When an agent does earn a commission, it often comes
several months after he has expended his time and money with no
guarantee of a closing on a sale. Realtors drill a lot of dry
wells.
In cases where successful transactions are completed, full
service commission rates have been trending down over the past
decade. They have gone from 6.1 percent in 1991 to the current
average rate of 5.1 percent. That is not a 1 percent decrease;
it is a 16 percent decrease.
With the rapid rise in housing prices recently, many have
questioned why commission rates have not come down further. The
answer is that agent income has not increased correspondingly.
The median gross income for real estate professionals in
2004, as reported by the National Association of Realtors, was
$38,000 for sales agents and $53,000 for brokers. That is gross
commission income, without health care and retirement benefits,
which are paid for by the agent. That is also before the agent
pays for advertising, Web site hosting, gasoline, and other
expenses.
Over the past 2 years, agent gross income is down 6
percent. The lack of increase in agent gross income, despite
rising housing prices, is due to the large increase in the
number of agents in the industry.
NAR reported a 26 percent increase in membership over the
past 2 years, and a 40 percent increase over the past 5 years.
In 1995, NAR reported having 1.2 million members.
These agents are being drawn in by the increase in housing
prices, but as a result of the increase in the number of agents
searching for transactions, the average number of transactions
per agent is decreasing.
This countervailing force puts resistance on the ability of
commissions to continue to come down further. Nonetheless, as I
have described, commissions have been coming down.
Let me address Internet companies and new business models.
It is easy to say that the Internet has brought down costs in
other industries, so it should do the same for real estate, but
not all industries are the same.
The Internet has not decreased prices for doctors,
accountants, attorneys, newspaper subscriptions, landscaping
contractors, or a myriad of other businesses, nor has it done
so for Government services.
Not every business is going to be impacted by the Internet
the same as airline ticket vendors, stock brokers, or book
sellers. After all, these industries are selling commodities.
Real estate agents are selling unique properties and providing
individualized service.
The Internet has enabled hundreds of real estate companies
with new business models. These companies offer rebates, flat
fee services, and discounted commissions.
A quick Internet search will reveal any number of national/
regional companies providing these services in every market.
New companies appear on a daily basis. Internet giants, Google,
Yahoo! and eBay have all jumped into the business of allowing
home sellers to list their homes on online classified ads.
Media titans, including Tribune Company, Washington Post, Belo
Corporation, and Gannett have formed an online classified
service that has a primary focus on real estate.
It should also be noted that in the last few years, we have
seen one of the hottest real estate markets in history. In
parts of the country, sellers have been able to attract
multiple offers the instant their home goes on the market. Some
sellers receive above their asking price. It is not surprising
in these markets that many sellers have been tempted to avoid
full service brokers in favor of limited-service providers or
discount brokers.
It is these same conditions that have caused the explosion
in new business models.
It should be noted that since the beginning of the year,
the market has returned to more normal levels. Inventories and
time on market have increased considerably over the last year.
Let me conclude by making one comment about the MLS, and
that is that the MLS no longer has the exclusivity it once did
for real estate listings. The Internet has enabled many new Web
sites that allow brokers or individual home sellers to upload
property information for free.
Chairman Ney. Time has expired, if you would like to
conclude.
Mr. Lewis. These are all alternatives to the MLS, and with
more than 80 percent of consumers using the Internet in real
estate transactions, all of these services are available to
them.
Thank you very much.
[The prepared statement of Mr. Lewis can be found on page
101 of the appendix.]
Chairman Ney. Thank you.
Ms. Vredevoogd-Combs?
STATEMENT OF PAT VREDEVOOGD-COMBS, 2006 PRESIDENT-ELECT,
NATIONAL ASSOCIATION OF REALTORS
Ms. Vredevoogd-Combs. Chairman Ney, Ranking Member Waters,
and members of the subcommittee, thank you for the opportunity
to testify on the changing real estate market.
My name is Pat Vredevoogd-Combs, and I am a broker/owner
and partner of AJS Realty in Grand Rapids, Michigan. I actually
sell real estate as my primary income.
As the 2006 President-Elect of the National Association of
Realtors, I am here to present the views of our 1.3 million
members, who are engaged in all aspects of the real estate
industry.
Those who have criticized the real estate industry often
oversimplify the issue by looking at real estate as one
national market. Real estate is local. With that in mind, I
want to highlight three positive developments we are seeing in
today's changing market.
First, competition is thriving. A recent study of 12 local
real estate markets conducted by Steve Sawyer, associate
professor at the Pennsylvania State University, found that
competition within each market is fierce, including competition
among agents affiliated with the same firm.
The report sends an important message for all industry
critics; there is no such thing as a national real estate
market. Agents compete fiercely for listings from potential
sellers, for potential buyers, and many times for both.
Likewise, all brokers compete for the best real estate agents.
Their competitive edge is based on a host of factors, including
quality, reputation, service, and price.
The overwhelming majority of industry participants are non-
salaried, independent contractors. In other words, they are
self-employed. Fifty percent of these contractors are
affiliated with an independent non-franchised firm.
As home sales slow to a more reasonable pace, competition
will likely increase among all service providers. NAR
encourages and promotes fair competition.
Our members represent almost every conceivable business
model including full service, limited service, so-called
discount models, Internet brokers, and others.
Second, the price of real estate services varies. The
latest research from REAL Trends, which Mr. Oxley referred to,
actually indicates that commission rates decreased 16 percent
from 1991 to 2004.
RISMedia's 2006 power broker report and survey confirms
this view, noting that the top 500 real estate brokers
anticipate the average commission rate will decline to 4.9
percent this year.
NAR has a long-standing antitrust compliance policy, which
says that each firm independently decides the price of services
provided by Realtors. Again, a lot of factors determine the
price for real estate services in a competitive market. There
is no national commission rate.
