By ALAN MURRAY
Staff Reporter of THE WALL STREET JOURNAL
Alan Greenspan thinks homeowners are powering consumer spending. I have
an additional culprit: Realtors.
Think about it. If you or I sell a house, we have to turn around and buy
another one -- minus moving expenses, closing costs, origination fees,
etc. No cause for a spending spree there.
But the real-estate brokers walk away with, on average, a neat 5% of the
sale. When I sold my inflated house in Washington, D.C., last month (in
order to purchase an inflated house in Fairfield County, Conn.), the
brokers earned enough to build their own house in most parts of the
world.
Of course, they do some work for that money. Most people don't sell
houses that often in life. Having a trusted professional who can help
them price it, prepare it, show it and negotiate multiple offers is
certainly of value. For that, real-estate brokers deserve something.
But 5%? With a report this week showing existing home prices up nearly
16% in the past year, and the median price now at $220,000, that large
commission amounts to a rapidly increasing windfall -- even as
technology, arguably, should be making Realtors' work easier.
It's remarkable that in today's economy, this classic middleman business
model survives -- and not just survives, but flourishes, like a hardy
breed of insect. There are more Realtors out there today -- 1.2 million
-- than there were a decade ago.
Compare that with what happened to stockbrokers, a similar breed who saw
their commissions fall from dollars to pennies over the course of three
decades. Or look at the even more dramatic fate of travel agents, whose
commissions on airline travel plummeted from 12% to nothing between 1995
and 2002.
In an age when information was scarce, Realtors could claim big
commissions, because they controlled the gold -- the information on
houses for sale. But in an age when information is ubiquitous, it's hard
to understand how they continue to rake in such fees.
For those willing to use it, the Internet has revolutionized the process
of buying a house. In Connecticut, we signed up for a service called
MLS-Pulse, provided through a local RE/Max agent. Every time a house
came on the market that matched our specifications, I automatically
received an email with the details. More than once, I was the first
person to see a house after it went on the market.
This was a great service, and a breeze for my agent, who waited for me
to call and tell him which houses I wanted to see. Then he called the
listing agent, and both showed up and formed a phalanx as I toured the
home -- protecting their respective commissions.
In theory, this dramatic change in technology should not only result in
a different way of doing business, but also dramatically lower
commissions. So far, however, it hasn't.
The relative absence of discounting has prompted the Justice Department
to charge that the National Association of Realtors is using illegal
tactics to fend off Internet competition by allowing brokers to keep
their house listings off such services. "Consumers benefit when
real-estate brokers are free to compete vigorously by offering
innovative services," says J. Bruce McDonald, the deputy assistant
attorney general for antitrust.
Steve Cook, vice president for public affairs for the National
Association of Realtors, says the Justice Department's case is based on
a rule that no longer exists, and that the department has informed the
group it's revising its complaint. "It's kind of difficult to respond
until we know what we're responding to," he says.
Mr. Cook also disputes the notion that the Realtors' business model is
obsolete. "There is a major difference between real estate and the other
products you mentioned," he says. "Airplane seats are all basically the
same. Shares of stock are all basically the same. But houses are all
different." That, he says, is why skilled professionals are needed.
I'm more inclined to agree with Eric Danziger, chief executive of
Internet home seller ZipRealty Inc. "We have an industry that truly has
not changed since Dwight Eisenhower was President," he says. "That's
principally because people in the industry don't want it to."
My guess is that change will come eventually, regardless of the fate of
the Justice Department's suit. Realtors won't disappear. But like travel
agents, they'll shrink in number and find new ways to create value for
their clients.
Once that happens, attention can turn to another remaining member of the
Overpaid Middleman's Club: Investment bankers.
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