Consumer group goes after real estate industry
Consumer Federation of America says home buyers pay higher prices because 'cartel' stifles competition.
NEW YORK (CNNMoney.com) - A leading consumer rights group, the Consumer Federation of America (CFA), on Monday issued a report charging that real estate industry members act as a cartel to stifle competition, resulting in higher prices and poorer service for homebuyers.
It's the latest episode in the long-running soap opera that pits consumer groups and the government against the real estate industry. The dispute has become increasingly heated in recent years as soaring home prices have resulted in huge commissions for the industry. At the same time, the technology advances that have dramatically lowered costs in investment, travel and other industries have not had a great impact on real estate.
"Many traditional real estate brokerage firms, and their organizations, function as a cartel that tries to set prices and restrict service options," said Stephen Brobeck, CFA's executive director at a press conference in Washington D.C.
The CFA charges that consumers are harmed in three main ways:
For those who have not followed the controversy closely, the CFA explained how traditional real estate brokers are able to control the sales process:
By having sellers pay all commissions
Home sellers' 6-percent commissions are split between their broker (the listing agent) and the buyer's agent. That creates reluctance among sellers and their brokers to lower commissions: They depend on their homes being seen by potential buyers, and buyers agents will be more likely to show homes with full commissions than discounted ones.
According to the CFA, if sellers and buyers each negotiated compensation separately with brokers, brokerage services and prices would quickly become unbundled and clients would pay only for the services they need.
Discriminary practices targeting non-traditional brokers
Brokers will sometimes offer rebates to buyers or sellers - cash back at closing - to attract their patronage. But many state commissions have banned rebates, prohibitions that the Department of Justice has gotten overturned in some cases.
State legislatures have also enacted minimum service regulations, which prohibit brokers from unbundling services and charging a fee for each. "We're asking states to end minimum service laws because we think they harm consumers," James Cooper of the Federal Trade Commission, noting, however that Washington can't dicate remedies to the states.
There are also more subtle forms of discrimination by traditional brokers. In one, "boycotting," discount brokers say that traditional brokers refuse to show their listings to clients.
Restricted listing services
The CFA says traditional brokers dominate the unregulated multiple listing services and restrict full access to broker clients, hide commission splits from consumers, and restrict non-traditional brokers from access or full information.
Lack of consumer knowledge
The CFA says homebuyers and sellers, especially first-time ones, are at a great disadvantage in that they know little about industry practices. Those selling one home and buying another tend to be preoccupied with matching these sales. Many consumers do not shop and negotiate for brokerage services as carefully as they would purchase a car or other much less expensive transactions.
Many real estate brokers also sit on state real estate commissions; they make up the majority of all state boards, according to the CFA. They regulate themselves and make rules that disadvantage competing business models.
The National Association of Realtors released a comment on the CFA report calling the industry, "One of the most competitive business environments in the world, characterized by low barriers to entry, intense personal client service and a results-based compensation structure. Real estate consumers can choose from nearly 80,000 real estate brokerages and more than 2 million real estate licensees, more than 1.3 million of whom are Realtors. Competition is fierce. In fact, discount brokerages and many innovative business models are doing very well today and the average real estate commission, as computed by Real Trends, has fallen from 5.5% in 1998 to 5.1% in 2003."
Tom Stevens, president of NAR, says the real estate brokerage is "an intensely client-driven business and every client's needs are different. You can't compare it to buying an airline ticket or stocks."
Brobeck agrees that, despite the best efforts of the industry, the commission structure is eroding in some markets.
"Sellers with a $600,000 home are saying, 'I'm not going to pay a commission of $36,000,'" he says. But in some slower markets, commission rates can still hover at around 7 percent. Overall, commission rates probably average well about 5 percent. They are much lower in other countries and would drop in the United States except for anti-competitive practices.
"Prices should be left up to the marketplace," says Brobeck, "but the cartel still sets the prices."