Realtors drive up housing prices. The restraints of trade ingrained into the way realtors work make the housing affordability crisis worse. Even the buyer’s agent is part of the problem, for they are incentivized to seek a higher sale price though that goes against the interest of their client.

But things are changing. The same lawyers who took on Big Tobacco are seeking to change the way realtors work.  The Federal Trade Commission is pursuing anti-trust investigations of realtors. Technology is shaking up the industry and stripping away justification for high real estate commissions and disrupting realtor controls on markets and data.

Housing activists have been slow to focus their attention on the impact realtors have on housing affordability, even though the transaction costs realtors impose on the market are a huge part of the problem. In the face of resistance to increasing property and other taxes–both political and practical, as many homeowners face losing their homes under the pressure of rising taxes–activists would do well to turn their attention to a sector of the housing market that profits handsomely without contributing to building or maintaining housing.

In our first installment in of this series, we proposed that housing activists should seek an increase in the negligible taxes on broker commissions, a step that could generate sizable funds for affordable housing without adversely impacting housing affordability.

Rigged for Ever Higher Prices

Realtors on both sides of a transaction get paid from the standard 6% commission that comes out of the sale price. It is easy to see why the seller’s representative wants a higher price. The buyer’s representative faces the same incentive structure. Except for a bit of fleeting gratefulness from their client, the buyer’s agent really has no motivation to pursue lower priced properties. Splitting 6% on $600,000 puts more money in their pocket than a 6% commission on a $400,000 house.

Industry observers have noted that there is evidence that realtors representing buyers steer them away from “for sale by owner” listings, because those homes are often priced lower, and also don’t come with the prospect of a 6% commission to divide. Ever notice how a FSBO property goes unsold for a long time, but, when the owner throws in the towel and signs with a realtor it suddenly sells, even at a higher price? This could be the result of realtors steering their clients away from the FSBO. There has been some litigation around the country raising claims of boycotts by realtors of FSBO properties, a violation of anti-trust and fair trade laws.

The inherent conflict of interest in this arrangement–where the buyer’s representative personally does better if their client does worse–would seem to crumble under the pressures of a freely working marketplace. But realtors have not worked long and hard for a free market place. Their industry has repeatedly been described as “a cartel” that suppresses competition and imposes rules to exclude innovation that would undercut their control and profit margins.

Enter the plaintiffs’ lawyers.

Taking on the Realtors’ Cartel

A class action lawsuit was filed about a year ago against the National Association of Realtors claiming that NAR’s compensation policies, which require all member brokers demand blanket, non-negotiable buyer-side commission fees when listing a property on the Multiple Listing Service, constitute a violation of federal anti-trust laws. Sellers who listed their properties on 21 Multiple Listing Service around the country are plaintiffs, and more are being actively recruited. NAR has faced similar claims in the past, but none have been brought by such a well-funded, experienced and skilled team of attorneys. The lawyers bringing this lawsuit are among the nation’s most successful, and most feared class action lawyers. They have prevailed against Big Tobacco, Big Pharma and Big Tech. They now have the realtors’ cartel in their sights.

No plaintiff has yet emerged from Washington, though the same NAR  policies challenged in the suit are in effect here. Anyone who has bought or sold a home in Jefferson County and used a realtor experienced the same fixed, mandatory commission arrangement.

Experts who have studied the lawsuit say it would revolutionize the American real estate market. Real estate commissions here are higher than in other countries where buyers and sellers each directly pay their own agent.  A 2002 study by the International Real Estate Review, cited in the lawsuit, concluded that if buyers negotiated and directly paid their agent, listing commissions for seller’s agents would be closer to 3% than the standard 5-6%. Consumer advocates say we can do better than that, and expect to see commissions in the 1.5% range, what buyers and sellers pay “estate agents” in the United Kingdom and elsewhere.

Further, the suit claims that the NAR mandatory payment arrangement results in buyers agents steering their clients to higher priced, and exclusively MLS listed properties.

According to Michael Walsh, CEO at Exclusively Buyers, quoted in a Forbes report on the suit, a rare real estate firm that works only with homebuyers, “This is no garden variety lawsuit.”

“Potential damages are estimated at $54 billion,” Walsh said. “The plaintiffs allege collusion, hidden payments and anti-competitive practices designed to maintain real estate commissions at artificially high levels.”

