This is the accessible text file for GAO report number GAO-06-1005T
entitled 'Real Estate Brokerage: Various Factors May Affect Price
Competition' which was released on July 25, 2006.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
United States Government Accountability Office:
GAO:
Testimony:
Before the Subcommittee on Housing and Community Opportunity, Committee
on Financial Services, House of Representatives:
For Release on Delivery:
Expected at 2:00 p.m. EDT Tuesday, July 25, 2006:
Real Estate Brokerage:
Various Factors May Affect Price Competition:
Statement of David G. Wood, Director:
Financial Markets and Community Investment:
GAO-PUB No. 06-1005T:
GAO Highlights:
Highlights of GAO-06-1005T, a testimony before the Subcommittee on
Housing and Community Opportunity, Committee on Financial Services,
House of Representatives
Why GAO Did This Study:
Consumers paid an estimated $65.7 billion in residential real estate
brokerage fees in 2005. Observing that commission rates have remained
relatively uniform—regardless of market conditions, home prices, or the
effort required to sell a home—some economists have questioned the
extent of price competition in the residential real estate brokerage
industry. Furthermore, while the Internet offers time and cost savings
to the process of searching for homes, Internet-oriented brokerage
firms account for only a small share of the brokerage market. This has
raised concerns about potential barriers to greater use of the Internet
in real estate brokerage.
In this testimony, which is based on a report issued in August 2005,
GAO discusses (1) factors affecting price competition in the
residential real estate brokerage industry and (2) the status of the
use of the Internet in residential real estate brokerage and potential
barriers to its increased use.
What GAO Found:
The residential real estate brokerage industry has competitive
attributes, but its competition appears to be based more on nonprice
factors, such as reputation or level of service, than on brokerage
fees, according to a review of the academic literature and interviews
with industry analysts and participants. Although comprehensive data on
brokerage fees are lacking, past analyses and anecdotal information
suggest that commission rates have persisted in the same range over
long periods, regardless of local market conditions, housing prices, or
the cost or the effort required to sell a home. One potential cause of
limited price variation in the industry is the use of multiple listing
services (MLS), which facilitates cooperation among brokers in a way
that can benefit consumers but may also discourage participating
brokers from deviating from conventional commission rates. For
instance, an MLS listing gives brokers information on the commission
that will be paid to the broker who brings the buyer to that property.
This practice potentially creates a disincentive for home sellers or
their brokers to offer less than the prevailing rate, since buyers’
brokers may show high-commission properties first. In addition, some
state laws and regulations may also affect price competition, such as
those prohibiting brokers from giving clients rebates on commissions
and those requiring brokers to provide consumers with a minimum level
of service. Although such provisions can protect consumers, the
Department of Justice and the Federal Trade Commission have argued that
they may prevent price competition or reduce consumers’ choice of
brokerage services.
The Internet has changed the way consumers look for real estate and has
facilitated the growth of alternatives to traditional brokers. A
variety of Web sites allows consumers to access property information
that once was available only by contacting brokers directly. The
Internet also has fostered the growth of nontraditional residential
real estate brokerage models, including discount brokers and broker
referral services. However, industry participants and analysts cited
several potential obstacles to more widespread use of the Internet in
real estate transactions, including restrictions on listing information
on Web sites, some traditional brokers’ resistance to cooperating with
nontraditional firms, and certain state laws and regulations that
prohibit or restrict commission rebates to consumers.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-1005T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David G. Wood at (202)
512-8678 or woodd@gao.gov.
[End of Section]
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to be here today as you consider issues
related to residential real estate brokerage--that is, the bringing
together of buyers and sellers of homes and the provision of related
services by licensed brokers and agents. My statement today is based
primarily on GAO's August 2005 report on the residential real estate
brokerage industry.[Footnote 1]
The fees paid for residential real estate brokerage have increased as
home prices have risen in recent years, well beyond the rate of general
price inflation. While comprehensive data do not exist, REAL Trends, an
industry source, estimated that in 2005 consumers paid about $65.7
billion in real estate brokerage fees related to home sales, up from
approximately $43 billion in 2000. Payments to brokers are typically
percentage commissions, or a percentage of the sales price of the home.
An observed tendency toward uniform commission rates regardless of
local market conditions has led many economists and other observers to
question the level of price competition--that is, the rivalry among
firms to attract clients on the basis of price--in the residential real
estate brokerage industry. While the emergence of the Internet offers
the potential to reduce costs by generating efficiencies and new ways
of doing business, and many consumers now use the Internet to search
for homes and related services such as mortgages, Internet-oriented
brokerage firms represent a small share of the market.[Footnote 2] This
has raised questions concerning potential institutional, legal, and
other barriers to greater "e-commerce" in real estate brokerage.
