Real Estate Brokerage: Factors That May Affect Price Competition 
(31-AUG-05, GAO-05-947).					 
                                                                 
Consumers paid an estimated $61 billion in residential real	 
estate brokerage fees in 2004. Because commission rates have	 
remained relatively uniform--regardless of market conditions,	 
home prices, or the effort required to sell a home--some	 
economists have questioned the extent of price competition in the
residential real estate brokerage industry. Further, while the	 
Internet offers time and cost savings to the process of searching
for homes, Internet-oriented brokerage firms account for only a  
small share of the brokerage market. Finally, there has been	 
ongoing debate about the potential competitive effects of bank	 
involvement in real estate brokerage. GAO was asked to discuss	 
(1) factors affecting price competition in the residential real  
estate brokerage industry, (2) the status of the use of the	 
Internet in residential real estate brokerage and potential	 
barriers to its increased use, and (3) the effect on competition 
and consumers of residential real estate brokerage by		 
state-chartered banks in states that permit this practice.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-947 					        
    ACCNO:   A35001						        
  TITLE:     Real Estate Brokerage: Factors That May Affect Price     
Competition							 
     DATE:   08/31/2005 
  SUBJECT:   Brokerage industry 				 
	     Competition					 
	     Fees						 
	     Internet						 
	     Prices and pricing 				 
	     Real estate purchases				 
	     Real estate sales					 
	     Websites						 
	     Comparative analysis				 
	     Cost analysis					 

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GAO-05-947

United States Government Accountability Office

  GAO	Report to the Committee on Financial Services, House of Representatives

August 2005

                                  REAL ESTATE
                                   BROKERAGE

                   Factors That May Affect Price Competition

                                       a

GAO-05-947

[IMG]

August 2005

REAL ESTATE BROKERAGE

Factors That May Affect Price Competition

  What GAO Found

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

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

Although about 30 states potentially authorize state-chartered banks or
their operating subsidiaries to engage in some form of residential real
estate brokerage, few banks in these states appear to have done so. GAO's
contacts with seven banks engaged in brokerage in two states found that
they were located in small communities with few other brokerage options,
and that their brokerage services did not differ significantly from those
of other local real estate brokers. In general, because residential real
estate brokerage by state-chartered banks appears to be so limited, its
effect on competition and consumers has likely been minimal.

                 United States Government Accountability Office

Contents

  Letter 1

Results in Brief 3

Background 5

Various Factors Can Influence the Extent of Price Competition in

Real Estate Brokerage 7 The Internet Has Increased Consumers'Options, but
Several Factors Could Limit Its Wider Use 17 Few State-Chartered Banks
Appear to Engage in Real Estate Brokerage 22

Appendix

               Appendix I: GAO Contact and Staff Acknowledgments

Bibliography

Abbreviations

DOJ Department of Justice
FTC Federal Trade Commission
MLS multiple listing service
NAR National Association of Realtors(R)
VOW Virtual Office Web site

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

August 31, 2005

The Honorable Michael G. Oxley Chairman The Honorable Barney Frank Ranking
Minority Member Committee on Financial Services House of Representatives

The fees paid for residential real estate brokerage-the bringing together
of buyers and sellers of homes and the provision of related services by
licensed brokers and agents-have increased as home prices have risen in
recent years, well beyond the rate of general price inflation. While
comprehensive data do not exist, REAL Trends, an industry source,
estimates that in 2004 consumers paid about $61 billion in real estate
brokerage fees related to home sales, up from approximately $43 billion in
2000.1 Payments to brokers are typically percentage commissions, or a
percentage of the sales price of the home. An observed tendency toward
uniform commission rates regardless of local market conditions has led
many economists and other observers to question the level of price
competition-rivalry among firms to attract clients on the basis of price-
in the residential real estate brokerage industry.

The emergence of the Internet offers the potential to reduce costs by
generating efficiencies and new ways of doing business. While many
consumers now use the Internet to search for homes and related services,
such as mortgages, Internet-oriented brokerage firms still represent a
small share of the market.2 This has raised questions concerning potential
institutional, legal, and other barriers to greater "e-commerce" in real
estate. Additionally, there has been an ongoing debate on the potential
competitive effects of allowing federally chartered banks and financial
holding companies to engage in real estate brokerage. Because some states

1REAL Trends is a company providing news, research, and information-based
services to the residential real estate industry. The company was cited in
industry press and among industry participants we interviewed as providing
the best available data on residential real estate brokerage fees. We
considered REAL Trends' estimates to be sufficiently reliable based on the
competency of the source producing the estimates and the reasonableness of
the estimates.

2For the purposes of this report, the term "Internet-oriented brokerages"
refers to brokerage firms whose business model depends largely on the
Internet. Other brokerage firms may also use the Internet to varying
degrees.

already permit brokerage by state-chartered banks, the experience of those
states may help inform this debate.

You requested that we review issues related to price competition and the
use of information technology in the residential real estate brokerage
industry. This report discusses (1) factors affecting price competition in
the residential real estate brokerage industry, (2) the status of use of
the Internet in residential real estate brokerage and potential barriers
to its increased use, and (3) the effect on competition and consumers of
residential real estate brokerage by state-chartered banks in states that
permit this practice.

In addressing these topics, we reviewed academic literature on the
structure and competitiveness of the residential real estate brokerage
industry. (A bibliography of selected literature reviewed appears at the
end of this report.) We did not collect original data on residential real
estate brokerage fees or attempt to analyze the extent of price
competition within any specific market. We interviewed and obtained
relevant documents from industry analysts and officials of real estate
brokerage and banking trade associations, including the National
Association of Realtors(R) (NAR); national associations of state real
estate and banking regulators; and the Department of Housing and Urban
Development, the Department of Justice (DOJ), and the Federal Trade
Commission (FTC). We also interviewed officials of 10 residential real
estate brokerage firms and franchisors, including 2 companies with major
national franchise operations, 1 fullservice brokerage firm, 2
Internet-oriented full-service discount brokerage firms, 2 companies that
franchise limited-service discount brokerage offices, and 3
Internet-oriented information and referral companies. The brokerages and
franchisors we spoke with included both small and large firms, and these
firms relied on the Internet to varying degrees. Because we spoke to a
limited number of brokerage firms and franchisors, their views cannot be
interpreted as being representative of all such firms. We also reviewed
the activities of two states, Iowa and Wisconsin, where some banks are
active in residential real estate brokerage. We spoke with these states'
banking regulatory agencies and real estate trade associations, as well as
with seven banks in these states that engage in residential real estate
brokerage. The information on these seven banks is intended to be
illustrative and cannot be generalized to state-chartered banks
nationwide. We also reviewed relevant selected state laws and regulations
and state and federal court decisions. The scope of our work was limited
to residential real estate brokerage and did not address other aspects of
real estate transactions, such as mortgage financing, title search and
insurance, or the

settlement process.3 We performed our work primarily in Boston,
Massachusetts; Chicago, Illinois; and Washington, D.C., between January
and July 2005. We performed our work in accordance with generally accepted
government auditing standards, except that we did not seek agency comments
on this report because we did not review agencies' programs. However, we
provided selected portions of a draft of this report to DOJ and FTC for
their technical comments, which we incorporated where appropriate.

