I just spent an hour glued to the TV, absolutely fascinated by what I was seeing and hearing. And no, it wasn’t the latest episode of Game of Thrones (which was rather disappointing in many ways… but I digress). I watched something normal human beings likely would not, since there are only 162 views on YouTube as I write this.
I watched a panel discussion that went down at the Brookings Institute. The event took place on May 8th, and was called, “Zoning, taxing, hoarding: Housing policies for the middle class.” Here’s the intro to the event from Brookings itself:
Over the past decade, housing costs in the United States have risen faster than incomes. While housing affordability has long been a problem for low-income families, middle-income families are increasingly facing affordability challenges, especially in urban areas with strong labor markets. How do current housing policies help – or harm – the well-being of middle-class families?
Yes, I yawned too. A DC-based think tank discussion about zoning and housing policy… wake me up when it’s over, yeah?
But I saw one of the panels shared on Facebook (thanks to Mike Jaquish of Realty Arts). He was angry about it, and at one of the panelists in particular. So I clicked through.
And spent the next hour trying to pick my jaw up off the floor.
For the TL;DR crowd, let me put it like this:
Policymakers either have or are in the process of turning against the real estate industry. Unlike previous times, this time, they know more. They know it all.
Combined with other things happening in society — technology advances, impact of capital, and growing number of lawsuits — the political power of NAR will be challenged as never before.
Since REALTORS across the country are gathering in Washington DC for its Midyear meetings right now, I figure this is a good time for me to write this in the hopes that at least a few of you in DC start realizing it is not business as usual anymore.
Let’s get into it.
Panel 2: Taxes, fees and middle class housing costs
The video you’re going to want to watch is Panel 2: Taxes, fees and middle class housing costs. Here it is:
Much of it is quite boring, and has a lot to do with the pied-a-terre tax in New York City… which was killed off by the real estate lobby in New York. But the commentary from Jack Ryan, CEO of REX, and from Ben Harris, Former Brookings Expert, Executive Director of the Kellogg Public-Private Interface – Kellogg School of Management, are incredible. Harris was also the chief economist for Joe Biden when he was VP, and I can’t imagine he doesn’t have Biden’s ear on economic policy issues. (By the way, Biden is leading the Democratic primaries by quite a lot as of this writing.)
Watch the whole thing.
Some of the key claims and assertions are:
- The cost to sell a home is 2-3 times higher in the U.S. than in developed nations worldwide.
- Every other agency fee in the U.S. is down 80% over last 10 years… except real estate agents, and this while the agents are doing less because of technology.
- There’s a systemic problem here, created and maintained by the real estate industry.
- The MLS is at the heart of that systemic problem, along with regulatory capture.
- The impact of high commissions is enormous social, economic and fiscal costs — including job mobility and homeownership.
This panel was brutal in a rather boring, academic way. Again, the only thing I can say is, watch the video (skip over the parts where they talk about NYC and taxes or whatever if you want).
The Structure of Real Estate
Jack Ryan really kept hammering on the fundamental structure of the residential real estate industry. Of course he would, since his company, REX, is betting that they can succeed outside of that structure. But even when you take his obvious bias into account, he’s not entirely wrong about a lot of what he brings up.
For example, here’s Ryan explaining one reason why the market inefficiencies in real estate persist:
People buy or sell a home once every seven to ten years on average. And it’s pretty complicated. And so they don’t spend a lot of time thinking about it for seven or eight years. Then all of a sudden, all at once, you have to think about buying a home, a broker’s fee, a mortgage rate, insurance, title, escrow, and it’s almost like it’s too much to handle and you need to move into a house by a certain time. So you just kind of pay the man, to use the phrase, right? You just get it over with and all those people along the way you’re dealing with are unsalaried totally commissioned people.
You’re the mark. They know that you need to buy a home in two months. They know that you don’t do this but once every seven years. They know everything and they’re totally commission driven.
So it’s a very bad asymmetric knowledge battle going on there.
He’s not wrong about that. I mean, he’s a bit too hostile to real estate agents, many of whom are motivated more by helping a client achieve his dream of homeownership than by dollars and cents. But it isn’t as if there aren’t a whole lot of real estate agents who are totally commission driven. We all know this, which is why professionalism is such an obsession within the industry.
A bit later, Ben Harris says that the problem is steering:
The question is so why do we have these persistently high Realtor fees. There is some decent evidence that there’s lack of competition in the real estate market. So there’s a couple of reasons why. So economists at Cornell looked at the impact on people when Realtors drop their fees. So all else equal, if you can sell a home for 5.7% instead of 6%, you should go with that. But the problem is one of steering. So when you had discount buyer’s fees, you saw [the buyers] being steered away from those homes and the volume went down, the likelihood of selling the home went down, and the amount of time that you would spend to sell the house went up. So there’s a certain natural disincentive towards offering a lower cost which is that the Realtor would be steered away from the home. And they looked at 650,000 transactions; this was a nationwide. And they found pretty systematic steering going on.