My statement today discusses (1) factors affecting price competition in
the residential real estate brokerage industry and (2) the status of
the use of the Internet in residential real estate brokerage and
potential barriers to its increased use. In preparing our August 2005
report, we reviewed academic literature and interviewed and obtained
documents from industry analysts, the National Association of Realtors®
(NAR), residential real estate brokerage firms and franchisors, the
Department of Justice (DOJ), the Federal Trade Commission (FTC), and
others. We also reviewed relevant selected state laws and regulations
and state and federal court decisions. Academic studies that we
reviewed for our work are listed at the end of this statement.
In summary:
* While the residential real estate brokerage industry has competitive
attributes--such as a large number of relatively small firms and ease
of entry--competition in this industry appears to be based more on
nonprice factors, such as reputation or level of service, than on
price. Although comprehensive data on brokerage fees are lacking, past
analyses and anecdotal information suggest that commission rates have
persisted in the same range over long periods, regardless of local
market conditions, housing prices, or the cost or the effort required
to sell a home. Our review of the academic literature and interviews
with industry analysts and participants suggested several potential
causes of this apparent lack of price variation. Multiple listing
services (MLS)--the local organizations through which residential real
estate brokers share information about properties for sale--facilitate
cooperation among brokers in a way that can benefit consumers, but it
may also discourage participating brokers from deviating from
conventional commission rates. For example, the practice of showing the
commission that buyers' brokers will receive for cooperating in the
sale of a property may discourage brokers from offering less than the
prevailing commission rate. In addition, some states prohibit brokers
from giving clients rebates on commissions, and some states require or
are considering proposals to require brokers to provide consumers with
a minimum level of service. Although such laws may offer some consumer
protections, DOJ and FTC have argued that they can potentially prevent
price competition or reduce consumers' choice of brokerage services.
* The Internet has increased consumers' access to information about
properties for sale and fostered the growth of Internet-oriented real
estate brokerage models, including some discount brokers and services
that refer clients to brokers. However, industry participants and
analysts cited several potential obstacles to more widespread use of
the Internet in real estate transactions. These obstacles include the
extent to which property information is made available for brokers to
post online, the resistance of some traditional brokers to cooperate
with nontraditional firms, and certain state laws and regulations that
prohibit or restrict commission rebates to consumers.
Background:
Traditionally, real estate brokers have offered a full, "bundled"
package of services to sellers and buyers, including marketing the
seller's home or assisting in the buyer's search, holding open houses
and showing homes, preparing offers and assisting in negotiations, and
coordinating the steps to close the transaction. Because real estate
transactions are complex and infrequent for most people, many consumers
benefit from a broker's specialized knowledge of the process and of
local market conditions. Still, some consumers choose to complete real
estate transactions without a broker's assistance, including those who
sell their properties on their own, or "for-sale-by-owner."
For many years, the industry has used a commission-based pricing model,
with sellers paying a percentage of the sales price as a brokerage fee.
Brokers acting for sellers typically invite other brokers to cooperate
in the sale of the property and offer a portion of the total commission
to whoever produces the buyer. Agents involved in the transaction may
be required to split their shares of the commission with their
brokers.[Footnote 3] Under this approach, brokers and agents receive
compensation only when sales are completed.
In recent years, alternatives to this traditional full-service
brokerage model have become more common, although industry analysts and
participants told us that these alternatives still represented a small
share of the overall market in 2005. Discount full-service brokerages
charge a lower commission than the prevailing local rate, but offer a
full package of services. Discount limited-service brokerages offer a
limited package of services or allow clients to choose from a menu of
"unbundled" services and charge reduced fees on a commission or fee-
for-service basis.
Most local real estate markets have an MLS that pools information about
homes that area brokers have agreed to sell. Participating brokers use
an MLS to "list" the homes they have for sale, providing other brokers
with detailed information on the properties ("listings"), including how
much of the commission will be shared with the buyer's agent. An MLS
serves as a single, convenient source of information that provides
maximum exposure for sellers and facilitates the home search for
buyers. Each MLS is a private entity with its own membership
requirements and operating policies and procedures. According to NAR,
approximately 900 MLSs nationwide were affiliated with the trade
association in 2005. These NAR-affiliated MLSs are expected to follow
NAR's model guidelines for various operational and governance issues,
such as membership requirements and rules for members' access to and
use of listing information. An MLS that is not affiliated with NAR is
not bound by these guidelines.
