House Real Estate Hearings - Prosecution Rests And Defense Steps Up

After a parade of seven witnesses (plus Full Committee Chair Michael Oxley) who appeared before the House Banking Subcommittee on Housing and Community Opportunity to testify about alleged limitations on competition from Internet competitors by the National Association of Realtors� and its affiliated multiple listing services, the defense got a few words in edgewise.

Geoffrey Lewis, Senior Vice President and Chief Legal Office of RE/MAX International and Pat Vredeycogd-Combs, President-Elect of NAR testified in support of NAR and Realtors in general.

Mr. Lewis presented some of the more original testimony heard at the hearings. Citing the success of his company, he said it still took over ten years for RE/MAX to establish its business models and in spite of the fact that the Internet has accelerated the pace of change other new models cannot complain that their success has been improperly hindered by traditional models. "They suffer more from impatience," he said, than they do from any alleged unfair efforts to thwart them."

"There are virtually no barriers to entry into our industry, the Internet is enabling new business models and there is no evidence that free market forces are being impeded in any way."

Lewis said that it is often overlooked by critics that real estate is a success based business. If a seller does not sell his house or a buyer does not purchase one, their agents receive 0% commission regardless of the time and money invested. Even when a commission is received, it often comes some months after the time or money is expended. "Realtors drill a lot of dry wells."

Both Lewis and Ms. Vredeycogd-Combs cited recent studies that indicate commissions have been trending down - going from 6.1 percent in 1991 to the current average of 5.1 percent. That is not a one percent decrease, Lewis said, but a 16 percent decrease, a level not experienced by many industries over the same period of time.

With the recent housing boom, "many have questioned why commission rates have not come down further. The answer is that agent income has not increased correspondingly. The median gross income for real estate professionals has decreased 6 percent notwithstanding that agents receive no healthcare or retirement benefits. On a net basis, the average agent salary is lower than that of school teachers who receive benefits and work only nine months a year. This is because of the large increase in the number of agents entering the industry. NAR, he said, reported a 26 percent increase in membership over the past two years and a 40 percent increase over the past five years. There are now 2.6 million licensed agents in the U.S., one for every 115 people.

There is little difference between traditional companies and online companies in terms of Internet use, but while the Internet has brought down costs in many industries it has not done so for doctors, accountants, attorney services, landscape contractors or many other businesses including real estate. Industries that are selling commodities (books, airline tickets) have saved but real estate agents are selling unique properties and providing individualized services.

Speaking to MLS, Mr. Lewis said that it was designed as a business-to-business vehicle not a business-to-consumer vehicle. "The idea was that cooperating brokers and agents would work to earn their own customers using their own assets and then share listings via the MLS. The concept is simple: you earn a customer, you get to use the MLS with the customer. The concept is not: you get free access to the MLS and then you use it to advertise the properties of your competitors in order to attract customers." MLS, he commented, is not a public utility.

Mr. Lewis probably made the most cogent arguments of any of those testifying at the hearings. If you can, take the time to read his entire prepared statement at http://financialservices.house.gov/hearings.asp.

Ms. Vredeycogd-Combs's testimony ran to 31 pages, a sizable amount of it directed to answering tangential criticisms of the industry not directly related to the subject of the hearing. It appeared that she was attempting to answer the criticisms directed at the "cockamamie system" of real estate alleged by the Consumer Federation of America and we will balance our later discussion of these charges with her testimony.

Responding directly to remarks from Oxley and in other testimony she said that those who criticize real estate as anti-competitive are over-simplifying the issue by looking at the country as one national market rather than as truly local. The problem with the simplified view, she said, is that it implies that agents in Washington, D.C. are competing with agents in Anchorage, Alaska. Competition should be measured at the local level. She quoted a report from Pennsylvania State University which, based on interviews in twelve local markets, stated that competition within each market is fierce, including competition within individual offices as well as among them.

And commissions, contrary to a monumental misunderstanding that exists, are not set by agents but are independently established by each firm along with the commission splits between the firm and its agents.

Blanch Evans, writing in Realty Times, asked if the "House Subcommittee Agree(s) with Oxley's Realtor Persecution?" She stated that the witnesses "were the same ones who have been making noise all along:" Lending Tree she said "because it's been thwarted from access to MLS (which) it wants to attract consumers to its referral-fee based business model; Aaron Farmer, a broker who insists that it's a service to let consumers use the MLS who don't want to pay for other brokerage services except MLS entry; and Stephen Brobeck the Consumer Federation of America, "who tipped his hand as an Oxley pawn when he outrageously suggested that if state legislatures couldn't provide adequate regulation of the real estate industry, then 'there needs to be a federal role.'"

Evans quoted sub-committee member Maxine Waters, D-California, as challenging the need for a Justice Department lawsuit against NAR saying that DOJ seemed to be the only unhappy party. "She also challenged (Redfin executive) Kelman's assertion that some MLS rules make it difficult for Redfin to do business. People talk, they threaten, so what? They haven't stopped you,' She said." Rep Arthur Davis, D-Alabama, said "I don't see a strong case for Congress to intervene."

Ms. Evans further stated, in a separate column: "It was such an embarrassment for Representative Oxley that he left halfway through the congressional committee hearings he had called for."

So what do you think?

Should NAR and/or local MLS affiliates be required to share information with all comers? Are they guilty of restricting competition?

How effective are discount services? Is anyone aware of any hard numbers regarding the cost to sellers from using full service vs. discount agents?

What is your opinion about the government injecting itself into real estate? How do you think Oxley's concerns shake out compared to current regulatory interest in other industries such as manufacturing or energy?

Are consumers sufficiently informed about rights, services, etc., and can informing them be achieved without bring in federal regulation?

What are commissions in your neck of the woods?

Or any other thoughts you have on the subject.

Please identify yourself as a traditional agent, mortgage officer, discount broker, attorney, regulator or a good old consumer and direct your questions via email to our News @ email address on the following page.