NAR Report Sees Banks as Non-Competitive

According to the recently released National Association of Realtors study "Structure, Conduct, and Performance of the Real Estate Brokerage Industry", economists classify industries into four broad categories: perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition "is said to yield 'good' economic outcomes while an unregulated monopoly is said to yield 'bad' outcomes due to resource misallocation."

The study states that, to be characterized as being perfectly competitive, an industry must meet a set of conditions:

• Many buyers and many suppliers;
• No barriers to entry
• Identical products and services
• Perfect information
• Consumers are able to maximize their well-being by seeking the lowest possible price and firms are able to maximize profit by seeking the highest possible price.

Not surprisingly, NAR defines real estate as a "nearly perfectly competitive" industry based on its own interpretation of real estate's conformance with these criteria, most of which we explored in an earlier article.

NAR is clearly trying to make a case for its competitiveness to a wide audience. The report argues against the Department of Justice lawsuit against NAR's rules (both current regulations and those it scrapped in response to earlier DOJ litigation threats) regarding on-line access to multiple listing data and DOJ's complaints against several states which require minimum levels of service from real estate firms and/or forbid the payment of rebates to non- agents (such as corporations or universities that set up affinity programs with real estate companies).

The study's main target, however, is the banking industry which has been trying to gain entry into real estate brokerage for many years. NAR and its supporters (or the banking industry's detractors, take your pick) have fought this off every year since 2001, most recently this fall when Congress extended the prohibition against bank holding companies and their financial subsidiaries entering the field for yet another year.

If NAR thinks that real estate is a nearly perfectly competitive industry, it describes banks and bank holding companies as an oligopoly, at least when it comes to the industries market leaders.

The report alleges that "The banking industry is one of the most highly concentrated industries in the country." Citing a wave of mergers over the past ten years NAR states that the top five banks now hold 45 percent of industry assets, totaling $3.4 trillion at the end of 2003. The top bank, JP Morgan Chase, on its own held 13.3% of the market and $1.01 trillion in assets. In contrast, NAR says, the top 100 real estate firms in the country combined held only 17 percent of total market share.

The report quotes two analysts for the Federal Deposit Insurance Corporation as stating that this high concentration of assets within the banking industry creates a situation where the failure of even one megabank could overwhelm the resources immediately available through the FDIC bank fund and expose taxpayers to huge potential liabilities.

NAR compares real estate brokerage and banks through a number of measures and finds banks wanting. Some of the yardsticks are:

Number of firms:
Real estate - 98,000 to over 200,000 (depending on who is counting)
Banks - 8,000 to 10,000.

Barriers to Entry:
Real estate - usually less than $1,000 and a few weeks of studying time to obtain a license and enter the field;
Banking - large capital requirement.

Taxpayer Risk and Historic Experience of Government Bailout:
Real estate - none;
Banking - yes (historic evidence, S&L failures and RTC bailout.)

Influence of Foreign Governments:
Real estate - no;
Banking - large multinational corporations are subject to foreign government regulation.

Consumer Data on Buying Habits and Possibility of Price Discrimination:
Real estate - none;
Banking, -vast, often based on data mining of credit card purchase information.

Cooperation with Competitors in the Sale of Products:
Real Estate - yes, through MLS;
Banking - no.

Degree of Regulation:
Real Estate - minimal;
Banking - heavy.

Social Promotion of Entrepreneurship, Women and Minorities, and Small Business:
Real Estate - yes in every category;
Banking - yes in every category bus assessment is limited to owners of community banks.

The report continues, stating that permitting holding companies and financial subsidiaries of mega-banks to engage in real estate brokerage raises many complex issues. NAR claims that allowing heavily regulated banks, some of which are also subject to foreign regulation, to engage in a dynamic, free-enterprise market creates risks for consumers, taxpayers, and the overall economy. These mega banks also enjoy legal and regulatory benefits which would unbalance competition and could lead to predatory pricing and possibly substantially raise barriers to those desiring to enter the market. Since banks are subsidized (a claim for which evidence is not provided,) their entry into the real estate business would create an uneven playing field in which small real estate companies would face obstacles that could ultimately reduce or eliminate the benefits of competition for homebuyers and sellers.

The entire study is undoubtedly sitting somewhere in the office of every member of Congress and probably is just as well distributed among state level officials. If you want to read it in its entirety it is available in PDF format at www.Realtor.org/Research.nsf. In addition to furthering its obvious political motives, the report provides some very interesting statistics about the real estate industry and we will abstract these in a forthcoming article.