Results in Brief	A number of factors can influence the degree of price
competition in the real estate brokerage industry. Some economists have
observed that while the industry has attributes associated with active
competition-a large number of relatively small firms and ease of entry-it
has displayed more evidence of competition on the basis of nonprice
factors, such as reputation or level of service, than on price. Although
there are no comprehensive data on brokerage fees, past analyses and
anecdotal information suggest that commission rates have persisted in the
same range-roughly 5 percent to 7 percent of a property's selling
price-over long periods, regardless of local market conditions, housing
prices, or the cost or effort required to sell different properties. Our
review of the academic literature and interviews with industry analysts
and participants suggest several potential causes of this relative lack of
price variation. First, multiple listing services (MLS)-the local
organizations through which brokers share information about properties-may
encourage price conformity by, for example, showing the commission that
buyers' brokers will receive for cooperating in the sale of a property.
Because, all else being equal, buyers' brokers have less incentive to show
properties that offer them a lower commission, this system may discourage
brokers from offering less than the prevailing commission rate. In
addition, sellers' brokers may offer a lower share of the sales commission
to buyers' brokers who advertise discounted prices than to other brokers.
Further, some states prohibit brokers from giving clients rebates on
commissions, and some states require or are considering proposals to
require brokers to provide consumers with a minimum level of service.
Although such laws may offer some consumer protections, DOJ and FTC have
argued that they can potentially prevent price competition or reduce
consumers' choice of brokerage services.

3Hereafter, for purposes of this report, the term "real estate brokerage"
refers to residential real estate brokerage.

The Internet has increased consumers' access to information about
properties for sale and facilitated new approaches to real estate
transactions. Many brokers post on Web sites information-in varying
degrees of detail-about properties they have contracted to sell
("listings"), enabling consumers to obtain such information without
consulting a real estate broker. The Internet also has fostered the
creation or expansion of a number of Internet-oriented real estate
brokerage and related firms, including some discount brokers and services
that refer clients to brokers. However, several potential obstacles to
further expansion of the Internet's role in real estate brokerage exist,
including the extent to which listing information is made available for
brokers to post online. For example, NAR has considered allowing listing
brokers to decide which other brokers may display their MLS listings
online. Some brokers' refusal to allow their listings to be posted on
certain brokers' Web sites could constrain potential buyers' Internet
searches for properties for sale, potentially limiting the business of
Internet-oriented brokers. Internet-oriented discount brokers may also
face resistance from traditional brokers and may be affected by the state
laws that prohibit or restrict commission rebates to consumers. Finally,
other factors, such as the lack of a uniform sales contract for
residential real estate and of a uniform technology to facilitate related
processes-such as inspection, appraisal, financing, title search, and
settlement-may inhibit the use of the Internet for accomplishing the full
range of activities needed for real estate transactions.

Approximately 30 states have laws or regulations that potentially
authorize state-chartered banks or their operating subsidiaries to engage
in real estate brokerage under some circumstances. However, only a limited
number of banks in these states appear to have used this authority, so the
effect on competition and consumers has likely been minimal. On the basis
of our review of state statutes and regulations identified by two national
associations, at least 5 states and the District of Columbia provide
relatively clear authority for banks or their subsidiaries to engage in
real estate brokerage. Laws in certain other states may also provide such
authority, but these laws are ambiguous or subject to regulatory
interpretation. The exact number of state-chartered banks engaged in real
estate brokerage is unknown but appears to be limited, according to trade
and regulator associations in the banking and real estate industries. The
seven banks we spoke with told us that they offered brokerage services in
small communities and provided an additional option for local customers.
These banks said that real estate brokerage was a small portion of their
business, and that their brokerage services and pricing did not differ
significantly from those of other local brokerage companies.

Background	Traditionally, real estate brokers have offered a full,
"bundled" package of services to sellers and buyers, including marketing
the seller's home or assisting the buyer's search, holding open houses for
sellers and showing homes to buyers, preparing offers and assisting in
negotiations, and coordinating the steps to close the transaction. Because
real estate transactions are complex and infrequent for most people, many
consumers benefit from a broker's specialized knowledge of the process and
of local market conditions. Still, some consumers choose to complete real
estate transactions without a broker's assistance, including those who
sell their properties on their own, or "for-sale-by-owner."

For many years, the industry has used a commission-based pricing model,
with sellers paying a percentage of the sales price as a brokerage fee.
Brokers acting for sellers typically invite other brokers to cooperate in
the sale of the property and offer a portion of the total commission to
whoever produces the buyer. Agents involved in the transaction may be
required to split their shares of the commission with their brokers.4
Under this approach, brokers and agents receive compensation only when
sales are completed. Common law has generally considered both brokers
cooperating in the sale of a home to have a fiduciary responsibility to
represent the seller's interests, unless the buyer's broker has
specifically agreed to represent the buyer's interests.5

In recent years, alternatives to this traditional full-service brokerage
model have become more common, although industry analysts and participants
told us that they still represent a small share of the overall market.
Discount full-service brokerages charge a lower commission than the
prevailing local rate, but offer a full package of services. Discount
limitedservice brokerages offer a limited package of services or allow
clients to choose from a menu of "unbundled" services and charge reduced
fees on a commission or fee-for-service basis.

4Brokers who operate as part of a franchise may also be required to share
a portion of their commission revenue with the franchise, in payment for
using the brand name and other services.

5T.J. Miceli, K.A. Pancak, and C.F. Sirmans, "Restructuring Agency
Relationships in the Real Estate Brokerage Industry: An Economic
Analysis," Journal of Real Estate Research, vol. 20, no. 1/2 (2000). Some
states require consumer consent if the buyer's broker is to represent the
seller's interests; other states prohibit this form of agency
representation.