Third, consumers can access more property and transaction
information through the Internet, thanks in large part to
Realtors. According to our surveys, the number of Realtors with
Web sites has increased 129 percent over the past 5 years, and
nearly 90 percent of Realtors and their firms have Web sites
with searchable property listings.
NAR also created and operates realtor.com, giving consumers
national access to local markets through the Internet. More
than 900 local multiple listing services are powerful forces
for competition. A listing placed by the newest rookie agent
can reach just as many other brokers as the seasoned
professional.
Participation in an MLS is readily available to all real
estate professionals, operating all kinds of brokerage business
models.
If the MLS system were restructured to prohibit listing
brokers from marketing a property as they and their clients see
fit, some brokers would pull out and create their own systems.
This would hurt small and new competitors.
Again, NAR favors competition in real estate.
To clarify some of the other testimony, there is no minimum
service legislation that only gives one a choice of either no
service or full service. Every minimum service legislation out
there, and everything that we see, is unbundled. You do not
have to either paint the whole house or nothing at all, and you
do not have to buy a Coke or a Coke and french fries and a
burger. You can unbundle those services wherever you are.
In conclusion, real estate is in many local markets. The
best assessment of a competitive landscape is based on the
local experience. In an economy in which large national
corporations, such as Wal-Mart and Microsoft, increasingly
dominate, real estate stands apart. It is one of the best
industries for entrepreneurs, and it offers consumers a wide
array of choices in both service and the price they pay for the
service.
Realtors are proud to be part of a competitive and growing
industry that accounts for roughly 20 percent of our Nation's
gross domestic product.
Chairman Ney. Your time has expired.
Ms. Vredevoogd-Combs. On behalf of our 1.3 million members,
I again thank you for the opportunity to share our views with
you. Thank you.
[The prepared statement of Ms. Vredevoogd-Combs can be
found on page 153 of the appendix.]
Chairman Ney. Thank you very much.
I want to start with Mr. Kelman. From your point of view,
do you see a Federal solution to this vis-a-vis the Congress
with a law?
Mr. Kelman. I am not a legislator, but we feel that there
are so many States where we cannot compete, where we have to go
market by market, on our hands and knees, and beg the MLS for
access to the data; they knock us up with all these ticky tacky
rules about what we can and cannot display, and it really
limits our ability to compete.
That is why we feel a Federal law that just provides open,
unfettered access to the MLS would be really important if you
wanted to have a truly free market.
Chairman Ney. Thank you. Mr. Lewis, as I have heard today
from the first panel, and I am really frankly so confused on
this, if you have more Realtors, you have a surplus of
Realtors, or maybe not a surplus but more Realtors, would there
not be competition? Would not the commissions go down? They
seem to be at 6 percent, unless you have a hot market.
Can you explain that? It does not seem like that variable
works.
Mr. Lewis. I think the number of Realtors in the industry
is an indication of what a free and competitive market it is,
and that there are no barriers to entry.
When you look at average Realtor income, gross commission
income, perhaps one of the factors for why commission rates
have not come down lower than they have is that some Realtors
would not be able to survive at anything less than current
market rates.
Chairman Ney. Let me ask another question for anybody who
would like to answer, regarding online services. If you have
the online service, your companies you represent, and right
now, people look at those as that is where I can go to get my
best deal possible, and I know how they operate, if you became
part of the listing, the MLS, what happens to the person who
wants to have full service from you, be there at the closing,
do this, do that? What happens there?
Mr. Kelman. Maybe I can answer that. First of all, to
address your concern and Ranking Member Waters' concern, our
goal is to actually provide better service than a traditional
Realtor from offer to close. We are at the closing. We
negotiate. We handle everything.
What we do not do--
Chairman Ney. I am sorry, not to interrupt you, you would
physically have someone show up at the closing?
Mr. Kelman. That is correct. What we do not do is the taxi
service, where we drive you around looking for homes.
The average Internet consumer finds a home 3 times faster
than someone who is not using the Internet. Typically, what we
hear customers say is that I can find the home on my own, what
I want you to do is to win the deal, and protect my interests.
Chairman Ney. How do they get into that house?
Mr. Kelman. They get into the house in one of three ways.
They visit an open house. They contact the seller. They contact
the listing agent, or we can provide the tour by their request.
Chairman Ney. There is no open house, say there is no open
house. They would have the alternative to directly contact the
seller?
Mr. Kelman. Or the listing agent.
Chairman Ney. Does that not concern you, the direct contact
with the seller?
Mr. Kelman. We understand that when our clients need the
listing agent, as an example, who represents the seller, that
many times, the listing agent will persuade the buyer just to
work with him or her on both sides of the deal.
Many of the folks want our advocacy, want our support.
Chairman Ney. I am sorry. I should clarify. Not so much on
the collusion. I just sold our house last year and we moved to
the central part of the district. I bought a house.
Sometimes if you get the buyer and seller together, you can
have a horrific argument when the buyer says I think you
painted this house terribly, what do you mean. Pretty soon,
they are at odds and you cannot communicate.
In the absence of a physical person, is what I am saying.
Mr. Kelman. Generally, the most common ways people see the
house are through a listing agent or through an open house. The
agent who represents the seller will show the house.
There have been cases where someone has been selling the
house on their own, and the buyer and seller meet directly.
That is not always the case.
I think the important thing to remember is that it is a
choice. There are going to be people who want full service and
we direct them to traditional Realtors every week. There are
people who want Internet service, who say I can find the home
on my own; I want you to close it for me. We feel actually that
we do a better job in part because instead of having an agent
who is waiting every 2 months to do a deal, we have
professional real estate agents working in each market that
have really high deal flow.
Chairman Ney. My time has expired. Ranking member?
Ms. Waters. I was just sitting here thinking about the real
estate business, and beginning to ask myself why I have been
very pleased with those people I have met and worked with.
First of all, I like it the way it is because it has opened
up opportunities for a lot of women to become entrepreneurs and
to earn a living. Women who oftentimes find themselves divorced
and needing a way to earn some money, or people who oftentimes
retire without a lot of retirement income, and so forth have
been able to start their careers in real estate. The same thing
is true of minorities, being able to get into a business, and
through their own initiative earn a living, is a powerful idea.