What’s happening too is another sort of indication there might be anti-competition in the Realtor market is that there’s bunching around certain prices. So it’s very common to have your buyers fee be 2.5%; it’s very uncommon for it to be 2.4%, right? And so when you start to see bunching around prices that’s sort of suggestive of anti-competition and that could be what’s going on here.
Those two paragraphs might be used in the Moehrl v. NAR anti-trust case (and the others that have also been filed) that will make its slow way through our legal system. I have said from the start that the key to that case will be the extent to which Realtors engage in steering, despite that steering being against the Code of Ethics and against the law in most cases (fiduciaries do not steer their clients away because of their own financial losses). That prominent and influential economists like Ben Harris thinks the same is not good news for real estate as we know it.
Harris also points out that there is significant regulatory capture at the state level, pointing to various state laws that prohibit competition, such as anti-rebate laws. Ryan agreed, asking what the economic justification is to prevent him from giving money back to his client.
The MLS and Information Transparency
Given my audience, I think the parts where the panel (and really, it’s Harris and Ryan) discusses the MLS are going to be of the greatest interest.
At the heart of that structure is the MLS. REX is not a member of any MLS, and is explicitly out to replace the MLS-based brokerage business with something else. And Ryan points the finger directly at cooperating compensation as the cause of the problems, which means he’s pointing the finger directly at the MLS.
Here’s what he says:
This is the peculiar thing about the industry: there’s the residential real estate agents who join the MLS and there’s one company’s not doing it to the MLS and that’s us. But why does everybody else do it the exact same way?
One is the access to data. The MLS gets the data when you sell a home. They keep it. They hold it to themselves.
Imagine if you could not know what the last share traded was for IBM — the last price and the last volume. You can only get it if you join the Goldman Sachs trading association. Well what would have happened to the price of trading shares? It would have never gone down if you had to ask Goldman Sachs and Morgan Stanley for approval to get the information. So one is the suppression of data.
Now we hire data scientists from Harvard and Stanford MIT to help us predict things and we go around that, but if you’re a normal realtor you can’t get access to the data.
The other thing to share with you about some things why this happens. If you join the MLS, there’s a rule that if you list a home with an MLS agent, you must also offer to pay a buy-side agent’s commission at the same moment. They tie those two together by fiat. To me it’s an illegal tying arrangement: you’d like one service, you must buy another. And you’re supposed to pick the price that you will offer the buy-side agent at the moment you list the home that is never modifiable. So you have to name a price for a buy-side agent for a buyer you don’t know and guess how much they might want to pay, at the moment you sign a listing agreement months before you even met a buyer, right?
There are so many things that they’re doing to constrain competition that results in these fees that are so high relative to almost any other developed country. I can go more — there’s about 20 things that happen, but we’re not a member of it [the MLS].
Once again, if you think this argument will not be brought forth in the Moehrl v. NAR case, you’re more of an optimist than is rational.
At one point, Ryan talked about information transparency:
I think a lot of it has to do with transparency of information because consumers will get themselves involved in this every seven years and they don’t know a lot and all the information is being husbanded by those who does every day for a living who are totally commission driven people. Not that they’re bad people, but the incentives are totally different. The focus, the attention, the knowledge asymmetry is dramatic for the people buying and selling a home.
It caught my ears because what he was saying was so reminiscent of some of the questions that the FTC and DOJ staffers were asking people at last year’s workshop. There were a lot of questions about sold data, about private remarks, about whether consumers could see commission rates, etc. that I thought were a bit odd. Now I know why they were asking those questions.
This Is a Big Deal
Now, nothing may come of this. Think tanks do panels and events all the time and nothing comes of them. They could publish papers and nothing comes of those. But I think this is a bigger deal than most for a few reasons.
First, Brookings Institute is not a run of the mill DC think tank that exists to provide sinecures for various people. It is enormously influential. In fact, from the Wikipedia article on Brookings, we get this:
Brookings traces its history back to 1916 and has contributed to the creation of the United Nations, the Marshall Plan, and the Congressional Budget Office, as well as to the development of influential policies for deregulation, broad-based tax reform, welfare reform, and foreign aid. The annual think tank index published by Foreign Policy ranks it the number one think tank in the U.S. and the Global Go To Think Tank Index believes it is the number one such tank in the world. Moreover, in spite of an overall decline in the number of times information or opinions developed by think tanks are referred to by the U.S. media, of the 200 most prominent think tanks in the U.S., the Brookings Institution’s research remains the most frequently cited.
In a 1997 survey of congressional staff and journalists, Brookings ranked as the first-most influential and first in credibility among 27 think tanks considered. Yet “Brookings and its researchers are not so concerned, in their work, in affecting the ideological direction of the nation” and rather tend “to be staffed by researchers with strong academic credentials”. Along with the Council on Foreign Relations and Carnegie Endowment for International Peace, Brookings is generally considered one of the most influential policy institutes in the U.S.
When ITIF came out talking about how real estate used data monopolies to suppress competition, it created a storm… but ITIF is not Brookings. The research paper by the economists at Cornell (Panle Jia Barwick, Parag A. Pathak, and Maisy Wong) is going to get more looks simply because it was mentioned by Brookings.