Individual states regulate real estate brokerage, establishing
licensing and other requirements for brokers and agents. Of the two
categories of state-licensed real estate practitioners, brokers
generally manage their own offices, and agents, or salespeople, must
work for licensed brokers. States generally require brokers to meet
more educational requirements than agents, have more experience, or
both. For the purposes of this statement, I will generally refer to all
licensed real estate practitioners as brokers.
Various Factors Can Influence the Extent of Price Competition in Real
Estate Brokerage:
Some economists have observed that brokers typically compete more on
nonprice factors, such as service quality, than on price. While
comprehensive price data are lacking, evidence from academic literature
and industry participants with whom we spoke highlight several factors
that could limit the degree of price competition, including broker
cooperation, largely through MLSs, which can discourage brokers from
competing with one another on price; resistance from traditional full-
service brokers to brokers who offer discounted prices or limited
services; and state antirebate and minimum service laws and
regulations, which some argue may limit pricing and service options for
consumers.
Real Estate Brokerage Is Characterized More by Nonprice Competition
Than Price Competition:
The real estate brokerage industry has a number of attributes that
economists normally associate with active price competition. Most
notably, the industry has a large number of brokerage firms and
individual licensed brokers and agents--approximately 98,000 active
firms and 1.9 million active brokers and agents in 2004, according to
the Association of Real Estate License Law Officials. Although some
local markets are dominated by 1 or a few large firms, market share in
most localities is divided among many small firms, according to
industry analysts. In addition, the industry has no significant
barriers to entry, since obtaining a license to engage in real estate
brokerage is relatively easy and the capital requirements are
relatively small.
While real estate brokerage has competitive attributes, with a large
number of players competing for a limited number of home listings, much
of the academic literature and some industry participants we
interviewed described this competition as being based more on nonprice
variables, such as quality, reputation, or level of service, than on
price. One reason for this characterization is the apparent uniformity
of commission rates. Comprehensive data on brokerage fees are lacking.
However, past analyses and anecdotal information from industry analysts
and participants indicate that, historically, commission rates were
relatively uniform across markets and over time. Various studies using
data from the late 1970s through the mid-1980s found evidence that the
majority of listings in many communities clustered around the same
rate, exactly 6 percent or 7 percent. Although these studies and
observations do not indicate that there has been complete uniformity in
commission rates, they do suggest that variability has been limited.
Many of the industry analysts and participants we interviewed said that
commissions still cluster around a common rate within most markets, and
they generally cited rates of 5 percent to 6 percent as typical.
Some economists have cited certain advantages to the commission-based
model that is common in real estate brokerage, most notably that it
provides sellers' brokers with an incentive to get the seller the
highest possible price. Moreover, uniformity in commission rates within
a market at a given time does not necessarily indicate a lack of price
competition. But some economists have noted that in a competitive
marketplace, real estate commission rates could reasonably be expected
to vary across markets or over time--that is, to be more sensitive to
housing market conditions than has been traditionally observed. For
example, commission rates within a market at a given time do not appear
to vary significantly on the basis of the price of the home. Thus, the
brokerage fee, in dollar terms, for selling a $300,000 home is
typically about three times the fee for selling a $100,000 home,
although the time or effort required to sell the two homes may not
differ substantially.[Footnote 4] Similarly, commission rates do not
appear to have changed as much as might be expected in response to
rapidly rising home prices in recent years. Between 1998 and 2005, the
national median sales price of existing homes, as reported by NAR,
increased about 74 percent, while inflation over the same period was
about 16 percent, leaving an increase of some 58 percent in the
inflation-adjusted price of housing. According to REAL Trends, average
commission rates among the largest brokerage firms fell from an
estimated 5.5 percent in 1998 to an estimated 5.0 percent in 2005, a
decrease of about 9 percent.[Footnote 5] Thus, with the increase in
housing prices, the brokerage fee (in dollars) for selling a median-
priced home increased even as the commission rate fell.
Some economists have suggested that uniformity in commission rates can
lead brokers to compete on factors other than price in order to gain
market share. For example, brokers might hire more agents in an effort
to win more sellers' listings. Brokers may also compete by spending
more on advertising or offering higher levels of service to attract
clients. Although some of these activities can benefit consumers, some
economic literature suggested that such actions lead to inefficiency
because brokerage services could be provided by fewer agents or at a
lower cost.