Most local real estate markets have an MLS that pools information about
homes that area brokers have agreed to sell. Participating brokers use an
MLS to "list" the homes they have for sale, providing other brokers with
detailed information on the properties, including how much of the
commission will be shared with the buyer's agent. An MLS serves as a
single, convenient source of information that provides maximum exposure
for sellers and facilitates the home search for buyers. Each MLS is a
private entity with its own membership requirements and operating policies
and procedures. According to NAR, approximately 900 MLSs nationwide are
affiliated with the trade association, whose more than 1 million members
represent approximately 60 percent of all active licensed real estate
brokers and agents. NAR has affiliations with 54 state and territorial
associations and more than 1,600 local associations. When one of these
local associations owns and operates an MLS, this NAR-affiliated MLS is
expected to follow NAR's model guidelines for various operational and
governance issues, such as membership requirements and rules for members'
access to and use of listing information. If a local association or its
MLS fails to comply with these guidelines, it can lose important insurance
coverage provided through NAR or have its charter membership in NAR
revoked. An MLS that is not affiliated with NAR is not bound by these
guidelines.

Individual states regulate real estate brokerage, establishing licensing
and other requirements for brokers and agents. Of the two categories of
statelicensed real estate practitioners, brokers generally manage their
own offices, and agents, or salespeople, must work for licensed brokers.
States generally require brokers to meet more educational requirements
than agents, have more experience, or both. For the purposes of this
report, we generally refer to all licensed real estate practitioners as
brokers. Generally, a state commission, led by appointees who may have a
professional background in real estate, oversees implementation of and
compliance with state requirements and may respond to complaints about
brokers or agents or take disciplinary action. Federal agencies do not
play a day-to-day regulatory role in real estate brokerage, although DOJ
and FTC enforce compliance with federal antitrust laws in this market, as
they do for many other markets.

Banks may obtain charters at the federal or state level, and their
activities are subject to oversight by federal or state regulators. The
Office of the Comptroller of the Currency, which is a bureau within the
Department of the Treasury (Treasury), charters and regulates national
banks. Statechartered banks are overseen by state regulators and, if they
have federal

deposit insurance, a federal regulator.6 Many companies that own or
control banks are regulated by the Board of Governors of the Federal
Reserve System (Federal Reserve) as bank holding companies. Under the 1999
Gramm-Leach-Bliley Act (Pub. L. No. 106-102), bank holding companies may
qualify as financial holding companies and thereby engage in a range of
financial activities broader than those traditionally permitted for bank
holding companies, such as securities and insurance underwriting.

Some states permit state-chartered banks to engage in real estate
brokerage, but national banks and financial holding companies may not
engage in such activity. The Gramm-Leach-Bliley Act permits financial
holding companies and financial subsidiaries of national banks to engage
in activities that the Federal Reserve and the Treasury deem, through
order or regulation, to be financial in nature, incidental to such
financial activity, or both complementary to a financial activity and not
posing substantial risk to the safety and soundness of depository
institutions or the financial system generally. In late 2000, the Federal
Reserve and the Treasury released a proposed regulation to allow banking
companies to enter real estate brokerage under some circumstances.7
However, from fiscal years 2003 to 2005, amendments to appropriations laws
precluded the Federal Reserve and the Treasury from issuing such
regulations. Legislation was introduced in the 109th Congress to prohibit
financial holding companies and national banks from engaging in real
estate brokerage activities. Legislation was also introduced to permit
such activity.

Various Factors Can A number of factors can influence the degree of price
competition in the

real estate brokerage industry. Some economists have observed
thatInfluence the Extent of brokers typically compete more on nonprice
factors, such as service Price Competition in quality, than on price.
Evidence from academic literature and industry Real Estate Brokerage
participants with whom we spoke highlighted several potential causes of

this apparent lack of price competition. These potential causes include
broker cooperation, largely through MLSs, which can discourage brokers

6The Board of Governors of the Federal Reserve System oversees
state-chartered commercial banks that are members of that system. Other
state-chartered banks with federal deposit insurance receive oversight
from the Federal Deposit Insurance Corporation.

7Board of Governors of the Federal Reserve System and the Department of
the Treasury, "Bank Holding Companies and Change in Bank Control," 66 Fed.
Reg. 307 (Jan. 3, 2001).

from competing with one another on price; resistance from traditional
fullservice brokers to brokers who offer discounted prices or limited
services; limited pressure from consumers for lower prices; and state
antirebate and minimum service laws and regulations, which some argue may
limit pricing and service options for consumers.

    Real Estate Brokerage Is Characterized More by Nonprice Competition Than
    Price Competition

The real estate brokerage industry has a number of attributes that
economists normally associate with active price competition. Most notably,
the industry has a large number of brokerage firms and individual licensed
brokers and agents-approximately 98,000 active firms and 1.9 million
active brokers and agents in 2004, according to the Association of Real
Estate License Law Officials.8 Although some local markets are dominated
by 1 or a few large firms, market share in most localities is divided
among many small firms, according to industry analysts. In addition, the
industry has no significant barriers to entry, since obtaining a license
to engage in real estate brokerage is relatively easy and the capital
requirements are relatively small.

While real estate brokerage has competitive attributes, with a large
number of players competing for a limited number of home listings, much of
the academic literature and some industry participants we interviewed
described this competition as being based more on nonprice variables,

8The Association of Real Estate Law License Officials is a membership
organization comprised of governmental agencies that regulate real estate
activities and license brokers and agents. According to association
officials, its members include regulators from 48 states as well as U.S.
territories and other countries. The association compiles data on the
number of real estate brokers, agents, and firms from state licensing
agencies.

such as quality, reputation, or level of service, than on price.9, 10 One
reason for this characterization is the apparent uniformity of commission
rates. Although comprehensive data on brokerage fees are lacking, past
analyses and anecdotal information from industry analysts and participants
indicate that, historically, commission rates have remained relatively
uniform across markets and over time. Various studies using data from the
late 1970s through the mid-1980s found evidence that the majority of
listings in many communities clustered around the same rate, exactly 6
percent or 7 percent.11 Although these studies and observations do not
indicate that there has been complete uniformity in commission rates, they
do suggest that variability has been limited.12 Many of the industry
analysts and participants we interviewed said that commissions still
cluster around a

9For discussions of nonprice competition among brokers, see J.H. Crockett,
"Competition and Efficiency in Transacting: The Case of Residential Real
Estate Brokerage," AREUEA Journal, vol. 10, no. 2 (1982); D.R. Epley and
W.E. Banks, "The Pricing of Real Estate Brokerage for Services Actually
Offered," Real Estate Issues, vol. 10, no. 1 (1985); T.J. Miceli, "The
Welfare Effects of Non-Price Competition Among Real Estate Brokers,"
Journal of the American Real Estate and Urban Economics Association, vol.
20, no. 4 (1992); and G.K. Turnbull, "Real Estate Brokers, Nonprice
Competition and the Housing Market," Real Estate Economics, vol. 24, no. 3
(1996).