That is one thing that attracts me to this business and
gives me an appreciation for what it has done for a lot of
folks who perhaps would not have opportunities in other
businesses.
The other thing is, as I started talking earlier today
about the complications of some of these sales, I was just
sitting here thinking about a purchase that I was involved in
where there was damage to the property from water that had not
been reported by the seller of the property for a lot of
reasons.
When I started to look for insurance, and I started
explaining to them about this big hole in the ceiling, they
wanted to know if it was water damage, whatever, and then I
could not get any insurance.
The real estate agent that I was working with was connected
to a lot of people in this industry, and therefore, was able to
not only get a contractor to come out and do the evaluation so
that I could tell the bank about the cost--they were going to
hold back on the cost until I did the repairs--but also they
helped to get the insurance.
It was just a lot of convenient assistance from this full
service Realtor; I was extremely appreciative for it. It is not
to say that everybody needs that. For those people who do, we
certainly want to have it available; it is critical.
This claim that there is this exclusion and conspiracy to
keep discount brokers from being able to market their product,
to sell their products, is incredible. I do not spend a lot of
time on the Internet, but I look from time to time, and even
before I bought the last house, I looked to see what was
available.
It seems to me that it is about what is being described
here. There are a lot of real estate opportunities. I liked
looking at some of the Web sites of these creative entrepreneur
women in particular, sometimes two of them team up on the
sales, and they present themselves, and they describe what they
do.
There are a lot of Web sites like that. Where is the
exclusion and discrimination, Mr. Kelman?
Mr. Kelman. First of all, we have no animus against real
estate agents. We are real estate agents ourselves. We hire
women and minorities in the same proportion that you would see
in the traditional industry.
The exclusion comes when you apply to enter a new market,
there are many agents and many brokerages, but when you are
offering your services at a different price point, the listing
service is looking for a way to deny you access.
We have gotten multiple calls and letters from every
listing service that we belong to trying to prevent us from
displaying information.
Ms. Waters. When they call you, what do they say? You
better not do what?
Mr. Kelman. They will say you cannot publish any commentary
about a listing, to which we say but every other broker does
what we are doing, why are you coming after us, or they will
say you cannot let people search for homes that have been on
the market a long time, so we allow you to do a search where
you can say show me houses that have not sold in 90 days. The
real estate industry does not like that.
Ms. Waters. If you do a search in the way they do not like,
what happens to you?
Mr. Kelman. Nothing happens to the consumer, but that is
the leverage point in this industry, the MLS threatens to cut
off access to the brokerage, to us.
Ms. Waters. Have they cut off access to you?
Mr. Kelman. No, but we have had to--
Ms. Waters. Who do you know where they have cut it off?
Mr. Kelman. Before starting Redfin, we talked to E-Realty,
which was the start-up that tried to be Redfin, before Redfin.
He said that if it was not for the Department of Justice, we
would go out of business in exactly the same way he did.
Ms. Waters. It is just talk? Someone else came here today
and talked about being bullied. You know, that is life. People
talk. They threaten. That is the marketplace working. So what?
Mr. Kelman. When you get a letter that tells you to take
down a feature from the site that is very popular and useful
for consumers, and then instead of building new features for
the site, you have to re-engineer your site, it is material to
a small business.
Ms. Waters. What if you do not take it down?
Mr. Kelman. If you lose MLS access, you will go out of
business.
Ms. Waters. You have not lost it. I hear a lot of talk
about what they say or how they are in collusion against us,
and they bully me, and I do not like the way they talk to me,
but--
Mr. Kelman. I am not here to whine. I love my job. I love
this business. It is growing like gangbusters.
Ms. Waters. You want us to stop people from bullying you;
is that right?
Mr. Kelman. All we want is fair, open access to the MLS.
Ms. Waters. But you have it. You do not like the fact that
there are people who do not like what you do, and they may say
to you I do not like what you do and you better not do this,
and you better not do that, but they have not stopped you, have
they?
Mr. Kelman. There are companies that are out of business
that we could have called here. We feel that if we did not
comply with their rules, they would pull our access and it
would be the third rail for our business.
Ms. Waters. Unless you have a list, unless you can tell us
who those companies are, they do not exist.
Mr. Kelman. Why don't we produce for the record the letters
that we get from the MLS about--
Ms. Waters. No, that will not do it. I want the result of
the letters. I want people who are out of business because they
got a letter.
Mr. Kelman. Since I am in business, I cannot do it.
Ms. Waters. I know. You are doing okay. They bully you.
Mr. Kelman. There are States we cannot go into. We would be
doing much better. We know 70 percent of consumers, as surveyed
by the Wall Street Journal, are angry about their commissions.
Fifty percent of the people--
Ms. Waters. I am really angry about the price I pay for
gas. I am really, really angry. There are a lot of prices that
I am angry about. I am angry about insurance costs. I am angry
about a lot of things.
Mr. Kelman. I agree.
Chairman Ney. Time has expired.
Ms. Waters. Thank you.
Chairman Ney. I am going to ditto on that gas part.
Mr. Miller?
Mr. Miller of California. Thank you, Mr. Chairman.
This is really interesting. I have been in the building
industry for over 35 years, which means I am older than heck,
and I admit it. I have done a lot of real estate transactions
over the years. I do not believe I have ever paid 6 percent for
anything I ever wanted to list. I would always go to the
Realtor and say, I will pay this amount for the listing agent,
and this amount for the selling agent. I never had anybody say
no.
You can go to a Realtor and say I will pay you 2 percent to
list, and I will pay you 2 percent to sell, but you know when
you say 2 percent to sell, there are some selling agents out
there who might say I would rather sell property where I can
get 3 percent. You take a chance.
I really enjoyed the testimony and it sounded like
LendingTree, you are doing pretty well. I have heard your name.
