Real Estate Brokerage: Various Factors May Affect Price 	 
Competition (25-JUL-06, GAO-06-1005T).				 
                                                                 
Consumers paid an estimated $65.7 billion in residential real	 
estate brokerage fees in 2005. Observing that 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.	 
Furthermore, 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.	 
This has raised concerns about potential barriers to greater use 
of the Internet in real estate brokerage. In this testimony,	 
which is based on a report issued in August 2005, GAO discusses  
(1) factors affecting price competition in the residential real  
estate brokerage industry and (2) the status of the use of the	 
Internet in residential real estate brokerage and potential	 
barriers to its increased use.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-1005T					        
    ACCNO:   A57448						        
  TITLE:     Real Estate Brokerage: Various Factors May Affect Price  
Competition							 
     DATE:   07/25/2006 
  SUBJECT:   Brokerage industry 				 
	     Competition					 
	     Cost analysis					 
	     Fees						 
	     Financial analysis 				 
	     Internet						 
	     Prices and pricing 				 
	     Real estate sales					 
	     Websites						 

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GAO-06-1005T

     

     * Background
     * Various Factors Can Influence the Extent of Price Competitio
          * Real Estate Brokerage Is Characterized More by Nonprice Comp
          * Cooperation Facilitated by MLSs and Other Factors May Inhibi
          * Some State Laws and Regulations Can Affect Price Competition
     * The Internet Has Increased Consumers' Options, but Several F
          * The Internet Allows Consumers More Direct Access to Informat
          * Wider Use of the Internet in Real Estate Brokerage Will Depe
     * Contacts and Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Testimony

Before the Subcommittee on Housing and Community Opportunity, Committee on
Financial Services, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 2:00 p.m. EDT

Tuesday, July 25, 2006

REAL ESTATE BROKERAGE

Various Factors May Affect Price Competition

Statement of David G. Wood, Director Financial Markets and Community
Investment

GAO-06-1005T

Mr. Chairman and Members of the Committee:

I appreciate the opportunity to be here today as you consider issues
related to residential real estate brokerage-that is, the bringing
together of buyers and sellers of homes and the provision of related
services by licensed brokers and agents. My statement today is based
primarily on GAO's August 2005 report on the residential real estate
brokerage industry.1

The fees paid for residential real estate brokerage 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, estimated that in 2005 consumers paid about $65.7 billion in real
estate brokerage fees related to home sales, up from approximately $43
billion in 2000. 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-that is, the rivalry among firms to attract clients on the
basis of price-in the residential real estate brokerage industry. While
the emergence of the Internet offers the potential to reduce costs by
generating efficiencies and new ways of doing business, and many consumers
now use the Internet to search for homes and related services such as
mortgages, Internet-oriented brokerage firms 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
brokerage.

My statement today discusses (1) factors affecting price competition in
the residential real estate brokerage industry and (2) the status of the
use of the Internet in residential real estate brokerage and potential
barriers to its increased use. In preparing our August 2005 report, we
reviewed academic literature and interviewed and obtained documents from
industry analysts, the National Association of Realtors(R) (NAR),
residential real estate brokerage firms and franchisors, the Department of
Justice (DOJ), the Federal Trade Commission (FTC), and others. We also
reviewed relevant selected state laws and regulations and state and
federal court decisions. Academic studies that we reviewed for our work
are listed at the end of this statement.

1GAO, Real Estate Brokerage: Factors That May Affect Price Competition,
GAO-05-947 (Washington, D.C.: Aug. 31, 2005).

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

In summary:

           o  While the residential real estate brokerage industry has
           competitive attributes-such as a large number of relatively small
           firms and ease of entry-competition in this industry appears to be
           based more on nonprice factors, such as reputation or level of
           service, than on price. Although comprehensive data on brokerage
           fees are lacking, past analyses and anecdotal information suggest
           that commission rates have persisted in the same range over long
           periods, regardless of local market conditions, housing prices, or
           the cost or the effort required to sell a home. Our review of the
           academic literature and interviews with industry analysts and
           participants suggested several potential causes of this apparent
           lack of price variation. Multiple listing services (MLS)-the local
           organizations through which residential real estate brokers share
           information about properties for sale-facilitate cooperation among
           brokers in a way that can benefit consumers, but may also
           discourage participating brokers from deviating from conventional
           commission rates. For example, the practice of showing the
           commission that buyers' brokers will receive for cooperating in
           the sale of a property may discourage brokers from offering less
           than the prevailing commission rate. In addition, 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.
           o  The Internet has increased consumers' access to information
           about properties for sale and fostered the growth of
           Internet-oriented real estate brokerage models, including some
           discount brokers and services that refer clients to brokers.
           However, industry participants and analysts cited several
           potential obstacles to more widespread use of the Internet in real
           estate transactions. These obstacles include the extent to which
           property information is made available for brokers to post online,
           the resistance of some traditional brokers to cooperate with
           nontraditional firms, and certain state laws and regulations that
           prohibit or restrict commission rebates to consumers.