10Our review cites a number of academic studies that date back many years
because, in large part, there is not a large body of more recent research
on the real estate brokerage industry. However, we found that older
research findings in this area have been consistent with more recent
studies, as well as with testimonial evidence we obtained in interviews
with industry analysts and market participants. For the most part, the
economic literature and available data related to real estate commissions
cover existing home sales and not new construction.

11For example, FTC found that more than one-half of home sales had a
commission rate of 6 percent, and that from one-quarter to one-third had a
commission rate of 7 percent. FTC based its findings on an analysis of
closing documents from 7,622 sales made nationwide in 1977 and a national
survey of 934 consumers who had sold homes in 1978 and 1979. FTC found
similar clustering at 6 percent and 7 percent in closing documents from
sales in 15 of 16 cities examined (Federal Trade Commission, The
Residential Real Estate Brokerage Industry, vol. 1 (Washington, D.C.:
1983)). J.E. Larsen and W.J. Park, "Non-Uniform Percentage Brokerage
Commissions and Real Estate Market Performance," AREUEA Journal, vol. 17,
no. 4 (1989), found that about 90 percent of listings had a commission
rate of 7 percent in their analysis of 669 listings in the Lincoln,
Nebraska, area in 1986.

12Some researchers have attempted to identify and explain variations in
commission rates. For example, using samples of commission rate data
within specific geographic areas, some studies found that rates could vary
with, among other things, a property's price or age, its expected
"difficulty of sale" (e.g., whether the home was vacant or
renter-occupied), or the size of the brokerage firm. See M. Carney, "Costs
of Pricing of Home Brokerage Services," AREUEA Journal, vol. 10, no. 3
(1982); W.C. Goolsby and B.J. Childs, "Brokerage Firm Competition in Real
Estate Commission Rates," The Journal of Real Estate Research, vol. 3, no.
2 (1988); and C.F. Sirmans and G.K. Turnbull, "Brokerage Pricing under
Competition," Journal of Urban Economics, vol. 41, no. 1 (1997).

common rate within most markets, and they generally cited rates of 5
percent to 6 percent as typical now.

Some economists have cited certain advantages to the commission-based
model that is common in real estate brokerage, most notably that it
provides sellers' brokers with an incentive to get the seller the highest
possible price.13 Moreover, uniformity in commission rates within a market
at a given time does not necessarily indicate a lack of price competition.
But some economists have noted that in a competitive marketplace, real
estate commission rates could reasonably be expected to vary across
markets or over time-that is, to be more sensitive to housing market
conditions than has been traditionally observed.14 For example, commission
rates within a market at a given time do not appear to vary significantly
on the basis of the price of the home. Thus, the brokerage fee, in dollar
terms, for selling a $300,000 home is typically about three times the fee
for selling a $100,000 home, although the time or effort required to sell
the two homes may not differ substantially.15 Similarly, commission rates
do not appear to have changed as much as might be expected in response to
rapidly rising home prices in recent years. Between 1998 and 2003, the
national median sales price of existing homes, as reported by NAR,
increased 35 percent, while inflation over the same period was 10 percent,
leaving an increase of some 25 percent in the inflation-adjusted price of
housing. According to REAL Trends, average commission rates fell from an
estimated 5.5 percent in 1998 to an estimated 5.1 percent in 2003, a

13For example, see M.A. Arnold, "The Principal-Agent Relationship in Real
Estate Brokerage Services," Journal of the American Real Estate and Urban
Economics Association, vol. 20, no. 1 (1992); and G.D. Jud and J. Frew,
"Real Estate Brokers, Housing Prices, and the Demand for Housing," Urban
Studies, vol. 23, no. 1 (1986).

14For example, see P. Anglin and R. Arnott, "Are Brokers' Commission Rates
on Home Sales Too High? A Conceptual Analysis," Real Estate Economics,
vol. 27, no. 4 (1999); R. Bartlett, "Property Rights and the Pricing of
Real Estate Brokerage," The Journal of Industrial Economics, vol. 30, no.
1 (1981); and C. Hsieh and E. Moretti, "Can Free Entry Be Inefficient?
Fixed Commissions and Social Waste in the Real Estate Industry," The
Journal of Political Economy, vol. 111, no. 5 (2003).

15Some industry participants we met with suggested that it costs more to
market expensive homes, in part because the number of prospective buyers
is smaller. However, we did not identify any data on brokers' actual costs
of marketing homes.

decrease of about 7 percent.16 Thus, with the increase in housing prices,
the brokerage fee for selling a median-priced home increased even as the
commission rate fell.17

Some economists have suggested that uniformity in commission rates can
lead brokers to compete on factors other than price in order to gain
market share. For example, brokers might hire more agents in an effort to
win more sellers' listings.18 Brokers may also compete by spending more on
advertising or offering higher levels of service to attract clients.19
Although some of these activities can benefit consumers, some economic
literature suggest that such actions lead to inefficiency because
brokerage services could be provided by fewer agents or at a lower cost.20
For example, although advertising can be effective in providing buyers and
sellers with information about broker services, the consumer benefit from
brokers' expenditures on advertising or promotions aimed at acquiring
listings may be less than their cost to the broker.

16REAL Trends' data do not address the range of or variation among actual
commission rates. REAL Trends' estimates average commission rates by
dividing the total gross commission revenue reported by the largest
brokerage firms by their total sales volume. The estimate for 1998 was
based on data from 532 firms, and the estimate for 2003 was based on data
from 541 firms. We considered REAL Trends' estimates to be sufficiently
reliable on the basis of the competency of the source producing the
estimates and the reasonableness of the estimates.

17Similarly, a decrease in commission rates from the prevalent 6 percent
and 7 percent rates reported by FTC in the period around 1980 to the
levels reported by REAL Trends in recent years would have been more than
offset by appreciation in housing prices during that period.

18For example, see Crockett, "Competition and Efficiency in Transacting."
Because agents generally are hired as independent contractors whose
incomes are based on commissions for complete sales, brokers can hire
agents to compete for more listings without incurring significant up-front
costs for their labor.

19For example, see Miceli, "The Welfare Effects of Non-Price Competition,"
and Turnbull, "Real Estate Brokers, Nonprice Competition and the Housing
Market."

