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 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. 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.
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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. ***