You guys are doing pretty good out there. You have the right to
go out and advertise, I will list your home for 1 percent or I
will sell your home for this amount.
Can you not do that today?
Ms. Gorsuch-Bradbury. No. That is not our business model
today. What we do is we cooperate with brokers. We have a
network of 500 brokers and 12,000 agents. We provide a
marketing service for them.
Mr. Miller of California. What is that marketing service?
Ms. Gorsuch-Bradbury. A marketing service--LendingTree
spends approximately $170 million a year in advertising, and
part of that is directed at attracting consumers who need the
services of a real estate broker.
Mr. Miller of California. Are you telling me you cannot be
flexible in your rates?
Ms. Gorsuch-Bradbury. We refer those consumers to our
broker partners, and part of what we offer--
Mr. Miller of California. Then what do you want? I heard
your testimony. I do not know what you want. Do you want free
access to the MLS? Is that what you want? What do you want?
Ms. Gorsuch-Bradbury. Our belief is that real estate is a
very important industry, obviously, both to consumers and to
the economy. We believe it is too important to be--
Mr. Miller of California. What do you want?
Ms. Gorsuch-Bradbury. We would like to make sure that the
markets are free and there are not--
Mr. Miller of California. That the MLS is available to you
free, is that what you are asking for?
Ms. Gorsuch-Bradbury. We believe--
Mr. Miller of California. Yes or no?
Ms. Gorsuch-Bradbury. We believe that the rules should be--
Mr. Miller of California. Yes or no, you want it free or
you do not want it free? You can join an MLS if you want to as
a licensed broker, you can join an MLS?
Ms. Gorsuch-Bradbury. There are some MLS' who would block
our access to it.
Mr. Miller of California. As a licensed broker?
Ms. Gorsuch-Bradbury. Yes.
Mr. Miller of California. Redfin, you seem to be having no
problem participating in MLS'.
Mr. Kelman. We apply to be in each MLS, and sometimes the
application goes through easily. Other times, we have to make
changes to our site that we feel are not in the interest of the
consumer.
Mr. Miller of California. You are a discount broker?
Mr. Kelman. We consider ourselves an online broker.
Mr. Miller of California. You could go out and spend all
the money in the world you want to and advertise, we are going
to offer you this online service and we are going to save you
money, we are going to cut the rates for listings, we are going
to cut the rates for the selling agent, you can do that
currently, can you not?
Mr. Kelman. We would just say that within the industry, it
is indisputable that--
Mr. Miller of California. I am having trouble getting the
answer to a simple question.
If I want to come and list a house with you and give you 2
percent to list and 2 percent to sell, you can accept that or
you can deny that?
Mr. Kelman. Of course, we can.
Mr. Miller of California. You can advertise that.
Mr. Kelman. Of course, we can.
Mr. Miller of California. What do you want then?
Mr. Kelman. What we want is to be able to go into States
where that is not legal.
Mr. Miller of California. Let's talk about California. How
are you doing in California?
Mr. Kelman. We are doing well.
Mr. Miller of California. What corrections do you want made
in California?
Mr. Kelman. The main issue is that you can display far more
information about every product except a home on an Internet
site.
Mr. Miller of California. There should be some restrictions
as to telephone numbers and addresses and stuff. Those should
not be necessarily on an Internet site.
Mr. Kelman. We agree completely that for privacy concerns
and security concerns, but there are other reasons that the MLS
restricts access to information.
Mr. Miller of California. What information?
Mr. Kelman. For example, they do not want you to search by
how long a house is on the market. They do not want people to
be able to add commentary on a house.
Mr. Miller of California. They do not want you to search?
Mr. Kelman. They do not want a consumer to be able to find
houses--
Mr. Miller of California. They do not want you to list on
your Web site that these are homes that have been on the market
for over 90 days, so you are probably going to get a better
deal on the price. Who would want that?
Mr. Kelman. Consumers definitely want that.
Mr. Miller of California. If I was selling my property, I
certainly would not want it, because then you become distressed
property.
Mr. Kelman. We understand it is not in the seller's
interest, but it is in the buyer's interest.
Mr. Miller of California. You are telling me that an
individual who contracts with a Realtor expecting his
information to be put on an MLS and being treated fairly has no
rights to what you should do with that information?
Mr. Kelman. I would not go that far.
Mr. Miller of California. That is what you just told me. It
might not be in the seller's interest, but it is in the buyer's
interest. You are going to put a seller in a situation where
they own a home and that home has been on the market for over
90 days, somebody who might advertise it says oh, I have a
home, they probably want to sell it in a bad way because it has
been listed for a long time and we can probably get a better
deal on this property.
I would not want my home listed like that.
Mr. Kelman. If I could respond to that, I have been an
executive at a publicly traded company. We sold our stock on
the market. There was plenty of information that we did not
want buyers to have, but for free market to function
effectively, we feel that just because the seller does not want
to expose certain types of information, it does not mean that
the information should not be available.
Mr. Miller of California. Do all of you discount brokers--
this is a stupid question--you have an opportunity to form your
own listing service. You could call it Cut Rate Listing
Service. You could get every broker who wants to be involved
and every individual out there who sells real estate to list
with Cut Rate Listing Service, could you not?
Mr. Kelman. We could, and if it was practical, we would.
Mr. Miller of California. Why not do that? At some point in
time, some Realtor came up with an idea, hey, let's start
working together because when you list a piece of property, I
do not know about it. When I list a piece of property, you do
not know about it. There is going to be a cost associated with
developing some type of a service, but let's do that, and we
will all pay for advertising and we will list it and then pay
to be a member of that and we will set guidelines and rules to
be a participant in that.
Somebody did that. What it sounds like is you are coming
along today and saying yes, they did that and yes, they set up
guidelines, I just do not like them.