To the extent that commission rates may have declined slightly in
recent years, the change may be the result in part of rapidly rising
home prices, which have generated higher brokerage industry revenues
even with lower commission rates. However, competition from increasing
numbers of discount, fee-for-service, and other nontraditional
brokerage models may have also contributed to the decline. These
nontraditional models typically offer lower fees, and although NAR
consultants estimated that nontraditional firms represented only about
2 percent of the market in 2003, these firms may be putting some
downward pressure on the fees charged by traditional brokerages.
Cooperation Facilitated by MLSs and Other Factors May Inhibit Price
Competition:
Factors related to the cooperation among brokers facilitated by MLSs,
some brokers' resistance to discounters, and consumer attitudes may
inhibit price competition within the real estate brokerage
industry.[Footnote 6]
First, while MLSs provide important benefits to consumers by
aggregating data on homes for sale and facilitating brokers' efforts to
bring buyers and sellers together, the cooperative nature of the MLS
system can also in effect discourage brokers from competing with one
another on price. Because participating in an MLS in the areas where
they exist is widely considered essential to doing business, brokerage
firms may have an incentive to adopt practices that comply with MLS
policies and customs. As previously noted, MLSs facilitate cooperation
in part by enabling brokers to share information on the portion of the
commission that sellers' brokers are offering to buyers' brokers. In
the past, some MLSs required participating brokers to charge standard
commission rates, but this practice ended after the Supreme Court
ruled, in 1950, that an agreement to fix minimum prices was illegal
under federal antitrust laws.[Footnote 7] Subsequently, some MLSs
adopted suggested fee schedules, but this too ended after DOJ brought a
series of antitrust actions in the 1970s alleging that this practice
constituted price fixing.[Footnote 8] Today, MLSs no longer establish
standard commission rates or recommend how commissions should be
divided among brokers. MLS listings do show how much sellers' brokers
will pay other brokers for cooperating in a sale, according to industry
participants. When choosing among comparable homes for sale, brokers
have a greater incentive--all else being equal--to first show
prospective buyers homes that offer other brokers the prevailing
commission rate, rather than homes that offer a lower rate. Therefore,
even without formal policies to maintain uniform rates, individual
brokers' reliance on the cooperation of other brokers to bring buyers
to listed properties may help maintain a standard commission rate
within a local area, at least for buyers' brokers. FTC, in a 1983
report, concluded that the cooperative nature of the industry and the
interdependence among brokers were the most important factors
explaining the general uniformity in commission rates that it had
observed in many markets in the late 1970s.
Second, traditional brokers may discourage price competition by
resisting cooperation with brokers and firms whose business models
depart from charging conventional commission rates, according to
several industry analysts and participants with whom we spoke.[Footnote
9] A discount broker may advertise a lower commission rate to attract
listings, but the broker's success in selling those homes, and in
attracting additional listings in the future, depends in part on other
brokers' willingness to cooperate (by showing the homes to prospective
buyers) in the sale of those listings. Some discount full-service and
discount limited-service brokerage firms we interviewed said that other
brokers had refused to show homes listed by discounters. In addition,
traditional brokers may in effect discourage discount brokers from
cooperating in the sale of their listings by offering discounters a
lower buyer's broker commission than the prevailing rate offered to
other brokers. This practice can make it more difficult for discount
brokers to recruit new agents because the agents may earn more working
for a broker who receives the prevailing commission from other
brokers.[Footnote 10] Some traditional full-service brokers have argued
that discount brokers often do less of the work required to complete
the transaction and, thus, deserve a smaller portion of the seller's
commission. Representatives of discount brokerages told us they
believed that reduced commission offers are in effect "punishment" for
offering discounts to sellers and are intended as signals to other
brokers to conform to the typical pricing in their markets.
Finally, pressure from consumers for lower brokerage fees appears to
have been limited, although it may be increasing, according to our
review of economics literature and to several industry analysts and
participants. Some consumers may accept a prevailing commission rate as
an expected cost, in part because that has been the accepted pricing
model for so long, and others may not realize that rates can be
negotiated. Buyers may have little concern about commission rates
because sellers directly pay the commissions. Sellers may be reluctant
to reduce the portion of the commission offered to buyers' brokers
because doing so can reduce the likelihood that their homes will be
shown. In addition, home sellers who have earned large profits as
housing prices have climbed in recent years may have been less
sensitive to the price of brokerage fees. However, some brokers and
industry analysts noted that the growth of firms offering lower
commissions or flat fees has made an increasing number of consumers
aware that there are alternatives to traditional pricing structures and
that commission rates are negotiable.
Some State Laws and Regulations Can Affect Price Competition:
Although state laws and regulations related to real estate licensing
can protect consumers, DOJ and FTC have expressed concerns that laws
and regulations that restrict rebates to consumers or require minimum
levels of service by brokers may also unnecessarily hinder competition
among brokers and limit consumer choice.
