By Steven Pearlstein
Washington Post
Wednesday, May 18, 2005; E01
R.Hewitt Pate will never make the list of aggressive antitrust
enforcers. But on his way out the door as assistant attorney general,
Pate has launched a laudable campaign to bring price competition to one
of the last outposts of cartel-like behavior.
I'm talking, of course, about residential real estate agents and
brokers. Theirs is an industry in which consolidation and time-saving
technology have not only not saved consumers any money, but also
coincided with steep price increases. It is an industry that has used
its political muscle in a number of states to ward off competition from
discounters. And at a time when the Internet has wiped out legions of
other middlemen in other industries while squeezing the incomes of those
who are left, the number of real estate agents has continued to climb
along with their income.
In recent months, Pate has sent letters to legislators in Oklahoma and
Texas warning against adoption of industry-inspired proposals that would
have blocked or limited competition from Internet brokers or discounters
offering something less than full-service representation. The department
also opened an investigation in Oklahoma, where discount brokers claimed
that their full-commission competitors were refusing to bring clients to
see the houses they listed, in clear violation of their professional
duty.
More recently, Pate sued to block Kentucky regulators from banning
rebates by real estate firms to their customers. In that suit, the
Justice Department cited the views about rebates of a number of agents
recently surveyed by the Kentucky Real Estate Commission.
"This would turn into a bidding war, lessen our profits and cheapen our
so-called profession," declared one horrified agent.
"They could lead to competitive behavior," said another.
We wouldn't want that now, would we?
Looming large in all this is the Internet, which threatens to break the
exclusive hold that local Realtor groups have had on information and
information channels vital to buyers and sellers. The Internet has made
it easier for buyers and sellers to go through the process without
agents. And it has provided an opening for lower-cost brokers offering
limited services.
In response, the National Association of Realtors announced a policy at
the end of 2003 that would have given traditional brokers the option of
withholding their listings on the regional Multiple Listing Services
from any brokers they chose (read: discounters). But after more than a
year of investigating, Justice last week forced the Realtors to withdraw
the new policy.
"We work very hard to get these listings," complains Long & Foster's Wes
Foster, reflecting the industry view that such information is the
listing agent's private property. "It is simply unfair to require us to
pay these 'discounters' to sell us back our own listings."
I have no quarrel with the idea that agents should be paid for their
experience, their knowledge and the time they spend developing
relationships and showing houses. But we already know that Foster and
his agents are happy with the standard practice of taking 2.5 to 3
percent of the sale price as their share of the commission. Why should
they care what arrangements buyers have with their agents? The answer is
that to most people, it appears as if the seller is paying for the
services of both agents -- after all, at the closing, commissions are
deducted from the seller's proceeds. But as any economist would tell
you, the opposite is the case: It is the buyer who pays through the
higher, commission-adjusted purchase price demanded by the seller. That
convoluted arrangement misaligns the agents' incentives, stifles
innovation and prevents efficient, competitive pricing.
The solution is pretty simple: Have buyers and sellers each pay their
own agents at a price and service level they negotiate beforehand.
That's the way it works in most other industries. And if the real estate
industry was as open to competition and as committed to putting
consumers' interests first, that's how it would work for them as well.
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