The nice thing about America is if you do not like what
somebody is doing, you can do something different. Why would
you not go out, if there is going to be this huge demand out
there for your service, based on you are going to give them a
better deal, but you are going to provide all these services,
but you are going to tell them that if your home is on the
market over 90 days, we will probably let people know you have
distressed property, why not go out to the American people and
start advertising like some Realtor did at some point in time,
and create your own service?
If it really is as good as you are telling me, you are
going to have more business and make more money than you are
ever going to be able to spend.
Mr. Kelman. What we are disagreeing about, with all due
respect, is whether or not the MLS asserts monopoly power. In
our view and in the view of everyone, I think, at this table,
people on either side of this issue, not having access to MLS
data--
Mr. Miller of California. You do have access to data. What
you do not have is the ability to use that data in a negative
way that would impact a seller, and you have real estate
brokers and agents that acted in good faith when they signed an
agreement to sell somebody's property that now they are being
impugned in some fashion, their property is being impugned,
because their property might be categorized as distressed, and
you think that you have a right that supersedes the right of
that seller who should have some control over the property they
listed.
That is where you and I disagree. That is why I think if
you want to come up with a service that lists all those things,
that people know they can take a chance at having their
property categorized as distressed, and you think the American
people want that, I think you would do really well.
I do not believe people in this country who are selling
their homes want their homes listed like that, to be put in
categories that makes it appear that it is distressed property,
and they cannot sell it. I do not think they want that.
If I was going to sell my house, I darn sure would not sign
with somebody who was going to do that with my property.
You are saying, irrespectful of the understanding that a
seller has with an agent or broker they listed with, that you
want to go out and change the rules under which they entered
into an agreement, and create your own rules, that you think
benefits somebody who is not even a participant in the original
contract.
I have a real problem with that. That is just me as an
individual saying if I was selling a property--if I was going
out and trying to steal property, maybe as a shark, I think
that is cool, because then I know who is hurting.
The person who should have some control and some rights is
the person who signed the original contract.
Chairman Ney. Time has expired.
Mr. Miller of California. I think you are trying to
supersede that. Good luck in the future.
Chairman Ney. Time has expired. We have to move on. Would
you like to answer?
Mr. Kelman. Just briefly.
Mr. Miller of California. I am not your enemy. I just
disagree with you.
Mr. Kelman. I am shaking in my boots. I am a little nervous
about this. All I was going to say is that an example that is
pro-seller would be we have sellers who volunteer information
about how the roof is and how the furnace is, and what their
favorite room in the house is, and they provide enriched
information around the listing, and the MLS has asked us to
stop doing that.
Mr. Miller of California. Mr. Chairman, I ask unanimous
consent to submit a letter for the record.
Chairman Ney. Without objection.
Mr. Davis?
Mr. Davis. Thank you, Mr. Chairman.
Mr. Kelman, some of the frustration is a function of the
fact that some of your testimony has been a little bit
nebulous, so let me try to clarify a little bit.
How many States right now, Mr. Kelman, would you contend
contain restrictions against your access to the MLS?
Mr. Kelman. Arguably, a dozen.
Mr. Davis. Twelve. Presumably, in all those dozen States,
you have the capacity to either go in and file a conventional
legal claim under State law, or I suppose in some cases, under
Federal law, or you have the capacity to go to the State
legislatures in those States.
The root of the problem, as I see it, given that Congress
has frankly just not gotten that involved in this area,
Congress has just not waded into regulation of the real estate
industry, it is something that for years upon years has been
essentially the province of State law, given the ample number
of options that you have politically and legally, I do not see
a strong case for Congress to intervene.
Where am I wrong?
Mr. Kelman. We are a 30 person business that has five law
firms. I do not have an administrative assistant. There is no
P.R. agency.
Mr. Davis. The problem with that argument, Mr. Kelman--this
is how I understand your argument. You are saying that you do
not have the ideal perfect access to this market that you would
desire. All of us can attest that there are third parties in
America who do not have the ideal access to the political
market they desire.
There are small mom and pop retail stores in Birmingham,
Alabama, who do not have the ideal access to the market they
would desire. That is just kind of the tough breaks of
capitalism sometimes.
I understand you do not have all that you desire and do not
have the playing field that you want. That is a common right in
this society.
Tell me the case for Congressional intervention in this
instance as opposed to all those others.
Mr. Kelman. First of all--
Mr. Davis. Why should we guarantee a perfect access or
market so you can do exactly what you want to do the way you
want to do it?
Mr. Kelman. First of all, I do not think any legislation
should be crafted to benefit Redfin or any other online broker,
discount broker. It just seems like we are having a
conversation today about how the real estate industry will be
affected instead of how the consumer will be affected.
It seems self evident to us that if you were to lower the
barriers to entry for companies operating at a different price
point and prevent blackballing and prevent discrimination--
Mr. Davis. Those are all good goals, Mr. Kelman. Tell me
why the current antitrust laws and all kinds of legal remedies
available at the State level do not accomplish exactly that
goal right now.
Mr. Kelman. They do not prevent discrimination from buyers
that are working with low fee brokerages. They do not
nationally apply to allow low fee brokerages to compete in
different States.
Mr. Davis. Let me raise a different set of concerns. One of
the policy rationales that Congress has to consider is whether
doing what you want would serve a pro-competitive agenda, and
second of all, would it open up the real estate markets to
people who are not a part of it right now.
What is the economic profile from an income standpoint of
people who utilize your service?
Mr. Kelman. In our case, it is actually people who are
buying houses more expensive than the median, and other types
of discounters that do not operate through the Internet
primarily, it is below the median. In our case, it is above the
median price. Zip Realty would be an example of a company that
operates well below the median.
Mr. Davis. Is there any identifiable class of people you
are reaching who you think are somehow not being served by the
conventional Realtors in this country?
Mr. Kelman. People who can find homes on their own using
the Internet.
Mr. Davis. People can find homes on their own using the
paper right now. I am trying to identify some class of
consumers who are not being served.
Presumably, the individuals you talk about also can find
access and service through the conventional real estate market
and make the same range of choices they want, can they not?