As of July 2006, at least 12 states appeared to prohibit, by law or
regulation, real estate brokers from giving consumers rebates on
commissions or appeared to place restrictions on this
practice.[Footnote 11] Proponents said such laws and regulations help
ensure that consumers choose brokers on the basis of the quality of
service as well as price, rather than just on the rebate being offered.
Opponents of antirebate provisions argued that such restrictions serve
only to limit choices for consumers and to discourage price competition
by preventing brokers from offering discounts. Opponents also noted
that offering a rebate is one of the few ways to reduce the effective
price of buyer brokerage services, since commissions are typically paid
wholly by the seller.[Footnote 12] In November 2005, DOJ and the
Kentucky Real Estate Commission settled a suit in which DOJ had alleged
that the commission's administrative regulation banning rebates
violated federal antitrust law. In its complaint, DOJ argued that the
regulation unreasonably restrained competition to the detriment of
consumers, making it more difficult for them to obtain lower prices for
brokerage services.[Footnote 13] Pursuant to the approved settlement
agreement, the commission put in place emergency regulations permitting
rebates and other inducements as long as they are disclosed in writing.
In addition, as of July 2006, 12 states appeared to be considering or
to have passed legislation that requires brokers to provide a minimum
level of service when they represent consumers.[Footnote 14] Such
provisions generally require that when a broker agrees to act as a
consumer's exclusive representative in a real estate transaction, the
broker must provide such services as assistance in delivering and
assessing offers and counteroffers, negotiating contracts, and
answering questions related to the purchase and sale process. Advocates
of minimum service standards argued that they protect consumers by
ensuring that brokers provide a basic level of assistance. Furthermore,
full-service brokers argued that such standards prevent them from
having to unfairly shoulder additional work when the other party uses a
limited-service broker. Opponents of these standards argued that they
restrict consumer choice and raise costs by impeding brokerage models
that offer limited services for a lower price.[Footnote 15] Between
April and November 2005, DOJ wrote to state officials in Oklahoma and
New Mexico, and DOJ and FTC jointly wrote to officials in Alabama,
Michigan Missouri, and Texas discouraging adoption of these states'
proposed minimum service laws and regulations. The letters argued that
the proposed standards in these states would likely harm consumers by
preventing brokers from offering certain limited-service options and
therefore requiring some sellers to buy brokerage services they would
otherwise choose to perform themselves. They also cited a lack of
evidence that consumers have been harmed by limited-service brokerage.
Despite the concerns raised by DOJ and FTC, the governors in Alabama,
Missouri, Oklahoma, and Texas subsequently signed minimum service
standards into law.
The Internet Has Increased Consumers' Options, but Several Factors
Could Limit Its Wider Use:
The Internet has increased consumers' access to information about
properties for sale and has facilitated new approaches to real estate
transactions. Whether the Internet will be more widely used in real
estate brokerage depends in part on the extent to which listing
information is widely available. Like discount brokerages, Internet-
oriented brokerage firms, especially those offering discounts, may also
face resistance from traditional brokers and especially may be affected
by state laws that prohibit them from offering rebates to consumers.
The Internet Allows Consumers More Direct Access to Information and
Facilitates Alternative Service and Pricing Options:
The Internet allows consumers direct access to listing information that
has traditionally been available only from brokers. Before the Internet
was widely used to advertise and display property listings, MLS data
(which comprise a vast majority of all listings) were compiled in an
"MLS book" that contained information on the properties listed for sale
with MLS-member brokers in a given area. In order to view the listings,
buyers generally had to use a broker, who provided copies of listings
that met the buyer's requirements via hard copy or fax. Today,
information on properties for sale--either listed on an MLS or
independently, such as for-sale-by-owner properties--is routinely
posted on Web sites, often with multiple photographs or virtual tours.
Thus, the Internet has allowed buyers to perform much of the search and
evaluation process independently, before contacting a broker.[Footnote
16] Sellers of properties can also benefit from the Internet because it
can give their listings more exposure to buyers. Sellers may also use
the Internet to research suitable asking prices for their homes by
comparing the attributes of their houses with others listed in their
areas.
Although Internet-oriented brokerages and related firms represented
only a small portion of the real estate brokerage market in 2005, the
Internet has made different service and pricing options more widely
available to consumers. Among these options are full-service and
limited-service discount brokerages, information and referral
companies, and alternative listing Web sites.