20For example, see Hsieh and Moretti, "Can Free Entry Be Inefficient?";
Miceli, "The Welfare Effects of Nonprice Competition"; and Crockett,
"Competition and Efficiency in Transacting."

To the extent that commission rates may have declined slightly in recent
years, the change may be the result in part of rapidly rising home prices,
which have generated higher brokerage industry revenues even with lower
commission rates. However, competition from increasing numbers of
discount, fee-for-service, and other nontraditional brokerage models may
have also contributed to the decline. These nontraditional models
typically offer lower fees, and although they currently represent only
about 2 percent of the market, they may be putting some downward pressure
on the fees charged by traditional brokerages.21

    Certain Factors May Inhibit Price Competition within the Real Estate
    Brokerage Industry

Cooperation Facilitated by Multiple Listing Services

Factors related to the cooperation among brokers facilitated by MLSs, some
brokers' resistance to discounters, and consumer attitudes may inhibit
price competition within the real estate brokerage industry.22

While MLSs provide important benefits to consumers by aggregating data on
homes for sale and facilitating brokers' efforts to bring buyers and
sellers together, the cooperative nature of the MLS system can also in
effect discourage brokers from competing with one another on price.
Because participating in an MLS in the areas where they exist is widely
considered essential to doing business, brokerage firms may have an
incentive to adopt practices that comply with MLS policies and customs. As
previously noted, MLSs facilitate cooperation in part by enabling brokers
to share information on the portion of the commission that sellers'
brokers are offering to buyers' brokers. In the past, some MLSs required
participating brokers to charge standard commission rates, but this
practice ended after the Supreme Court ruled, in 1950, that an agreement
to fix minimum prices was illegal under federal antitrust laws.23
Subsequently, some MLSs adopted suggested fee schedules, but this too
ended after DOJ brought a series of antitrust actions in the 1970s
alleging that this practice constituted

21Consultants to NAR estimated that discount, full-service brokerages,
Internet-oriented fullservice brokerages, broker referral services, and
other nontraditional brokerage models collectively represented buyers and
sellers in less than 2 percent of all real estate brokerage transactions
in 2003.

22We make no judgment on the legality of any actions that may inhibit
price competition; such matters are beyond the scope of our work.

23United States v. National Association of Real Estate Boards, 339 U.S.
485, 488-89 (1950).

price fixing.24 Today, MLSs no longer establish standard commission rates
or recommend how commissions should be divided among brokers. MLS listings
do show how much sellers' brokers will pay other brokers for cooperating
in a sale, according to industry participants. When choosing among
comparable homes for sale, brokers have a greater incentive-all else being
equal-to first show prospective buyers homes that offer other brokers the
prevailing commission rate than homes that offer a lower rate. Therefore,
even without formal policies to maintain uniform rates, individual
brokers' reliance on the cooperation of other brokers to bring buyers to
listed properties may help maintain a standard commission rate within a
local area, at least for buyers' brokers.25

Traditional Brokers' Resistance Traditional brokers may discourage price
competition by resisting

to Nontraditional Brokerage cooperation with brokers and firms whose
business models depart from

Models 	charging conventional commission rates, according to several
industry analysts and participants we spoke with. A discount broker may
advertise a lower commission rate to attract listings, but the broker's
success in selling those homes, and in attracting additional listings in
the future, depends in part on other brokers' willingness to cooperate (by
showing the homes to prospective buyers) in the sale of those listings.
Some discount full-service and discount limited-service brokerage firms we
interviewed said that other brokers had refused to show homes listed by
discounters.26 In addition, traditional brokers may in effect discourage
discount brokers from cooperating in the sale of their listings by
offering discounters a lower buyer's broker commission than the prevailing
rate offered to other

24For example, see United States v. Greater Pittsburgh Bd. of Realtors,
1973-1 Trade Cas. P: 74,454 (W.D. Pa. 1973) and United States v. Los
Angeles Realty Bd., 1973-1 Trade Cas. P: 74,366 (C.D. Cal. 1973). In 1971,
NAR adopted a policy prohibiting its affiliated MLSs from fixing or
recommending to their members commission rates or fees to be charged or
the percentage division of commissions or fees.

25For examples of this long-standing observation, see Bartlett, "Property
Rights and the Pricing of Real Estate Brokerage"; Crockett, "Competition
and Efficiency in Transacting"; T.J. Miceli, "The Multiple Listing
Service, Commission Splits, and Broker Effort," AREUEA Journal, vol. 19,
no. 4 (1991); and N.G. Miller and P.J. Shedd, "Do Antitrust Laws Apply to
the Real Estate Brokerage Industry?," American Business Law Journal, vol.
17, no. 3 (1979). FTC (Residential Real Estate Brokerage) concluded that
the cooperative nature of the industry and the interdependence among
brokers were the most important factors explaining the general uniformity
in commission rates that it had observed in many markets in the late
1970s.

26We did not investigate specific instances of brokers' alleged refusal to
show homes listed with discounters, nor do we have information to assess
how common such a practice might be.

brokers.27 This practice can make it more difficult for discount brokers
to recruit new agents because they may earn more working for a broker who
receives the prevailing commission from other brokers.28 Some traditional
full-service brokers have argued that discount brokers often do less of
the work required to complete the transaction and, thus, deserve a smaller
portion of the seller's commission. Representatives of discount brokerages
told us they believed that reduced commission offers are in effect
"punishment" for offering discounts to sellers and are intended as signals
to other brokers to conform to the typical pricing in their markets.

Limited Consumer Pressure 	Pressure from consumers for lower brokerage
fees appears to be limited, although it may be increasing, according to
our review of economics literature and to several industry analysts and
participants. Consumers may accept a commission rate of about 6 percent as
an expected cost of selling a home, in part because that has been the
accepted pricing model for so long, and some consumers may not know that
rates can be negotiated. Buyers may also have little concern about
commission rates because sellers directly pay the commissions. Sellers may
be reluctant to reduce the portion of the commission offered to buyers'
brokers because doing so can reduce the likelihood that their home will be
shown.29 In addition, home sellers who have earned large profits as
housing prices have climbed in recent years may have been less sensitive
to the price of brokerage fees. However, some brokers and industry
analysts noted that the growth of firms offering lower commissions or flat
fees has made an increasing

27We did not investigate alleged incidents of differences in the
commissions offered to buyers' brokers. We note that the practice of
offering certain firms a smaller share of the commission than that posted
in the MLS is not necessarily limited to firms that advertise discounted
prices. In a private antitrust suit settled in 2000, Re/Max International,
Inc., and some of its franchises alleged that two large brokerage firms in
northeast Ohio had conspired to prevent Re/Max from establishing a
presence in that area by offering Re/Max agents less in commission than
other agents. Re/Max International, Inc., v. Realty One, Inc., 173 F.3d
995 (6th Cir. 1999). Re/Max does not advertise itself as a brand that
offers discounted fees, but its business model departs from the
traditional brokerage model in which brokers retain a significant portion
of agents' commissions. Re/Max agents retain 95 percent to 100 percent of
their commission revenues and pay a fixed monthly fee to their brokers, an
approach that arguably gives agents greater flexibility to reduce their
fees than the traditional brokerage model.

