Landmark Settlement Breaks Up the Real Estate Cartel

There are far too many goods and services for which you can say Americans pay the highest prices in the world. One of those outliers was likely put to an end late last week, thanks to a remarkable settlement in a private antitrust case. The outcome shows that too many of America’s high costs are often a function of power, and that the tools to check that power and lower those costs cannot be unilaterally found at the Federal Reserve.

The National Association of Realtors (NAR) has agreed to end the age-old practice of 6 percent agent commissions for residential home sales, which are six times the level of the U.K. According to The New York Times, which first got the news, the settlement could drop U.S. commission costs by as much as 30 percent, which comes out to more than $8,000 on a home sale with the average purchase price of $417,000. It’s not going to suddenly make housing affordable, though the collusive arrangement did tend to drive home prices higher. And given that real estate commissions are a $100 billion-per-year business, we’re talking about $30 billion in savings, a not-incidental amount at a time when housing costs are a primary driver of inflation.

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The end of the 6 percent commission is another example of the intelligent design of the Sherman Antitrust Act, with its private right of action. NAR is a powerful lobby that would have never let this happen if they had the wherewithal to stop it. But it had no politicians or regulators to persuade in this case; a group of Missouri homeowners and their legal team were the chief antagonists.

TYPICALLY IN A REAL ESTATE SALE, sellers pay a commission to their agent to manage creating the listing, making the home available for viewing, accepting offers, and closing the deal. But there’s a form of collusion involved: The buyer’s agent gets a share of that commission. That’s true despite the fact that it’s hard to understand why two agents are essential to a real estate sale. In the past, a buyer’s agent would find listings for clients, but in the age of Zillow and Redfin, purchasers have no problem doing that themselves. Worldwide, buyer agents are involved in only one-third of all sales; in the U.S., it’s about 89 percent.

This persisted because of a cartel-like scheme, coordinated through NAR and major real estate brokers. In the 1990s, NAR set a rule for their agents, known as the cooperative commission rule, requiring that any home listed for sale on a multiple listing service (MLS) include the commission rate that the seller will give to the buyer. Large brokers copy the NAR rule. These rates were allegedly negotiable, but in reality were mandatory. They are also based on percentages of the sale, so if home prices go up, so did the agent’s fee. That gives an incentive to the middlemen in the system to uplift listing prices and buyer offers.

Without getting on the MLS, few prospective homebuyers would see the listing; that’s how you’re finding those homes on Zillow and Redfin. This locks in the commission on both sides of the transaction. The sellers must compensate the buyer’s agent, and they coordinate their compensation to keep those rates standard, without negotiations. The buyer’s agent knows what houses will draw the standard commission. That way they can steer clients away from “For Sale by Owner” listings or other arrangements where the commission amount isn’t specified. This also tends to push prices upward.

Other services attempting to enter the real estate market, like a startup called Trelora that promised lower buyer commissions, were prevented from getting MLS data by large brokers and NAR. There was next to no escape from this agent commission cartel.

Commissions are folded into the sale price. They make houses a little bit more expensive through a concealed form of price-fixing. For 30 years, buyers and sellers endured this, until advocates and class action lawyers determined it was illegal, and sought to prove that in court.

Commissions are folded into the sale price. They make houses a little bit more expensive through a concealed form of price-fixing.

It took several years. NAR refused to settle a 2019 class action case alleging anti-competitive conduct, which went to trial before a federal judge in Kansas City. In October, a jury awarded the plaintiffs $1.8 billion in damages, just for home sellers in Missouri. (The sellers brought the case, saying that they shouldn’t be forced to pay out the buyers’ agents.) Because it’s an antitrust case, the judge was able to triple those damages to $5.4 billion if he wanted.

The same lawyers in the Missouri case quickly filed a national class action, and there were almost a dozen other lawsuits teed up. For context of the liability at play here, another case involving 20 large housing markets was set for trial shortly. If it were decided in the same manner as the Missouri case, damages could reach $40 billion. NAR had no available funds to even pay the Missouri damages, let alone other ones.

So they decided to settle. The fine of $418 million is in many ways the trivial part; NAR also agreed to eliminate the cooperative commission rule, end the requirement that brokers subscribe to the MLS, and mandate that all fee arrangements between buyers and agents be put down in writing. This should end most lawsuits over commissions, and come into effect by this summer. (The broker HomeServices of America, which is a Warren Buffett company, is still fighting this out in court, which should tell you something about America’s cuddliest billionaire.)

THIS WILL UNLOCK COMPETITION in a closed market. I’d expect services offering discounted rates or flat fees for real estate sales. And buyers may not have agents at all, simply someone to represent their interests at closing. You likely haven’t been to a travel agent in the last 20 years because you can do it yourself online. That’s what we could potentially see for homebuyers in the very near future.

Whatever results will require antitrust oversight. A large tech platform like Amazon or Google could undercut the entire market to gain share, and then recoup down the road when they’re the only option in town. Regulators will have to remain involved to ensure real estate agents don’t just shift from one cartel to another.

This will also likely lead to a mass exodus of agents from the real estate business, which for many was a side hustle of relatively easy money. Three million Americans have real estate licenses in America, compared to about 48,000 in the U.K., which has one-fifth the population. There are about 1.5 million active NAR realtors, and many of them will now have little reason to stay with the lobby shop. That’s good news for weakening the power of an organization that was influential enough in Washington to keep this collusive arrangement in place. And it means that other measures to improve the housing market for Americans, like incentives to add housing supply, won’t be subject to as powerful a lobby for the status quo.

(By the way, NAR’s past president, Kenny Parcell, resigned amid sexual harassment allegations last August; his replacement, Tracy Kasper, spent about four months in the top slot before resigning after being threatened with blackmail. It’s not exactly a tip-top operation poised to weather this storm.)

Nobody wants to see a million jobs or more incinerated. But an economy predicated on middlemen isn’t beneficial or stable. Real estate agents didn’t really get rich from the commission arrangement, because higher home prices lured more agents into the market. Fewer agents mean that the ones who are honest, hard-working, and good at their jobs will thrive, with lower rates but more activity. The brokers and NAR, who control the listing services, were the true beneficiaries of this cartel, and squeezing them out of the system will help everyone else.

An old settlement of a price-fixing case against NAR blocked the newly aggressive leadership at the Justice Department’s Antitrust Division from bringing an unfair competition case. (DOJ has been issuing strong briefs in private cases.) But “private attorneys general” helped right the wrongs in this market, thanks to the opportunity afforded under our antitrust laws. That will come in handy as even more hidden forms of price-fixing, embedded in algorithms and other forms of technology, proliferate.

We tend to think of inflation as the exclusive province of monetary policy, leaving it up to technocrats to twist dials on interest rates to manage prices. This settlement shows that cartel behavior is both rampant and often beyond the purview of central bankers. Strong oversight by the public, both through their elected representatives and through their own powers, is needed to counteract this growing area of overstuffed prices.

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