           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 in the buyer's search, holding open
           houses and showing homes, 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.3 Under this approach,
           brokers and agents receive compensation only when sales are
           completed.

           In recent years, alternatives to this traditional full-service
           brokerage model have become more common, although industry
           analysts and participants told us that these alternatives still
           represented a small share of the overall market in 2005. Discount
           full-service brokerages charge a lower commission than the
           prevailing local rate, but offer a full package of services.
           Discount limited-service 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.

           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 ("listings"), 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 were affiliated with the trade association in
           2005. These NAR-affiliated MLSs are 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. 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 state-licensed 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 statement,
           I will generally refer to all licensed real estate practitioners
           as brokers.

           Various Factors Can Influence the Extent of Price Competition in
			  Real Estate Brokerage
			  
			  Some economists have observed that brokers typically compete more
           on nonprice factors, such as service quality, than on price. While
           comprehensive price data are lacking, evidence from academic
           literature and industry participants with whom we spoke highlight
           several factors that could limit the degree of price competition,
           including broker cooperation, largely through MLSs, which can
           discourage brokers from competing with one another on price;
           resistance from traditional full-service brokers to brokers who
           offer discounted prices or limited services; 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. 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, such as quality, reputation, or
           level of service, than on price. One reason for this
           characterization is the apparent uniformity of commission rates.
           Comprehensive data on brokerage fees are lacking. However, past
           analyses and anecdotal information from industry analysts and
           participants indicate that, historically, commission rates were
           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.
           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. Many of the industry analysts
           and participants we interviewed said that commissions still
           cluster around a common rate within most markets, and they
           generally cited rates of 5 percent to 6 percent as typical.

           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. 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.
           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.4 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 2005, the national median sales price of existing homes,
           as reported by NAR, increased about 74 percent, while inflation
           over the same period was about 16 percent, leaving an increase of
           some 58 percent in the inflation-adjusted price of housing.
           According to REAL Trends, average commission rates among the
           largest brokerage firms fell from an estimated 5.5 percent in 1998
           to an estimated 5.0 percent in 2005, a decrease of about 9
           percent.5 Thus, with the increase in housing prices, the brokerage
           fee (in dollars) for selling a median-priced home increased even
           as the commission rate fell.

           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. Brokers may also
           compete by spending more on advertising or offering higher levels
           of service to attract clients. Although some of these activities
           can benefit consumers, some economic literature suggested that
           such actions lead to inefficiency because brokerage services could
           be provided by fewer agents or at a lower cost.

           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 NAR consultants estimated that nontraditional firms
           represented only about 2 percent of the market in 2003, these
           firms may be putting some downward pressure on the fees charged by
           traditional brokerages.

           Cooperation Facilitated by MLSs and Other Factors May Inhibit Price Competition
			  
			  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.6

           First, 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.7 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 price fixing.8 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, rather 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. FTC, in a 1983 report, 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.

           Second, traditional brokers may discourage price competition by
           resisting cooperation with brokers and firms whose business models
           depart from charging conventional commission rates, according to
           several industry analysts and participants with whom we spoke.9 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. 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 brokers. This
           practice can make it more difficult for discount brokers to
           recruit new agents because the agents may earn more working for a
           broker who receives the prevailing commission from other
           brokers.10 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.

           Finally, pressure from consumers for lower brokerage fees appears
           to have been limited, although it may be increasing, according to
           our review of economics literature and to several industry
           analysts and participants. Some consumers may accept a prevailing
           commission rate as an expected cost, in part because that has been
           the accepted pricing model for so long, and others may not realize
           that rates can be negotiated. Buyers may 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 homes will be shown. 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 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 laws and regulations that restrict rebates to
           consumers or require minimum levels of service by brokers may also
           unnecessarily hinder competition among brokers and limit consumer
           choice.