28Conversely, officials from one firm suggested that a broker that offers
lower commissions to other brokers may have difficulty recruiting or
retaining agents because the affected brokers will have less incentive to
cooperate with those agents.

29Anglin and Arnott, "Are Brokers' Commission Rates on Home Sales Too
High?," and Goolsby and Childs, "Brokerage Firm Competition in Real Estate
Commission Rates."

number of consumers aware that there are alternatives to traditional
pricing structures and that commission rates are negotiable.

    Some State Laws and Regulations Can Affect Price Competition

Although state laws and regulations related to real estate licensing can
protect consumers, DOJ and FTC have expressed concerns that some of these
laws and regulations may also unnecessarily hinder competition among
brokers and limit consumer choice.

Antirebate Provisions	At least 14 states appear to prohibit, by law or
regulation, real estate brokers from giving consumers rebates on
commissions or to place restrictions on this practice.30 Proponents say
such laws and regulations help ensure that consumers choose brokers on the
basis of the quality of service as well as price, rather than just on the
rebate being offered.31 Opponents of antirebate provisions argue that such
restrictions serve only to limit choices for consumers and to discourage
price competition by preventing brokers from offering discounts.32
Proponents also note that offering a rebate is one of the few ways to
reduce the effective price of buyer brokerage services since commissions
are typically paid wholly by the seller.33 In March 2005, DOJ's Antitrust
Division filed suit against the Kentucky Real Estate Commission, arguing
that the commission's administrative regulation banning rebates violated
federal antitrust laws. In

30Based on our review of selected statutes and regulations in states
identified by the Association of Real Estate Law Licensing Officials and
two brokerage firms that provide rebates to consumers, states that appear
to prohibit or place restrictions on real estate brokers giving consumers
rebates on commissions include Alabama, Alaska, Iowa, Kansas, Kentucky,
Louisiana, Mississippi, Missouri, New Hampshire, New Jersey, Oklahoma,
Oregon, Tennessee, and West Virginia. We did not review all states' laws
and regulations or evaluate how the states interpret and apply provisions,
so other states may also prohibit or restrict commission rebates to
consumers. The original intent of some state antirebate laws and
regulations was to avoid conflicts of interest between agents and
customers by preventing brokers from giving a share of their commission to
lawyers, title companies, or others involved in the real estate
transaction.

31Coldwell Banker Residential Real Estate Servs. v. Clayton, 475 N.E.2d
536, 543 (Ill. 1985).

32During negotiations for the sale of a home, brokers sometimes agree to
reduce their commissions to pay for repairs or to bridge a gap between the
offer and the asking price. However, these reductions do not represent
price competition because they are offered after the buyer and seller have
selected their brokers.

33According to economic theory, sellers pass a portion of their brokerage
costs to buyers in the price of the home. By offering a rebate to the
buyer, a broker is in effect offering to offset this cost.

its complaint, DOJ argued that the regulation unreasonably restrained
competition to the detriment of consumers, making it more difficult for
them to obtain lower prices for brokerage services.34 In July 2005, DOJ
and the commission proposed a settlement agreement which, if approved by
the court, would require the commission to cease enforcing its regulation
prohibiting rebates and other inducements.35

Minimum Service Standards	Ten states are considering or have passed
legislation that requires brokers to provide a minimum level of service
when they represent consumers.36 Such provisions generally require that
when a broker agrees to act as a consumer's exclusive representative in a
real estate transaction, the broker must provide such services as
assistance in delivering and assessing offers and counteroffers,
negotiating contracts, and answering questions related to the purchase and
sale process. Advocates of minimum service standards argue that they
protect consumers by ensuring that brokers provide a basic level of
assistance. Further, full-service brokers argue that such standards
prevent them from having to unfairly shoulder additional work when the
other party uses a limited-service broker. Opponents of these standards
argue that they restrict consumer choice and raise costs by impeding
brokerage models that offer limited services for a lower price.37 In April
and May 2005, DOJ wrote to state officials in Oklahoma, and DOJ and FTC
jointly wrote to officials in Alabama, Missouri, and Texas, discouraging
adoption of these states' proposed minimum service laws and regulations.
The letters argued that the proposed standards in these states would
likely harm consumers by preventing brokers from offering certain
limitedservice options and therefore requiring some sellers to buy
brokerage services they would otherwise choose to perform themselves. They
also

34Complaint, United States v. Kentucky Real Estate Commission, U.S. Dist.
Ct., W.D. Ky., Case No. 3:05CV-188H, at 1, 2 (Mar. 30, 2005).

35Department of Justice, Antitrust Division, "United States v. Kentucky
Real Estate Commission; Proposed Amendment Final Judgment and Competitive
Impact Statement," 70 Fed. Reg. 45,424 (Aug. 5, 2005).

36As of August 16, 2005, Alabama, Florida, Illinois, Iowa, Missouri,
Oklahoma, Texas, and Utah had enacted minimum service standards. Delaware
and Kansas were considering adopting such standards.

37Minimum service standards would not necessarily prohibit a broker from
providing limited advice or service to a client if the broker had not
agreed to act as the consumer's exclusive representative. However, an MLS
may require brokers to have such an agreement in order to enter a property
listing in the MLS.

cited a lack of evidence that consumers have been harmed by limitedservice
brokerage. Despite the concerns raised by DOJ and FTC, the governors in
all 4 states subsequently signed minimum service standards into law.

