There is no price competition in the real estate industry, and the very structure of organized real estate is what may be preventing this, according to a report from the Government Accountability Office released today.
The use of the multiple listing service enables brokers to cooperate, but may discourage them from offering discounted commission rates, the report notes. And while the Internet has opened up more information to consumers, its power may be limited by real estate brokers.
In addition, some state laws and regulations may also impede price competition, the GAO said.
Price competition in the real estate industry has come under scrutiny because as the housing boom has pushed up home prices nationwide, fees paid for brokerage services have also climbed. The average commission on a home sale remains at about 6 percent of the total sales price, regardless of home price, local market conditions or effort required to sell the home, and this has raised questions over price competition.
Property listings displayed in MLSs give brokers information on commission splits that will be paid to the broker who secures a buyer for the property. The GAO says that this creates an incentive for brokers to show only properties with higher commission rates and not discounted commission properties.
MLSs “may encourage price conformity by, for example, showing the commission that buyers’ brokers will receive for cooperating in the sale of a property,” the report states. “Because, all else being equal, buyers’ brokers have less incentive to show properties that offer them a lower commission, this system may discourage brokers from offering less than the prevailing commission rate.”
Also, seller’s brokers may resist cooperation with discount brokers by offering a lower commission cut or refusing to show their listings, the report notes. “Some discount full-service and discount limited-service brokerage firms we interviewed said that other brokers had refused to show homes listed by discounters,” the GAO said.
State laws and regulations that prohibit brokers from offering rebates to consumers, as well as those requiring brokers to offer a minimum level of service also may be restricting price competition, the report said. The U.S. Justice Department and the Federal Trade Commission have argued that these laws potentially prevent price competition or reduce consumer choice in brokerage services.
At least 14 states prohibit real estate brokers from offering rebates on commissions, the report notes. The Justice Department this year sued the Kentucky Real Estate Commission for its policies against rebates and the Commission lifted the restrictions in July to settle the suit. South Dakota also lifted similar restrictions on rebates after officials began investigating the practice.
The report also points out 10 states that have passed or are considering legislation that would require brokers to perform a minimum level of service in real estate transactions. The Justice Department and FTC have charged that these so-called “minimum-service” laws would likely harm consumers by forcing them to purchase services they would prefer to do themselves.
State Realtor associations have been driving the support for these law changes, stating that the laws aim to protect consumers from receiving less services than they expect in a real estate transaction while also preventing situations in which full-service real estate professionals may feel obligated to assist consumers on the other side of a real estate deal who are working with limited-service real estate companies.
But opponents of the measures say that consumers should be able to choose which real estate services they receive in a real estate transaction, and there are not enough complaints against limited-service companies to justify the law changes.
Like discount brokerages, Internet brokerage companies may also face resistance from traditional brokers, the GAO report said. While the Internet has opened up property information to the public, wider use will depend on the availability of listings information, the report said, and there are potential restrictions.
For instance, the Justice Department’s Antitrust Division is suing the National Association of Realtors over the trade group’s policy that enables brokers to withhold their listings from all other brokers’ Web sites. Antitrust officials charge that the policy obstructs real estate brokers who use innovative Web-based systems to offer lower costs to consumers. NAR has said the policy was intended to protect brokers’ ownership rights in their property listings.
The GAO report on price competition in real estate was ordered in March by Rep. Michael Oxley, R-Ohio, who is chairman of the U.S. House Committee on Financial Services.
There has been an ongoing debate over the potential competitive effects of banks entering the real estate brokerage business, one of the things Oxley wanted the GAO to investigate. Banking conglomerates have requested permission from the Federal Reserve Board and the Treasury Department to sell and manage real estate under the 1999 Gramm-Leach-Bliley Act. For the past three years, Congress has denied financial holding companies and subsidiaries of national banks from taking over local real estate companies by denying yearly funds to finalize the proposed rule.
The Realtors association has lobbied to support this annual denial of funds, and has loudly opposed banks becoming brokers, saying that it would lead to conflicts of interest, fewer competitive loans, and higher rates for consumers.
The GAO report found about 30 states that potentially authorize state-chartered banks or their operating subsidiaries to engage in some form of real estate brokerage. However, few banks in these states have opened brokerage operations so their effect on competition has “likely been minimal,” the report said.
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