           As of July 2006, at least 12 states appeared to prohibit, by law
           or regulation, real estate brokers from giving consumers rebates
           on commissions or appeared to place restrictions on this
           practice.11 Proponents said 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. Opponents of antirebate provisions argued that such
           restrictions serve only to limit choices for consumers and to
           discourage price competition by preventing brokers from offering
           discounts. Opponents also noted 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.12 In November 2005, DOJ and the Kentucky Real Estate
           Commission settled a suit in which DOJ had alleged that the
           commission's administrative regulation banning rebates violated
           federal antitrust law. In 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.13 Pursuant to the approved
           settlement agreement, the commission put in place emergency
           regulations permitting rebates and other inducements as long as
           they are disclosed in writing.

           In addition, as of July 2006, 12 states appeared to be considering
           or to have passed legislation that requires brokers to provide a
           minimum level of service when they represent consumers.14 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 argued that they protect
           consumers by ensuring that brokers provide a basic level of
           assistance. Furthermore, full-service brokers argued 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 argued that they restrict consumer choice and
           raise costs by impeding brokerage models that offer limited
           services for a lower price.15 Between April and November 2005, DOJ
           wrote to state officials in Oklahoma and New Mexico, and DOJ and
           FTC jointly wrote to officials in Alabama, Michigan, 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 limited-service options
           and therefore requiring some sellers to buy brokerage services
           they would otherwise choose to perform themselves. They also cited
           a lack of evidence that consumers have been harmed by
           limited-service brokerage. Despite the concerns raised by DOJ and
           FTC, the governors in Alabama, Missouri, Oklahoma, and Texas
           subsequently signed minimum service standards into law.

           The Internet Has Increased Consumersï¿½ 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. 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
           especially may be affected by state laws that prohibit them from
           offering rebates to consumers.

           The Internet Allows Consumers More Direct Access to Information
			  and Facilitates Alternative Service and Pricing Options
			  
			  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 MLS-member
           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-by-owner properties-is routinely
           posted on Web sites, often with multiple photographs or virtual
           tours. Thus, the Internet has allowed buyers to perform much of
           the search and evaluation process independently, before contacting
           a broker.16 Sellers of properties can also benefit from the
           Internet because it can give their listings more exposure to
           buyers. 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 areas.

           Although Internet-oriented brokerages and related firms
           represented only a small portion of the real estate brokerage
           market in 2005, 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 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.
           o  Limited-service discount brokerages provide fewer services than
           full-service brokerages but also charge lower commissions or offer
           their services for flat fees. For example, some 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. The Internet has allowed these firms 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 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.17
           Some of these companies charge referral fees to brokers and then
           rebate a portion of that fee back to buyers and sellers. The
           Internet allows these companies 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, Craigslist, and
           "for-sale-by-owner" Web sites.18

           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 NAR's
           Realtor.com Web site. The real estate brokerage industry has faced
           controversy over the public availability of listings on the
           Internet and over whether brokers can restrict the display of
           their listings on other brokers' Web sites.19 Proponents of
           allowing such restrictions argued that listings are the work
           product, and thus the property, of the selling broker, who should
           have control over how the listings are used. Opponents argued that
           such control would unfairly limit Internet-oriented brokers'
           ability to provide their clients with access to MLS listings
           through their Web sites.

           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 with whom
           we spoke 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
           business models often were built around such rebates. Finally,
           other factors, such as the lack 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.

           Mr. Chairman, this concludes my prepared statement. I would be
           happy to answer any questions at this time.

           Contacts and Acknowledgments
			  
			  For further information on this testimony, please contact David G.
           Wood at (202) 512-8678. Contact points for our Offices of
           Congressional Relations and Public Affairs may be found on the
           last page of this statement. Individuals making key contributions
           to this testimony include Jason Bromberg, Tania Calhoun, Julianne
           Stephens Dieterich, and Cory Roman.

           Bibliography
			  
			  This bibliography includes articles from our review of literature
           on the structure and competitiveness of the residential real
           estate brokerage industry.

           Anglin, P. and R. Arnott. "Are Brokers' Commission Rates on Home
           Sales Too High? A Conceptual Analysis." Real Estate Economics,
           vol. 27, no. 4 (1999): 719-749.

           Arnold, M.A. "The Principal-Agent Relationship in Real Estate
           Brokerage Services." Journal of the American Real Estate and Urban
           Economics Association, vol. 20, no. 1 (1992): 89-106.