* Full-service discount brokerages offer buyers and sellers full-
service real estate brokerage services but advertise lower than
traditional commissions, for example between 3 percent and 4.5 percent.
These types of brokerages existed before widespread use of the
Internet, but many have gained exposure and become more viable as a
result of the Internet. In addition, by posting listings online,
displaying photographs and virtual tours of homes for sale, and
communicating with buyers and sellers by e-mail, some of these
companies say that they have been able to cut brokerage costs.
* Limited-service discount brokerages provide fewer services than full-
service brokerages but also charge lower commissions or offer their
services for flat fees. For example, some firms charge a flat fee for
marketing and advertising homes and, for additional fees, will list a
property in the MLS and show the home to prospective buyers. The
Internet has allowed these firms to grow in number and size in recent
years, in part because they can market their services to a larger
population of buyers and sellers.
* Information and referral companies provide resources for buyers and
sellers--such as home valuation tools and access to property listings-
-and make referrals of those consumers to local brokers.[Footnote 17]
Some of these companies charge referral fees to brokers and then rebate
a portion of that fee back to buyers and sellers. The Internet allows
these companies to efficiently reach potential consumers and offer
those customers services and access to brokers.
* Alternative listing Web sites offer alternatives to the MLS, allowing
sellers who want to sell their homes themselves to advertise their
properties to buyers and giving buyers another source of information on
homes for sale. These alternative listing sites include the Web sites
of local newspapers, Craigslist, and "for-sale-by-owner" Web
sites.[Footnote 18]
Wider Use of the Internet in Real Estate Brokerage Will Depend on the
Availability of Listing Information and Other Factors:
Several factors could limit the extent to which the Internet is used in
real estate transactions. A key factor is the extent to which
information about properties listed in an MLS is widely available.
Currently, buyers may view MLS-listed properties on many Web sites,
including broker and MLS Web sites and on NAR's Realtor.com Web site.
The real estate brokerage industry has faced controversy over the
public availability of listings on the Internet and over whether
brokers can restrict the display of their listings on other brokers'
Web sites.[Footnote 19] Proponents of allowing such restrictions argued
that listings are the work product, and thus the property, of the
selling broker, who should have control over how the listings are used.
Opponents argued that such control would unfairly limit Internet-
oriented brokers' ability to provide their clients with access to MLS
listings through their Web sites.
Even with few restrictions on the availability of information about
properties for sale, Internet-oriented brokerage firms may face other
challenges. First, Internet-oriented brokers with whom we spoke
described resistance, similar to that previously described, involving
some traditional brokerages that refused to show the Internet-oriented
brokerages' listed properties or offered them buyers' brokers
commissions that were less than those offered to other brokers.
However, the online availability of listing information may discourage
such behavior by enabling buyers to more easily detect whether a broker
is avoiding other brokers' listings that are of interest. Second, some
Internet-oriented companies said that state antirebate laws and
regulations could affect them disproportionately, since their business
models often were built around such rebates. Finally, other factors,
such as the lack of a uniform technology to facilitate related
processes--such as inspection, appraisal, financing, title search, and
settlement--may inhibit the use of the Internet for accomplishing the
full range of activities needed for real estate transactions.
Mr. Chairman, this concludes my prepared statement. I would be happy to
answer any questions at this time.
Contacts and Acknowledgments:
For further information on this testimony, please contact David G. Wood
at (202) 512-8678. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
statement. Individuals making key contributions to this testimony
include Jason Bromberg, Tania Calhoun, Julianne Stephens Dieterich, and
Cory Roman.
Bibliography:
This bibliography includes articles from our review of literature on
the structure and competitiveness of the residential real estate
brokerage industry.
Anglin, P. and R. Arnott. "Are Brokers' Commission Rates on Home Sales
Too High? A Conceptual Analysis." Real Estate Economics, vol. 27, no. 4
(1999): 719-749.
Arnold, M.A. "The Principal-Agent Relationship in Real Estate Brokerage
Services." Journal of the American Real Estate and Urban Economics
Association, vol. 20, no. 1 (1992): 89-106.
Bartlett, R. "Property Rights and the Pricing of Real Estate
Brokerage." The Journal of Industrial Economics, vol. 30, no. 1 (1981):
79-94.
Benjamin, J.D., G.D. Jud and G.S. Sirmans. "Real Estate Brokerage and
the Housing Market: An Annotated Bibliography." Journal of Real Estate
Research, vol. 20, no. 1/2 (2000): 217-278.
-----"What Do We Know about Real Estate Brokerage?" Journal of Real
Estate Research, vol. 20, no. 1/2 (2000): 5-30.