Mr. Kelman. All I am trying to do is characterize how we
think about our market, and what we hear from the people who
buy our service is, I found the home on my own, and I did not
want to pay an agent 3 percent. They come to us and they use
our online service to draft the offer, and to handle
negotiations and closings.
Mr. Davis. Right. The response to that would be that is
exactly right, you have provided this alternative service to
people who want to take advantage of it. It still raises the
question of what extra regulatory tilt you want.
Let me ask another set of questions. What is the default
rate? Have you monitored default rates of people who engage
your service?
Mr. Kelman. We do. Generally, it is 3 percent and 3
percent. Just to respond to your other question, it seems like
Congress is not sensitive to the amount of blackballing that is
going on.
Our customers, as we testified, and as you have heard Mr.
Farmer testify, feel like they are going through an experience
that is completely extra legal, where there is no remedy for
them when people refuse to show them properties, when they get
hostile messages and things like that. It is just a very
difficult climate for a consumer to operate in.
Mr. Davis. For the consumer to operate in or for your
industry to operate in? I guess there is a difference.
Mr. Kelman. We are trying to take the point of view of the
consumer here.
Mr. Davis. Let me follow along those lines. One of the
arguments you heard raised by Mr. Green in the earlier panel
and by others is obviously, do not consumers often benefit from
having to go through brokers, do they not benefit from going
through a third party. Does that not give them information they
would not have?
You have dismissed that and you said if someone wants the
physical presence at closing, we will provide that.
Let's say you do that, you provide a physical presence at
the closing.
Mr. Kelman. We do.
Mr. Davis. What duty of care do you owe in that instance to
the buyer?
Mr. Kelman. In that case, our duty is to offer better
service from offer to close than a traditional agent. We
specialize in the legalities, in the negotiations.
I think in the more general case, I would refer to the
testimony earlier today that you should disclose what you do
and then give people the choice to buy what they want.
Mr. Davis. Let me try to wrap this up. The concern that I
think some of us have is, I think all of us would acknowledge
that no, the real estate market does not work perfectly in
terms of reaching underserved populations, in terms of reaching
people who may be victimized by predatory lending, all those
kinds of things.
What is completely unclear to me is how your service does
any better, or how your service meets any of these gaps. I am
not trying to run you out of business. For the Federal
Government to weigh in on these issues, when frankly they seem
to be somewhat peripheral, somewhat limited to a few instances
and in a few States, I do not see a compelling Federal
rationale for that, when you cannot identify to me a population
of people that you would reach or who are not reached by the
conventional market, and frankly, when you do not indicate to
me that you would mitigate any wrong that is happening in the
current market.
That is just my two cents' worth.
Mr. Kelman. Current market--the current market is served by
agents in a comprehensive way. People just pay too much. When
they try to get a discount, there is anticompetitive behavior
that is hostile.
Mr. Davis. Mr. Kelman, what is a little bit bizarre about
your argument, you are saying you want to cut some of the
transactional layers that are involved in the real estate
transaction. The real estate transaction is probably one of the
most acute financial decisions someone can make over the course
of his or her economic life.
It would seem that, given how acute that risk is, you would
want, frankly, as many guardrails built into the process as
possible, and as much intermediation built into the process as
possible.
If you do not want to shorten steps, because if you shorten
steps, you may cut information out. People may make enormously
erroneous choices.
Mr. Kelman. We would hold there are people who need those
guardrails, and want those guardrails, but we also believe in
free markets rather than a paternalistic approach, and we would
just suggest there are people who feel confident to find the
home--
Mr. Davis. I am not saying you should go out of business.
The ultimate question is whether the Federal Government ought
to weigh in and do more than we are doing. I think all of us
conservatives and liberals believe if you are coming to
Congress wanting something, the burden is on you to tell us why
we need it.
I am getting mean looks from my chairman.
Chairman Ney. Actually, I have to tell you something. This
is the second time this has happened. The majority staff over
here, I think they liked your questions. They accidently bumped
the clock and you re-set for 5 minutes. I kind of think they
favor you.
Mr. Cleaver?
Mr. Cleaver. Thank you, Mr. Chairman. I did think that was
lengthy.
I would just like to ask the panel, I am a Democrat, and I
am very much interested in getting access to the Republican
mailing list for contributors in my district. I want to know
what you think should be done to allow me access.
Mr. Kelman. We do not contribute to Republicans or
Democrats. We read an article in the New York Times and called
Clinton.
Mr. Cleaver. There is nothing that would cause me to
believe that I deserve to get that access.
Mr. Brobeck. Can I respond to that question?
Mr. Cleaver. Yes, please.
Mr. Brobeck. The problem today is that sellers are under
enormous pressure to list with a multiple listing service. If
they do not list with the local multiple listing service, they
are going to be disadvantaged in trying to sell their home for
an adequate price.
It is sort of a critical mass question. Microsoft and
others tried to develop alternative listing services and failed
because they could not reach the critical mass.
We would like nothing better than to have every seller list
on two or three different listing services. If that were the
case--you probably saw the article in the New York Times
several months ago that in Madison, Wisconsin, and it just
surprised me a great deal, they achieved critical mass with 20
percent of the market. I would have guessed you would have
needed 40 percent.
Maybe it is much lower. We need some alternatives to the
multiple listing service. Now that we do not have them, it is
essentially functioning as a monopoly.
We are not criticizing the Realtors. They worked very hard
to build it up and it is an extraordinary useful information
source. It does have a monopolistic character.
Either we need alternatives or we need some kind of
oversight.
As our report we released last week indicated, the
practicing brokers are controlling virtually all of the State
commissions, so we would prefer, as in insurance, independent
commissioners to regulate the industry.
If in fact the States turned around and decided to regulate
this effectively, and I have to say for the ranking member that
California is relatively independent of the industry--it is one
of two or three States that has the most effective, not really
effective, but the most effective State regulation.