Second, if Biden should win the presidency, Ben Harris is going to have a major role in shaping economic policy. Not that that fact will make REALTORS from San Francisco and New York vote for Trump, but it’s not nothing.
Third, the world is changing already. The lawsuits mentioned above could force a change, but those will take years to resolve. Where the lawsuits could have more of an impact is in public perception, especially as media coverage of the massive class action lawsuits grows. Think of the Big Tobacco and asbestos litigations of the past; the government got involved once those got big enough to draw media attention. The same could happen here.
What seems more relevant in the near future are three changes in the business itself: the rise of iBuyer, the rise of institutional real estate, and the decline in the value of buyer agency within the industry. We have spent a lot of pixels on these pages talking about iBuyer and the rise of institutional real estate. We have touched on the decline in the value of buyer agency within the industry, but I think maybe I need to write a fuller treatment on that. Let me start with the high level thoughts, and look to expand on these in future posts.
Buyer agency is dying out within the industry; we haven’t seen the full expression of the trend as yet. But there are a few reasons why I say that:
- Continual domination of the business by agent teams;
- The continual growth of “coming soon” listings as a business strategy, often formalized by brokerages;
- The drive by large brokerages to control the distribution of data, including listings, to deal with eroding margins;
- Others I might be leaving out right now.
I think the root causes of the decline are technology on the one hand, and the never-addressed (by think tanks) issue of professionalism on the other hand. But neither are going to change anytime soon.
Combine all of the above factors with the simple fact that housing costs are out of control in many of the major metro areas of the United States (where by definition most of the people live) and it isn’t all that difficult to see how policymakers and politicians will respond. Most policies will deal with taxes, subsidies, zoning regulations, and so on but there are a few I could easily see affecting the industry directly.
Three Possible Policy Changes
Given the above, I could see policymakers making three changes that are aimed squarely at the real estate industry.
One is to require disclosure of previously confidential data. I think this is the most likely scenario, especially since Canada just did it the hard way, through Competition Bureau v. TREB. I wrote about that in the November Red Dot.
Basically, the Canadian government is requiring that TREB disclose solds, pending solds, withdrawn, expired, suspended or terminated listings, and offers of cooperating compensation commission at least to its own members via VOW. And while I don’t know what has actually been done to date, it is clear what the Canadian government expects will happen:
If you listen to Jack Ryan above, requiring the disclosure of those things is enough to drive commission costs down. Once consumers can see for themselves what a home sold for, or when it went off-market for various reasons, and what the cooperating compensation is, they can negotiate their own commissions with their agents more effectively.
Given the tone and tenor of the questions at the recent FTC/DOJ workshop, I think this change is the most likely to occur. That in turn supercharges institutional real estate companies like REX and Redfin, not to mention iBuyers.
Data Accuracy Requirements
Closely related to information transparency is the likelihood that after requiring such disclosure, there is likely to be some kind of regulation on data accuracy. MLS data is accurate only to the extent that compliance is robust. Most MLSs are excellent at compliance, but as private organizations, their power and authority are quite limited.
As I’ve written about in this post, data compliance in the MLS is a must-fix issue. If the MLS won’t do it, someone else will, because that data is too important to financial institutions:
What we have to realize is that people other than REALTORS and their clients, and companies other than brokerages, and industries other than real estate, rely on and use MLS data. At the top of my list are Wall Street investment banks, credit rating agencies, and giant investment firms.
If and when information transparency becomes required, expect that policymakers will require the industry to ensure that information is accurate and timely. The SEC does it for the stock market; I imagine somebody (HUD? CFPB?) will require it for the housing market.
Finally, given the tenor of the conversation at Brookings, I do think it isn’t out of the question that the government makes changes in sharing of commissions. I am particularly struck by what Ben Harris said about this.
Essentially, he acknowledges that real estate agents provide a valuable service and should be compensated. But he wants far greater variety of services at a greater range of fees, and greater competition on price. The barrier to that greater competition on price is cooperating compensation.
That this is the gravamen of the Moehrl v. NAR lawsuit is not lost on any policymaker anywhere. They might wait a bit to see how the lawsuits play out, but if those are not dismissed soon, it might be easier for everybody involved to have the government step in and work out a resolution. That’s how it played out in the Big Tobacco litigation of the late 90s, with a Master Settlement Agreement between the tobacco companies and most of the states.
This is getting too long. I may have a number of follow-up posts as thing develop. Maybe some of you can comment below on what, if anything, you’d like me to expand on.
I don’t think it’s crazy to say that policymakers and influencers have turned against the real estate industry. Or perhaps the hostility from the depths of the Great Recession never really went away. But I know I haven’t seen this level of skepticism about the fundamental structures and systems of the residential real estate industry in quite some time.
NAR defeated the various ideas ten years ago. NAR might defeat whatever new ideas come up again this time around. But things have changed in the intervening decade.
As various REALTOR leaders get together in Washington DC this week to confer, to make NAR policies, and to visit Capitol Hill, I think it would be wise for them to at least be aware of what is brewing beneath the surface.
Just because you’re paranoid doesn’t mean they’re not after you.