Carney, M. "Costs and Pricing of Home Brokerage Services." AREUEA
Journal, vol. 10, no. 3 (1982): 331-354.
Crockett, J.H. "Competition and Efficiency in Transacting: The Case of
Residential Real Estate Brokerage." AREUEA Journal, vol. 10, no. 2
(1982): 209-227.
Delcoure, N. and N.G. Miller. "International Residential Real Estate
Brokerage Fees and Implications for the US Brokerage Industry."
International Real Estate Review, vol. 5, no. 1 (2002): 12-39.
Epley, D.R. and W.E. Banks. "The Pricing of Real Estate Brokerage for
Services Actually Offered." Real Estate Issues, vol. 10, no. 1 (1985):
45-51.
Federal Trade Commission. The Residential Real Estate Brokerage
Industry, vol. 1 (Washington, D.C.: 1983).
Goolsby, W.C. and B.J. Childs. "Brokerage Firm Competition in Real
Estate Commission Rates." The Journal of Real Estate Research, vol. 3,
no. 2 (1988): 79-85.
Hsieh, C. and E. Moretti. "Can Free Entry Be Inefficient? Fixed
Commissions and Social Waste in the Real Estate Industry." The Journal
of Political Economy, vol. 111, no. 5 (2003): 1076-1122.
Jud, G.D. and J. Frew. "Real Estate Brokers, Housing Prices, and the
Demand for Housing." Urban Studies, vol. 23, no. 1 (1986): 21-31.
Knoll, M.S. "Uncertainty, Efficiency, and the Brokerage Industry."
Journal of Law and Economics, vol. 31, no. 1 (1988): 249-263.
Larsen, J.E. and W.J. Park. "Non-Uniform Percentage Brokerage
Commissions and Real Estate Market Performance." AREUEA Journal, vol.
17, no. 4 (1989): 422-438.
Mantrala, S. and E. Zabel. "The Housing Market and Real Estate
Brokers." Real Estate Economics, vol. 23, no. 2 (1995): 161-185.
Miceli, T.J. "The Multiple Listing Service, Commission Splits, and
Broker Effort." AREUEA Journal, vol. 19, no. 4 (1991): 548-566.
-----"The Welfare Effects of Non-Price Competition Among Real Estate
Brokers." Journal of the American Real Estate and Urban Economics
Association, vol. 20, no. 4 (1992): 519-532.
Miceli, T.J., K.A. Pancak and C.F. Sirmans. "Restructuring Agency
Relationships in the Real Estate Brokerage Industry: An Economic
Analysis." Journal of Real Estate Research, vol. 20, no. 1/2 (2000): 31-
47.
Miller, N.G. and P.J. Shedd. "Do Antitrust Laws Apply to the Real
Estate Brokerage Industry?" American Business Law Journal, vol. 17, no.
3 (1979): 313-339.
Munneke, H.J. and A. Yavas. "Incentives and Performance in Real Estate
Brokerage." Journal of Real Estate Finance and Economics, vol. 22, no.
1 (2001): 5-21.
Owen, B.M. "Kickbacks, Specialization, Price Fixing, and Efficiency in
Residential Real Estate Markets." Stanford Law Review, vol. 29, no. 5
(1977): 931-967.
Schroeter, J.R. "Competition and Value-of-Service Pricing in the
Residential Real Estate Brokerage Market." Quarterly Review of
Economics and Business, vol. 27, no. 1 (1987): 29-40.
Sirmans, C.F. and G.K. Turnbull. "Brokerage Pricing under Competition."
Journal of Urban Economics, vol. 41, no. 1 (1997): 102-117.
Turnbull, G.K. "Real Estate Brokers, Nonprice Competition and the
Housing Market." Real Estate Economics, vol. 24, no. 3 (1996): 293-316.
Yavas, A. "Matching of Buyers and Sellers by Brokers: A Comparison of
Alternative Commission Structures." Real Estate Economics, vol. 24, no.
1 (1996): 97-112.
Yinger, J. "A Search Model of Real Estate Broker Behavior." The
American Economic Review, vol. 71, no. 4 (1981): 591-605.
Zumpano, L.V. and D.L. Hooks. "The Real Estate Brokerage Market: A
Critical Reevaluation." AREUEA Journal, vol. 16, no. 1 (1988): 1-16.
(250308):
FOOTNOTES
[1] GAO, Real Estate Brokerage: Factors That May Affect Price
Competition, GAO-05-947 (Washington, D.C.: Aug. 31, 2005).