Similarly, while state licensing rules for real estate brokers and agents
may ensure standards of quality that protect consumers, these rules may
also restrict consumers' ability to choose among services and prices,
ultimately reducing competition. For example, in 2004, a federal district
court found unconstitutional a California real estate licensing law that
required the operator of a for-sale-by-owner Web site to obtain a
brokerage license in order to advertise property listings without
providing any additional brokerage services. The court found that the law
impermissibly differentiated between publications displaying the same
basic content on their Web sites, noting that newspapers were not required
under the law to obtain a brokerage license simply to display property
listings on their Web sites.38

  The Internet Has Increased Consumers' Options, but Several Factors Could Limit
  Its Wider Use

The Internet has increased consumers' access to information about
properties for sale and has facilitated new approaches to real estate
transactions. Many brokers post information on their Web sites-in varying
degrees of detail-on properties they have contracted to sell, enabling
consumers to obtain such information without consulting a broker. The
Internet also has fostered the creation or expansion of a number of
Internet-oriented firms that provide real estate brokerage or related
services, including discount brokers and broker referral services. Whether
the Internet will be more widely used in real estate brokerage depends in
part on the extent to which listing information is widely available. Like
discount brokerages, Internet-oriented brokerage firms, especially those
offering discounts, may also face resistance from traditional brokers and
may especially be affected by state laws that prohibit them from offering
rebates to consumers. In addition, certain factors-such as the lack of a
uniform sales contract-may inhibit the use of the Internet for
accomplishing the full range of activities needed for real estate
transactions.

38ForSaleByOwner.com Corp. v. Zinneman, 347 F. Supp. 2d 868, 877 (E.D.
Cal. 2004).

    The Internet Allows Consumers More Direct Access to Information

The Internet allows consumers direct access to listing information that
has traditionally been available only from brokers. Before the Internet
was widely used to advertise and display property listings, MLS data
(which comprise a vast majority of all listings) were compiled in an "MLS
book" that contained information on the properties listed for sale with
MLSmember brokers in a given area. In order to view the listings, buyers
generally had to use a broker, who provided copies of listings that met
the buyer's requirements via hard copy or fax. Today, information on
properties for sale-either listed on an MLS or independently, such as
for-sale-byowner properties-is routinely posted on Web sites, often with
multiple photographs or virtual tours. For example, NAR's Realtor.com Web
site features more than 2 million properties listed with MLSs around the
country, and most brokers also maintain their own Web sites with
information on properties for sale in their area. Buyers may also search
for non-MLS listed properties on the Web sites of companies that help
owners market their properties themselves. Thus, the Internet has allowed
buyers to perform much of the search and evaluation process independently,
before contacting a broker.39

Sellers of properties can also benefit from the Internet because it can
give their listings more exposure to buyers. For example, according to
NAR, Realtor.com-which provides information on approximately 95 percent of
all homes listed with MLSs around the country-had 6.2 million unique
visitors in February 2005. Sellers who choose to sell their homes without
the assistance of a broker can advertise their properties on a multitude
of "for-sale-by-owner" Web sites. Sellers may also use the Internet to
research suitable asking prices for their homes by comparing the
attributes of their houses with others listed in their area.

39Before the Internet, a buyer could still learn about properties without
a broker-for example, through newspaper advertisements or by driving past
a property to view it. However, the Internet can provide consumers with
far more extensive information, including, in some cases, complete details
on the property from the MLS as well as photographs or a virtual tour.

Despite more active participation of some buyers and sellers in the
transaction process, some industry analysts and participants noted that
because of the complexity of real estate transactions, some buyers and
sellers will always desire the assistance of a broker to help them
navigate the process.40 Unlike transactions that can now be completed
entirely on the Internet-such as purchasing airline tickets or trading
securities-real estate transactions are likely to continue to involve at
least some in-person services for the foreseeable future.

    The Internet Facilitates Alternative Service and Pricing Options

Although Internet-oriented brokerages and related firms represent only a
small portion of the real estate brokerage market at present, the Internet
has made different service and pricing options more widely available to
consumers. Among these options are full-service and limited-service
discount brokerages, information and referral companies, and alternative
listing Web sites.

o 	Full-service discount brokerages offer buyers and sellers full-service
real estate brokerage services-including listing properties in the MLS,
conducting open houses, negotiating contracts, and assisting with
closings-but advertise lower than traditional commissions, for example
between 3 percent and 4.5 percent. These types of brokerages existed
before widespread use of the Internet, but many have gained exposure and
become more viable as a result of the Internet. In addition, by posting
listings online, displaying photographs and virtual tours of homes for
sale, and communicating with buyers and sellers by e-mail, some of these
companies say that they have been able to cut brokerage costs, allowing
them to offer rebates to buyers or discounted commissions to sellers.

o 	Limited-service discount brokerages provide fewer services than
fullservice brokerages but also offer lower commission rates or offer
their services for flat fees. For example, some firms market a full array
of brokerage services for a reduced commission but do not list homes in
the MLS. Other firms charge a flat fee for marketing and advertising homes
and, for additional fees, will list a property in the MLS and show the
home to prospective buyers. Although these types of discount

40Consistent with Internet usage patterns in the United States, younger
consumers may be more likely than older consumers to search listings
online, a factor that could influence the growth of Internet use in real
estate transactions over time.

brokers have existed since at least the 1970s, industry participants told
us that the Internet has allowed them to grow in number and size in recent
years, in part because they can market their services to a larger
population of buyers and sellers.

o 	Information and referral companies, including some that are licensed
real estate brokers, provide resources for buyers and sellers-such as home
valuation tools and access to property listings-and make referrals of
those consumers to local brokers.41 Some of these companies charge
referral fees to brokers and then rebate a portion of that fee back to
buyers and sellers. It is through the Internet that these companies are
able to efficiently reach potential consumers and offer those customers
services and access to brokers.

o 	Alternative listing Web sites offer alternatives to the MLS, allowing
sellers who want to sell their homes themselves to advertise their
properties to buyers and giving buyers another source of information on
homes for sale. These alternative listing sites include the Web sites of
local newspapers, Craig's List, and "for-sale-by-owner" Web sites.42 These
services, which generally do not provide buyers and sellers with the
assistance of a licensed broker, are limited to providing consumers with a
venue for advertising homes and viewing properties for sale.

    Wider Use of the Internet in Real Estate Brokerage Will Depend on the
    Availability of Listing Information and Other Factors

Several factors could limit the extent to which the Internet is used in
real estate transactions. A key factor is the extent to which information
about properties listed in an MLS is widely available. Currently, buyers
may view MLS-listed properties on many Web sites, including broker and MLS
Web sites and on Realtor.com. NAR has considered a policy on Virtual
Office Web sites (VOW) that would allow brokers to selectively exclude
their MLS listings from being displayed on certain other brokers' Web
sites and would prohibit certain types of companies, such as information
and referral

41These information and referral companies typically have a network of
participating real estate brokers in various markets to which they refer
customers. Although many information and referral companies are themselves
licensed real estate brokers, they generally do not directly provide
services typical of a real estate broker, such as showing homes or
negotiating a sales price.