Absent that, there needs to be a Federal regulatory role.
We propose the fairly modest step of a careful study of prices
and the way multiple listing services function, so that this
committee would have available information, adequate
information, to make sound decisions about policies.
Mr. Cleaver. Thank you. Mr. Farmer, I am from Waxahachie. I
read the e-mail. My colleague, Mr. Davis, was a prosecutor
before he became a Member of Congress. I just asked him a few
questions before he left.
I do not understand why you could not, or the Daily Light
did not, simply contact the Texas Attorney General's Office. I
have a cousin who actually works in that office. I was trying
to e-mail him from here on my Blackberry to find out would they
investigate that kind of charge.
I do not understand why this cannot be dealt with by the
State Attorney General or is there a request for greater
oversight by the Federal Trade Commission, or do you need some
kind of involvement from the Department of Justice.
Mr. Farmer. I am not asking anyone to do anything. I am
just showing this as evidence of the things we go through on a
daily basis. To be honest with you, I am not asking Congress--I
do not think there should be any Federal regulation of the real
estate industry. I think it should stay on a State level.
Mr. Cleaver. I do, too.
Mr. Farmer. As far as this letter, we got this back in
November. DOJ, I told them about it, and then DOJ actually
asked me about it. I talked to my agent about it. He was kind
of in fear of any kind of reprisal.
As you know, Waxahachie is still a pretty small town. He
was born and raised there, grew up there. It is still kind of a
good old boy system. He is in fear of kind of what might happen
when this came out. I did convince him, hey, this is the right
forum for me to present this.
I am not asking anybody to do anything. I have never asked
anybody to do anything about it.
Chairman Ney. Time has expired.
Mr. Cleaver. Thank you, Mr. Chairman.
Chairman Ney. Mr. Sherman?
Mr. Sherman. Thank you, Mr. Chairman. Mr. Lewis, we have
Mr. Brobeck here suggesting that we get this big investigation
and report. What would be the advantage or disadvantage of
implementing his suggestion?
Mr. Lewis. There are over 800 multiple listing services in
the country today. It is a very fragmented market. The point I
made earlier, any home seller, whether it is a for sale by
owner, using a fee for service provider, a discount broker, a
full service broker, today, they can up load their property
listing to Google, to Yahoo!, to eBay, to Craig's List,
PropsMart, and Trulia. There are new Web sites popping up every
day.
There is no limit on the amount of exposure that a home
seller gets. The MLS is no longer the exclusive preserve that
it once was.
Mr. Sherman. He wants us to do this study. Are you saying
it is just unnecessary because it would be a study of the MLS
which is kind of like studying Yahoo! and Google is taking over
anyway?
Mr. Lewis. I do not think it is as relevant as he is
suggesting.
Mr. Sherman. First of all, I want to thank all the
panelists for coming to us, in large part, I guess, on the
theory that wisdom and justice will come from Washington when
it has not come from State legislatures. I am dumbfounded by
such a belief, and doubt very much whether we are going to do
or could do any better job.
I have run out of specific questions. I do want to make the
point that this price competition, I have seen not so much in
the middle class district I represent now, but I used to
represent Malibu, and as you might know, nobody gets 6 percent
in Malibu, never got 6 percent in Malibu. We have seen Realtors
compete on the basis of price.
I am just going to refer to Ms. Vredevoogd-Combs, whether
you have any additional comments.
Ms. Vredevoogd-Combs. Yes. Thank you very much.
One of the things that is just so obvious to me as I am
listening to this, because I sell real estate every day and
because I am in a marketplace in Grand Rapids, Michigan, that
is just a little bit different than the California market, we
have been seeing a down market for the last few years.
It has been very interesting.
Mr. Sherman. Even the last few years when the whole country
is going up?
Ms. Vredevoogd-Combs. Yes. Welcome to Michigan. We have
some great values for you over there. Waterfront property.
Mr. Sherman. Does this mean you are raising your percentage
rates so you can make as much on each sale? It has been
suggested that we should cut the rate when house prices go up.
Your house prices are going down. Are you raising your rates?
Ms. Vredevoogd-Combs. Our house prices are going down and
we are not raising rates. I will tell you, in Grand Rapids,
Michigan, every conceivable type of brokerage is out there.
The first thing anyone asks you, even in a down market, is
what is your commission rate, and what are you going to charge,
and what are you going to co-op that with?
I will tell you that there are discount brokers. There are
Internet brokers.
The other thing is I have to spend more money because I am
on the Internet than I ever did just because I was doing print
advertising.
Mr. Sherman. The Internet is more expensive than print
advertising?
Ms. Vredevoogd-Combs. It is an additional thing that I have
to pay for. I have my own Web site. In the mid-1980's, I had my
own Web site built. I was the first person in Grand Rapids to
have a Web site. Of course, nobody saw it because nobody had
the Internet.
I also had an e-mail address, and nobody e-mailed me
because nobody had e-mail.
I started in that. I have been selling real estate since
1971. I have seen a lot of changes in the marketplace. It costs
money to be on the Internet. Those of us who are in brokerage
have to take into consideration not only the fact that we are
in brokerage and we earn a commission and we are independent
contractors, but we also have to pay for our own advertising.
We have to pay for our own Internet. It is just an added cost.
The other part is that there are a lot of free places you
can go on the Internet. We can put them, just as Mr. Lewis
said, I can put my listings up free on a number of sites. The
listings that I have right now probably are on 15 or 16 sites.
People can find them all over the place, in addition to the
MLS, and our MLS happens to be open to the public, so people
can go on our MLS site and search for houses.
I think the market is much more open than it ever has been.
We work with and cooperate with people who are doing all sorts
of brokerage business.
Mr. Sherman. I do not know which person to address this
question to, but if you have a menu of services rather than the
one fixed rate, I think one of the witnesses testified that
they offer a menu of services, what is on that menu? What
service would I buy independently of another, and what are the
entrees that sell well, and what are the side dishes that sell
poorly?