You can learn more about the lawsuit at the website established by the plaintiffs’ lead counsel, Hagens Berman of Seattle. If you sold a home in the past five years and believe that you paid too much in commissions due to your realtors’ participation in the NAR cartel scheme, the attorneys may be interested in hearing from you. You can contact them at the link we just provided.

The Federal Government Combats The Realtors Cartel

If realtors had their way, we would not be shopping for homes on the internet. Some innovators who threated their monopoly faced threats of violence, as well as business-destroying harassment by state real estate commissions dominated by and existing for the benefit of influential realtor trade associations.

In 2005, the Department of Justice sued to overturn the NAR’s barricades to allowing the public to search properties on the Internet.  That was the advent of websites such as Redfin and Zillow. After three years of litigation, the National Association of Realtors surrendered and entered into a ten-year consent decree. Now most buyers find their properties on-line, many before contacting a realtor. But, real estate commissions have barely budged. Consumer advocates continue to insist that realtors’ anti-competitive practices preserve the inflated commission structure and much more work needs to be done.

The Department of Justice has stepped into the pending class action challenging the NAR commission mandates. Their first step was to inform the court that the NAR had been misrepresenting the consent decree. The DOJ is now an interested party in that lawsuit as it moves forward.

At the same time, the Federal Trade Commission has opened its own investigation into anti-competitive practices by realtors and their trade associations, with an emphasis on broker compensation and restricted access to listings.

In June 2018 the DOJ and FTC held a joint workshop on anti-competitive practices and barriers to entry in the real estate market, as well as the impact of past regulatory actions. These efforts by the DOJ and FTC come as the Trump administration has recognized a national affordable housing crisis.  Dr. Ben Carson, Secretary of the Department of Housing and Urban Development, has won bi-partisan support for his proposals for regulatory reform to promote affordable housing availability.

Technology is Disrupting the Realtor Cartel

Zillow and Redfin have already made a huge impact, and shown that sky-high commissions for every real estate transaction are not justified and needlessly raise the cost of housing. Much of the work done in the past by realtors is now being done for them. More and more consumers question whether realtors are worth the enormous commissions they can make for very little effort.

The multi-billion dollar real estate industry continues to draw innovation as entrepreneurs see an opportunity to profit by disrupting the cartel and outmoded ways of doing business. Space does not permit an in-depth look into all the innovation afoot, innovation that will dramatically reduce transaction costs. Home buyers will benefit from lower prices and rechanneling of their scarce dollars into housing instead of unnecessary and inflated commissions.

What Housing Activists Can Do

First, housing activists should recognize that transactions costs are a real problem in making housing less affordable. Inflated commissions are factored into the ultimate sale price. That is why FSBOs are frequently priced lower: the seller does not have to factor into her bottom line having to pay a realtor tens of thousands of dollars. (High closing costs and title insurance are another area deserving of activists’ attention).

Second, housing activists should work to end the conflict of interest present in the current mandatory NAR commission structure. They should press local government to outlaw the practice of sellers and buyers agents splitting the same pot of money. They should urge lawmakers to require that buyers agents be paid directly by buyers. Local laws can override the NAR’s anti-competitive rules.

Housing activists must pursue every opportunity to bring down housing costs. A market hobbled by decades of poor land use regulations, stifling building codes and exclusionary zoning laws–all of which have severely restricted the supply of affordable housing–needs lots of work before it is fixed. But in a crisis no opportunity for improvement must be ignored. Considering how much consumers hate paying sky-high real estate commissions, an effort to correct the anti-competitive forces behind those commissions might find a more receptive public than another call to raise property taxes.

Realtors Are Feeling the Heat

Facing a very serious class action that has been described as a “nuclear bomb” on the industry, and federal anti-trust inquiries, the realtors industry has announced that affordable housing has become “a top advocacy priority for 2020.” The National Association of Realtors is the nation’s largest trade association, representing more than 1.4 million agents and brokers. In a policy forum held this month at its imperial Washington, D.C. offices, the NAR announced it is getting behind various regulatory reforms to increase the stock of affordable housing and make home ownership more accessible at lower income levels. Echoing Secretary Carson, they have called for reforms on mortgage lending, zoning, and local development plans.

One idea they somehow failed to discuss: bringing down the cost of buying and selling by reforming realtors’ anti-competitive, conflict-laden commission structure.

In our next installment, we return to the proposal that realtors’ commission should be taxed at a higher rate to raise funds for affordable housing projects.