42Craig's List is a noncommercial Internet bulletin board that operates in
170 communities in 34 countries. Among other things, users of Craig's List
can post or review information on properties for sale.

companies, from operating VOWs.43 Proponents of this policy argue that
listings are the work product, and thus the property, of the selling
broker, who should have control over how the listings are used. Proponents
maintain that brokers should be able to prevent certain companies-such as
information and referral companies-from using their listings simply to
earn referral fees. NAR and others have also argued that freely posting
MLS data-such as addresses, descriptions of properties, and property tax
information-on the Internet may compromise the security and privacy of
their clients.

Opponents of the VOW policy argue that it is anticompetitive because it
would unfairly limit Internet-oriented brokers' ability to provide their
clients with access to MLS listings through their Web sites. They argue
that NAR already has policies on the appropriate distribution of MLS
information, and that their rules should treat information disseminated
via the Internet no differently than information distributed via
traditional bricks-and-mortar brokerages. They also note that measures can
be taken to address security and privacy concerns related to MLS listings
on the Internet, such as restricting the number of listings that result
from an online search. Some opponents also expressed concern that some
Internetoriented brokers would not be able to compete if-in a market
dominated by a single player-they were selectively excluded from
displaying that player's listings.

Even with few restrictions on the availability of information about
properties for sale, Internet-oriented brokerage firms may face other
challenges. First, Internet-oriented brokers we spoke with described
resistance, similar to that previously described, involving some
traditional brokerages that refused to show the Internet-oriented
brokerages' listed properties or offered them buyers' brokers commissions
that were less than those offered to other brokers. However, the online
availability of listing information may discourage such behavior by
enabling buyers to more easily detect whether a broker is avoiding other
brokers' listings that are of interest. Second, some Internet-oriented
companies said that state antirebate laws and regulations could affect
them disproportionately, since their model often was built around such
rebates.

43NAR issued its VOW policy in 2003; however, NAR has postponed requiring
implementation of the VOW policy by its affiliated MLSs pending the
outcome of its negotiations with DOJ, whose Antitrust Division has been
investigating the policy. According to NAR, some MLSs have implemented
their own VOW policies.

Finally, certain factors may inhibit the use of the Internet for
accomplishing the full range of activities needed for real estate
transactions. For example, some companies told us that they would like to
make greater use of the Internet to facilitate the execution of the
contract used in the purchase and sale of a property. However, they said
that there is no single, uniform sales contract for residential real
estate, and state laws vary with respect to which disclosures must
accompany a sales contract. They also said that state laws vary in their
requirements for physical copies of signed contracts, attorneys'
involvement in signing a contract, and the circumstances under which a
contract may be rescinded. As a result, it would be difficult to develop
an online platform that could be used nationwide for residential real
estate contracts. Further, industry participants told us that no uniform
technology currently exists to facilitate the assistance that brokers
often provide in other aspects of the real estate transaction, such as
coordinating inspections, appraisals, financing, title searches, and
settlements.

  Few State-Chartered Banks Appear to Engage in Real Estate Brokerage

Our review of certain state statutes and regulations showed that
approximately 30 states may potentially authorize state-chartered banks or
their operating subsidiaries to engage in some real estate brokerage
activities. However, we also found that because only a small number of
banks in these states appeared to have taken advantage of this authority,
the effect on competition and consumers was likely minimal. We reviewed
the state statutes and regulations that NAR and the Conference of State
Bank Supervisors, using the broadest interpretations, identified as
potentially authorizing banks' brokerage activity. While many of these
laws are ambiguous and subject to interpretation by state regulators, it
appears that at least 5 states and the District of Columbia provide
relatively clear authority for banks or their subsidiaries to engage in
real estate brokerage. An additional 8 states permit involvement in other
real-estate-related activities or in unspecified activities that might be
approved by the state. At least 7 states could potentially permit banks to
conduct real estate activities as an incidental power, an activity closely
related to banking, or an activity that is financial in nature. Many of
the remaining states could potentially allow state-chartered banks to
conduct real estate activities to the extent that national banks or other
federal depository institutions are allowed to do so.

The exact number of state-chartered banks that engage in real estate
brokerage is unknown because not all state regulators track such activity.
However, available data and interviews with real estate, banking, and
state

regulatory officials suggest that such activity is very limited among the
approximately 5,700 state-chartered banks nationwide. In separate surveys
in 2001, NAR and the Conference of State Bank Supervisors identified only
eight states where state-chartered banks had engaged in at least some real
estate brokerage activity. More recent data were not available, but
regulators and industry officials told us that they doubted that this
activity had expanded significantly since 2001. They noted that real
estate brokerage is not typically part of a bank's business model, and
that banks in small communities may be reluctant to compete with local
real estate brokers that may be clients of the banks.

We spoke with officials from banks engaged in real estate brokerage, bank
regulators, and real estate industry representatives in Iowa and
Wisconsin-two states identified as having the most banks involved in real
estate brokerage in 2001.44 The seven such banks we identified in these
states were all in small communities that had few or no other real estate
brokers, and some of these banks noted that their presence provided an
additional option for local residents. None of the banks we spoke with
offered brokerage services that were different than those offered by
traditional brokerages, and none offered discount brokerage services. Most
of the bank officials said that real estate brokerage was not a large
portion of their business. They said their primary goal was not to link
brokerage customers to the bank's mortgage financing and added that most
of their brokerage customers in fact obtained their mortgages outside of
the bank.

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
the report date. At that time, we will send copies to the Secretary of
Housing and Urban Development, the Attorney General, and the Chairman of
the Federal Trade Commission. We will make copies available to others upon
request. This report will also be available at no charge on GAO's Web site
at http://www.gao.gov.

44The information we obtained from these banks is meant to be illustrative
and is not representative of all banks' brokerage activity nationwide.

Please contact me at (202) 512-8678 or [email protected] if you or your staffs
have any questions about this report. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Key contributors to this report are listed in appendix I.

David G. Wood Director, Financial Markets and Community Investment

Appendix I

                     GAO Contact and Staff Acknowledgments

GAO Contact David Wood, (202) 512-8678, [email protected]

Staff 	In addition to the contact named above, Jason Bromberg, Assistant
Director; Tania Calhoun; Emily Chalmers; Evan Gilman; Christine Houle;

Acknowledgments	Austin Kelly; Cory Roman; and Julianne Stephens made key
contributions to this report.

Bibliography

This bibliography includes articles cited in our report and selected other
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Bibliography

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