[2] For the purposes of this statement, the term "Internet-oriented
brokerages" refers to brokerage firms whose business models depend
largely on the Internet. Other brokerage firms may also use the
Internet to varying degrees.
[3] Brokers who operate as part of a franchise may also be required to
share a portion of their commission revenue with the franchise, in
payment for using the brand name and other services.
[4] Some industry participants we met with suggested that it costs more
to market expensive homes, in part because the number of prospective
buyers is smaller. However, we did not identify any data on brokers'
actual costs of marketing homes.
[5] REAL Trends' data did not address the range of or variation among
actual commission rates. REAL Trends estimates average commission rates
by dividing the total gross commission revenue reported by the largest
brokerage firms by their total sales volume.
[6] We made no judgment on the legality of any actions that may inhibit
price competition; such matters were beyond the scope of our work.
[7] United States v. National Association of Real Estate Boards, 339
U.S. 485, 488-89 (1950).
[8] For example, see United States v. Greater Pittsburgh Bd. of
Realtors, 1973-1 Trade Cas. ¶ 74,454 (W.D. Pa. 1973), and United States
v. Los Angeles Realty Bd., 1973-1 Trade Cas. ¶ 74,366 (C.D. Cal. 1973).
In 1971, NAR adopted a policy prohibiting its affiliated MLSs from
fixing or recommending to their members commission rates or fees to be
charged or the percentage division of commissions or fees.
[9] We did not investigate specific instances of alleged resistance to
cooperation, nor did we have information to assess how common such
practices might be.
[10] Conversely, officials from one firm suggested that a broker who
offers lower commissions to other brokers may have difficulty
recruiting or retaining agents because the affected brokers will have
less incentive to cooperate with those agents.
[11] As of July 13, 2006, states that appeared to prohibit or place
restrictions on real estate brokers giving consumers rebates on
commissions included Alabama, Alaska, Iowa, Kansas, Louisiana,
Mississippi, Missouri, New Jersey, North Dakota, Oklahoma, Oregon, and
Tennessee. At the time of our August 2005 report, West Virginia also
restricted rebates, but it no longer does so. We did not review all
states' laws and regulations or evaluate how the states interpret and
apply provisions, so other states also may prohibit or restrict
commission rebates to consumers.
[12] According to economic theory, sellers pass a portion of their
brokerage costs to buyers in the price of the home. By offering a
rebate to the buyer, a broker is in effect offering to offset this
cost.
[13] Complaint, United States v. Kentucky Real Estate Commission, U.S.
Dist. Ct., W.D. Ky., Case No. 3:05CV-188H, at 1, 2 (Mar. 30, 2005).
[14] As of July 13, 2006, Alabama, Delaware, Florida, Georgia,
Illinois, Indiana, Iowa, Missouri, Oklahoma, Texas, Wisconsin, and Utah
had enacted minimum service standards. At that time, Michigan was
considering adopting such standards.
[15] Minimum service standards would not necessarily prohibit a broker
from providing limited advice or service to a client if the broker had
not agreed to act as the consumer's exclusive representative. However,
an MLS may require brokers to have such an agreement in order to enter
a property listing in the MLS.
[16] Before the Internet, a buyer could still learn about properties
without a broker--for example, through newspaper advertisements or by
driving past to view a property. However, the Internet enables
consumers to obtain far more extensive information, including, in some
cases, complete details on the property from the MLS as well as
photographs or a virtual tour.
[17] These information and referral companies typically have a network
of participating real estate brokers in various markets to which they
refer customers. Although many information and referral companies are
themselves licensed real estate brokers, they generally do not directly
provide services typical of a real estate broker, such as showing homes
or negotiating a sales price.
[18] Craigslist is a noncommercial Internet bulletin board that
operates in more than 300 communities in more than 50 countries. Among
other things, users of Craigslist can post or review information on
properties for sale.
[19] On August 31, 2005, NAR's Internet Listing Display policy took
effect, replacing the Virtual Office Web site policy that was in place
when we completed our August 2005 report. Both policies set out
guidelines for how NAR-affiliated MLSs could govern the Internet
display of listing information. The Virtual Office Web site policy
allowed MLS participants to selectively exclude their listings from
display on other participants' Web sites, while the newer policy allows
participants to exclude their listings on either all other
participants' Web sites, or none of them. DOJ filed suit against NAR
alleging that both policies violate federal antitrust laws (Amended
Complaint, United States v. National Association of Realtors, U.S.
Dist. Ct., N.D. Ill., Case No. 05C-5140 (Oct. 4, 2005)).
GAO's Mission:
The Government Accountability Office, the investigative arm of
Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548: