[Quick disclosure: While I admire and respect Jack Ryan, CEO of REX, and count him as one of my friends, I have no business relationship with REX, apart from using them for a home purchase. I have spoken to REX prior to writing this post to make sure that I do not violate any confidentiality and to protect any sources.]
Shortly after I posted my quick reactions to the DOJ-NAR lawsuit-cum-settlement, I received a press release from REX. It was interesting for a variety of reasons, but one sentence jumped out at me. I copy and paste from the email:
– The DOJ’s lawsuit, filed today, alleges that the National Association of Realtors “established and enforced illegal restraints” on competition in the market. Traditional brokers extract approx. $60B in fees annually from consumers; this is a step in ending that.
– REX Real Estate has been working with the DOJ, giving evidence of NAR’s brokers locking us out of the field.
– This is huge news for lower and middle-class Americans hoping to enter the real estate market: https://newsroom.rexhomes.com/p/inequities-in-homeownership-drive
– REX’s Mission: We unsettle the traditional residential real estate transaction and those who have benefitted from it for decades—brokerages and their brokers. Through data, AI, better tech tools, and an honest approach to every customer relationship, REX remakes the industry, putting home buyers and sellers first, and the priority of a fast commission last. [All emphasis in original email]
We also have this in REX newsroom:
Statement from Jack Ryan, REX’s CEO and Co-Founder:
“As the tech company founded to upset the old real estate industry by offering much lower fees and better experiences for homeowners, REX and our customers have firsthand experience with the predatory real estate broker behavior that the DOJ’s action today addresses. We have been working with the DOJ to share with them the many ways that the NAR and the MLS set their practices to extract money from home buyers and sellers.
“We applaud the DOJ for demanding that big real estate and their agents quit concealing $60 billion of excess annual fees that Americans pay, and the brazenly anti-competitive practices that make it two to three times more expensive to sell a home in the U.S. than anywhere else in the developed world.
REX built itself as the singular consumer-first solution in real estate, and we will continue to develop products and services that bring trust and transparency—long absent, as shown in DOJ’s complaint—to buying and selling a home. We will continue to put the customer first at REX.”
I think this revelation puts the whole DOJ-NAR situation in a slightly different light.
REX might be a tiny little company you haven’t paid any attention to, but Jack Ryan is genuinely in the Masters of the Universe category. Him being the driving force behind this is different than say Joshua Hunt from Trelora, another disruptor and one of the Seven Most Interesting People in Real Estate of 2018 being the driving force.
Meet Jack Ryan
So first, let’s look at Mr. Jack Ryan. I recorded a podcast with him last year that you might want to go back and listen to, at least the first 30 minutes or so, because the audio cut out thanks to a malfunction. 🙁
But I did write him up as one of the Seven Most Interesting People in Real Estate of 2019. So go read that.
Seriously, he’s a super-impressive guy… and I realize some people will want to paint him as the devil incarnate, but… he’s one of the nicest, most down-to-earth guys you’ll ever meet. But let’s talk about Jack Ryan in terms of his views and his impact on the industry.
More interesting for our purposes is this video:
There are two reasons why.
One, listen to what Jack lays out. I know it might infuriate you, and you might not agree with how he phrases the facts, but I’m not sure how you actually argue against the facts themselves.
Two, and potentially more important, is the guy sitting next to Jack Ryan wearing the pink tie. That is one Dr. Ben Harris, an economist from Kellogg School of Management. Listen to what he says.
I wrote at some length about this panel in this post back in 2019. Let me excerpt the part where I talked about what Ben Harris said:
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 [study]. 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. [Emphasis added]
Who is Ben Harris?
So who is this guy? Well, here’s a profile of one Ben Harris from the New York Times titled, “The Quiet Architect of Biden’s Plan to Rescue the Economy:”
Penny Pritzker, the billionaire commerce secretary under President Barack Obama, would lead off with an overview of Mr. Biden’s plans. But the worried capitalists always wanted details, and for that, Ms. Pritzker would turn over the video calls to the little-known fulcrum of the Biden campaigns economic policymaking: a 43-year-old tax and budget specialist named Ben Harris.
Mr. Biden has a sprawling and secretive orbit of economists offering him policy advice as he seeks to pacify an insurgent liberal wing of economic thinkers within the Democratic Party and the business leaders who still feel mistreated by the Obama-Biden administration. Mr. Harris, an economist who is relatively anonymous even to other economists, has taken a starring role in both efforts.
A former chief economist for Mr. Biden in the White House, Mr. Harris helped fashion a campaign agenda from the work of a small inner circle and hundreds of outside economists and sell it to the donors, executives, labor unions and activists whom Mr. Biden needs behind him to win the election. He has two other jobs but works up to 50 hours a week for Mr. Biden, unpaid.
In his efforts, people in and outside of the campaign say, Mr. Harris has become a sort of policy avatar for Mr. Biden, molding new ideas into the candidate’s longstanding brand of middle-class economics and changing his sales pitch to meet his audience. Before Mr. Biden even announced his campaign, Mr. Harris was attending senior staff meetings at the vice president’s home to help develop an economic platform.
Um. Ben Harris is the brain behind Biden’s economic policies, and is likely to be extraordinarily influential in a Biden Administration. He may be the next chair of the Council of Economic Advisors, for example.
Furthermore, I am told by REX executives that Harris is an advisor to REX, and I imagine he was consulted when REX was working with the DOJ. (A while back, I recorded a podcast/video for REX talking about my experience as a customer, and Ben Harris was the other guest.) Various Democrat loyalists in real estate are making fun of two other REX advisors, Chris Christie and Jeb Bush, who tweeted support for the DOJ lawsuit and for REX, because they are Republicans and not widely seen as geniuses.
They’re not realizing who the real power behind the Guy is… and not realizing who the real power behind the guy behind the Guy is….
In any event, so what does Harris think about housing? About real estate brokerage?
The excerpt from my post above shows clearly that Harris believes there is significant steering going on, and that there’s some funny business happening in real estate. Then here’s my conclusion from the writeup:
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.
Finally, here’s an Op/Ed in the Wall Street Journal titled, “Why the Cost of Buying and Selling a Home Remains High–and What We Can Do About It” by one Ben Harris. (Firewalled) It makes for an interesting read.
Why It’s Relevant
Once I saw the tweets and the press releases saying that REX was the company behind the DOJ lawsuit, things started to click into place. Obviously, Ben Harris and REX have a close relationship. Jack Ryan is a mover and a shaker, and so is Harris. The Department of Justice has political appointees, but it also has staff attorneys and staff economists who stick around one administration after another.
There is no doubt in my mind that Ryan and Harris have relationships with and influence on some of the professionals at the DOJ, and likely with some of the political appointees as well. They have all, I think, concluded that there are significant shenanigans going on with commissions in real estate, and that there is quite a bit of steering by buyer agents that cause problems. That fits right in with the theory of the plaintiffs in Moehrl and Sitzer.
What this means is that no matter who is ultimately declared the winner of the Presidential election, the DOJ will remain hot and heavy on the heels of NAR and the MLS.
It also means that I can’t see a full resolution between NAR and the DOJ short of doing away with cooperation and compensation entirely. Whether that happens via Moehrl and Sitzer, or via legislation, or via direct DOJ action, or via federal regulation, I don’t know. I suspect that the DOJ would prefer to have it happen via the private civil lawsuits so they don’t have to get directly involved, but I also suspect that the DOJ would get directly involved if they have to, particularly under a Biden Administration where Dr. Harris will have a very significant role in economic policy.
One More Thing…
Finally, in this context, we simply cannot ignore the racial angle to housing that has now been raised to the forefront of everybody’s awareness.
Start with Jack Ryan’s view on race and real estate, from this post on the REX website:
Closing the racial wealth gap is an economic imperative, but the outsized importance of home equity means it will never happen unless we eliminate bias in housing markets. We will never eliminate this bias as long as consumers are subject to the unseen incentives of their agents. If you want to change the score, sometimes you have to change the rules of the game.
He connects the racial wealth gap to steering by buyer agents, the practice that the DOJ, Moehrl and Sitzer lawyers, and Ben Harris find problematic.
Let’s continue to this article from the Columbian talking about how the Biden economic plan is deeply concerned with systemic racism:
“To have true justice in America, we need economic justice,” Biden said this week in Philadelphia. “The moment has come for our nation to deal with systemic racism, to deal with the growing economic inequality in our nation and to deal with the denial of the promise of this nation.”
Remember that Ben Harris is a key advisor, and the “quiet architect” of the Biden economic plan. There is little chance that Biden says that line without Harris having something to do with it.
Now read this article from Bloomberg, hardly a right-wing media outlet, titled “Biden Fills Economic Posts With Experts on Systemic Racism.” Key grafs:
When it comes to economic policy, President-elect Joe Biden is putting racial disparities high on the agenda as he assembles his administration.
The incoming president tapped Mehrsa Baradaran, whose book “The Color of Money” is a key reference on the racial wealth gap, to prepare the Treasury Department for the transition. She’s joined by Lisa Cook, an economist at Michigan State University, on the “landing team” for the Federal Reserve and banking and securities regulators. They are among more than 500 experts who will focus on race as they shape Biden’s policies on issues like housing, health and small-business lending. Baradaran declined to comment, and Cook referred questions to the Biden team.
Observers say they’ve never seen expertise about race figure so prominently in economic roles.
Of course, the Biden Administration will be coming into power (if it does) not too long after Long Island Divided, and the disastrous performance by real estate brokers and agents during the NYS Senate hearings on the topic. I can all but assure you that the NYS Senate (almost all Democrats) will be talking with the Biden team, if they haven’t already. The NYS Senate has its own plans for brokers and agents in New York, I imagine, but they’re not going to pass up the chance to help drive policy at the national level.
At said national level, much of the economic policy will be set by hundreds of experts who will focus on race as they shape policy on housing… led by one Dr. Ben Harris… who thinks that steering by real estate agents is a major reason why the wealth gap exists.
And last, but not least, we have late breaking news that the new President of NAR, Charlie Oppler, has issued a formal apology for past misdeeds by REALTORS and by REALTOR Associations on race:
CHICAGO (November 19, 2020) – Newly-installed National Association of Realtors® President Charlie Oppler issued a formal apology Thursday for the association’s past policies that contributed to segregation and racial inequality in America. During a virtual fair housing summit hosted by The Hill and co-sponsored by NAR, Oppler offered an emotional apology on behalf of the industry for NAR’s actions during a large part of the 20th century.
“What Realtors® did was an outrage to our morals and our ideals. It was a betrayal of our commitment to fairness and equality. I’m here today, as the President of the National Association of Realtors®, to say that we were wrong,” Oppler said. “We can’t go back to fix the mistakes of the past, but we can look at this problem squarely in the eye. And, on behalf of our industry, we can say that what Realtors® did was shameful, and we are sorry.”
When the new Biden economic team, staffed with more experts on systemic racism than ever before, guided by Ben Harris whose views on real estate industry is in lockstep with Jack Ryan’s views, comes to NAR whether informally or through the DOJ and says, “Hey, we need you guys to cut it out with the whole sellers paying buyer agents, and all these shenanigans with the MLS,” what exactly can NAR say in response?
How do you argue against dismantling a system that experts on systemic racism point to as causing racial inequality when you have just apologized and said what REALTORS did was shameful, and you’re sorry?
“Well, we didn’t mean that system that keeps commissions high,” is not likely to go over that well with the systemic racism experts in the new Biden economic team, is it?
Strong Motivation, Abiding Interest
The real estate industry as a whole has not changed much over the years; it doesn’t change much because of the nature of the business and because real estate brokers and agents resist change. The MLS and Associations haven’t changed much because they really resist change. And history is littered with corpses of companies that come in saying they’re going to change everything, fail, and fade away.
Plus, the DOJ has sued NAR and various local Associations and local MLSs over the years, and that hasn’t changed things very much.
So there are good reasons to think that things really won’t change very much this time around.
REX and Jack Ryan change things a bit, and in an important way. Unlike the federal government, REX and Ryan have a very strong motivation to create change. I’m fairly confident that Ryan isn’t running REX to make a fortune; he’s already a rich guy, because partners at Goldman Sachs were not and are not poor people. In that sense, Jack Ryan is the closest thing we have to a Rich Barton on the brokerage side: someone working hard not to make a ton of money, but to change the world.
That motivation to drive permanent change, coupled to the fact that Jack Ryan likely has Ben Harris on the team, and having Harris on the team means he has the Biden Administration on the team, means that unlike previous challenges to the structure of the industry… this one has real legs.
This doesn’t mean NAR is helpless, or that the industry can’t fight back, or any such thing. It simply means that the combination of everything together suggests that this threat is a bit different from other threats the industry has faced.
I honestly can’t think of a stronger reason for MLS and Associations and brokers and agents and technology companies and everybody else to start making “what if” contingency plans. Whatever strategic plans you crafted can and probably should be tossed in the trash; you have to redo them in light of this development. You don’t have to redo them with me — this is not a sales pitch — but the future of the industry as a whole is no longer as certain as it was a few days ago.
My original pick for the song to accompany this was Rex Tremendae, from Mozart’s Requiem. But I think there’s an ever better fit, given what’s headed our way: Dies Irae…
Dies irae, dies illa
Solvet saeclum in favilla,
teste David cum Sibylla.
Quantus tremor est futurus,
quando judex est venturus,
cuncta stricte discussurus!