Mr. Farmer. We have three different listing options when
you list your home with us. We have a limited-service listing
that used to be our most popular, now after the new State laws,
it is not the most popular any more. It can still be done, but
it is much more tedious.
The most popular one is the one where we actually help with
contract negotiations and basically, from the time a buyer is
found, all the way through closing. It is essentially a full
service listing. We charge a flat rate of $1,500, plus $495 at
the time of listing for that.
Mr. Sherman. That is full service.
Mr. Farmer. We do not do any additional marketing of the
property. We do have a full service option. We will do open
houses, and we will make flyers, and we will do newspaper ads,
and we will do whatever they want.
Chairman Ney. Time has expired.
Mr. Sherman. Thank you.
Chairman Ney. By the way, we are waiting for the votes. If
you have additional questions, we can do it.
I wanted to also recognize Kara Mundy. It is her last day.
Kara, do you want to raise your hand? Thank you. It is her last
hearing, it is not her last day, as an intern from Ohio State.
I wanted to mention that, a graduate of Ohio State.
The question I had, I want to ask the Realtors. What is
wrong with Mr. Kelman or Redfin, LendingTree, why can't they
come to the Realtors and say, okay, I want to be part of this
MLS and I am going to pay a fee like other Realtors would do to
join, and do it nationally instead of going State by State and
district by district?
Ms. Vredevoogd-Combs. All of our MLS' are local. They are
not national at all. We have MLS rules that are national rules.
Some of those, or actually most of those rules are optional.
Chairman Ney. That is what DOJ is objecting to, the
national rules, correct?
Ms. Vredevoogd-Combs. We have some national rules, and
those are really there to protect our MLS', so they do not get
sued by the DOJ.
Chairman Ney. DOJ is objecting to the rules?
Ms. Vredevoogd-Combs. Objecting to some of the optional
rules that were set out prior to--those have been changed now--
that is what they are objecting to.
Chairman Ney. None of your rules could override a State
law, no matter what association?
Ms. Vredevoogd-Combs. No.
Chairman Ney. The State law would come in and undo a rule,
and that would be the law of the land?
Ms. Vredevoogd-Combs. You have to abide by State laws, but
every one of our MLS' is local. The only thing the National
Association of Realtors does is we promulgate various rules and
regulations for MLS', and most of them are optional, if they
want to do those, they can, and if they do want to do those, we
set out the wording for them.
Chairman Ney. Are there any groups, online groups, online
companies, that can go all over the entire United States? I
think there are 1,000 MLS'.
Ms. Vredevoogd-Combs. All real estate is local. You have to
join your local association. That is the beauty of the real
estate industry.
Chairman Ney. How much does it cost to join that local, do
you know, on average?
Ms. Vredevoogd-Combs. I do not. Maybe these guys do.
Mr. Farmer. I belong to nine different MLS' in Texas. Every
one of them has different rules, standards, and practices. Some
of them make you go to orientation. I have to drive from Austin
to Amarillo, which is about--I do not have to drive but I have
to go to Amarillo to go to that board's orientation. Some MLS'
have orientation, and some do not. It is very tedious.
I am not here to complain about the MLS rules. I know that
is part of the business and part of my job.
Generally, it is going to run you, MLS fees alone will
generally run you about $500 to $700 a year, and then
additional dues as far as NAR, TAR, and local board dues,
another $500 a year or so. Around $1,000 to $1,500, depending
on the board, a year to belong to an MLS.
Chairman Ney. Did you want to comment?
Ms. Gorsuch-Bradbury. I think one of the issues is you need
to go and join each of those MLS' individually, which by the
way, realestate.com is completely fine with. I think one of the
key points that probably several of us have tried to convey is
that we are fine joining the MLS' and we are fine abiding by
the rules.
What we want to know, or have assurance of, is that when we
join, we will not be discriminated against based on our
business model. We want to have equal access as long as we are
playing by the licensing rules and we are playing by all the
MLS rules. We want to have the rules enforced equally so that
we have a chance to compete fairly.
What that does is it allows us to innovate knowing that we
will have access to the key information, which is the listings.
I think you have to think of an MLS as a market maker. That
is where real estate is transacted. It is where buyers and
sellers find each other. If, for whatever reason, we are
excluded from that, it is very hard to compete.
Chairman Ney. Yes?
Ms. Vredevoogd-Combs. Just a comment. All of our MLS' are
independent, and we welcome everybody to join these MLS' if
they are licensed in that State, and if they do business as a
brokerage, they are welcome. Our arms are open. What we are
finding is that we want to do business in every way, but they
all have to follow the same rules that we do in our businesses,
too. I think they agree with that.
Chairman Ney. Do you agree with that?
Ms. Gorsuch-Bradbury. We do agree, but with all respect, I
do not think the rules are necessarily enforced equally by all
the MLS'.
Mr. Farmer. I agree except for when MLS' go--when you
create a business model, then they go and change the rules.
That is what has happened in Austin. That is what the State of
Texas has tried to do with minimum service laws.
When you go and join and then some boards see this new
competition and start changing the rules on you. That is what I
object to.
Chairman Ney. Mr. Kelman?
Mr. Kelman. I was only going to reference again E-Realty.
That is a company where the CEO testified before Congress
saying that he felt his company was being discriminated against
by the MLS'.
In conversations with him, we have heard that his business
would apply to be in the MLS. The application would be put on a
slow boat to China. The MLS would confer with the National
Association of Realtors. This was the issue he testified to 4
years ago.
In talking to him now, he said that he did not think
Congress would act, but the Department of Justice would at
least dampen the bullying effect of the National Association of
Realtors.
Chairman Ney. Thank you. Very interesting panel. I
appreciate the testimony and look forward to talking with you
all in the future.
The Chair notes that some members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses, and to place their responses in the record.
The hearing is adjourned.
[Whereupon, at 5:29 p.m., the subcommittee was adjourned.]
A P P E N D I X
July 25, 2006
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