           Bartlett, R. "Property Rights and the Pricing of Real Estate
           Brokerage." The Journal of Industrial Economics, vol. 30, no. 1
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3Brokers 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.

4Some 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.

5REAL Trends' data did 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.

6We made no judgment on the legality of any actions that may inhibit price
competition; such matters were beyond the scope of our work.

7United States v. National Association of Real Estate Boards, 339 U.S.
485, 488-89 (1950).

8For 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.

9We did not investigate specific instances of alleged resistance to
cooperation, nor did we have information to assess how common such
practices might be.

10Conversely, officials from one firm suggested that a broker who 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.

11As of July 13, 2006, states that appeared to prohibit or place
restrictions on real estate brokers giving consumers rebates on
commissions included Alabama, Alaska, Iowa, Kansas, Louisiana,
Mississippi, Missouri, New Jersey, North Dakota, Oklahoma, Oregon, and
Tennessee. At the time of our August 2005 report, West Virginia also
restricted rebates, but it no longer does so. We did not review all
states' laws and regulations or evaluate how the states interpret and
apply provisions, so other states also may prohibit or restrict commission
rebates to consumers.

12According 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.

13Complaint, 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).

14As of July 13, 2006, Alabama, Delaware, Florida, Georgia, Illinois,
Indiana, Iowa, Missouri, Oklahoma, Texas, Wisconsin, and Utah had enacted
minimum service standards. At that time, Michigan was considering adopting
such standards.

15Minimum 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.

16Before the Internet, a buyer could still learn about properties without
a broker-for example, through newspaper advertisements or by driving past
to view a property. However, the Internet enables consumers to obtain far
more extensive information, including, in some cases, complete details on
the property from the MLS as well as photographs or a virtual tour.

17These information and referral companies typically have a network of
participating real estate brokers in various markets to which they refer
customers. Although some 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.

18Craigslist is a noncommercial Internet bulletin board that operates in
more than 300 communities in more than 50 countries. Among other things,
users of Craigslist can post or review information on properties for sale.

19On August 31, 2005, NAR's Internet Listing Display policy took effect,
replacing the Virtual Office Web site policy that was in place when we
completed our August 2005 report. Both policies set out guidelines for how
NAR-affiliated MLSs could govern the Internet display of listing
information. The Virtual Office Web site policy allowed MLS participants
to selectively exclude their listings from display on other participants'
Web sites, while the newer policy allows participants to exclude their
listings on either all other participants' Web sites, or none of them. DOJ
has filed suit against NAR alleging that both policies violate federal
antitrust law (Amended Complaint, United States v. National Association of
Realtors, U.S. Dist. Ct., N.D. Ill., Case No. 05C-5140 (Oct. 4, 2005)).

                 
(250308)

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Highlights of GAO-06-1005T , a testimony before the Subcommittee on
Housing and Community Opportunity, Committee on Financial Services, House
of Representatives

July 25, 2006

REAL ESTATE BROKERAGE

Various Factors May Affect Price Competition

Consumers paid an estimated $65.7 billion in residential real estate
brokerage fees in 2005. Observing that 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.
Furthermore, 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. This has raised concerns
about potential barriers to greater use of the Internet in real estate
brokerage.

In this testimony, which is based on a report issued in August 2005, GAO
discusses (1) factors affecting price competition in the residential real
estate brokerage industry and (2) the status of the use of the Internet in
residential real estate brokerage and potential barriers to its increased
use.

The residential real estate brokerage industry has competitive attributes,
but its competition appears to be based more on nonprice factors, such as
reputation or level of service, than on brokerage fees, according to a
review of the academic literature and interviews with industry analysts
and participants. Although comprehensive data on brokerage fees are
lacking, past analyses and anecdotal information suggest that commission
rates have persisted in the same range over long periods, regardless of
local market conditions, housing prices, or the cost or the effort
required to sell a home. One potential cause of limited price variation in
the industry 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. In addition, some state laws and regulations may also affect price
competition, such as those prohibiting brokers from giving clients rebates
on commissions and those requiring brokers to provide consumers with a
minimum level of service. Although such provisions can protect consumers,
the Department of Justice and the Federal Trade Commission have argued
that they may prevent price competition or reduce consumers' choice of
brokerage services.

The Internet has changed the way consumers look for real estate and has
facilitated the growth 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 potential 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 that prohibit or restrict commission rebates to
consumers.
*** End of document. ***