Brief Reflections on the DOJ/FTC Panel

It hasn’t even been 24 hours since the joint DOJ-FTC workshop on competition in real estate ended. I’ve heard quite a bit, and although one would think listening to panelists in a controlled environment talk about what ought to be truly mind-numbing topics to regular humans, I wasn’t bored at all. Not sure what that says about me, but I hope it’s relatively positive.

In any event, here are just a few rambling thoughts on what I heard. I don’t have a transcript or anything, so any quotes are likely paraphrased and from memory (and Sunny can attest that my memory is just awful). When the DOJ/FTC release the video of the event, you can check for yourself.

Also, Inman has reported extensively on the event, and you can find coverage on the first panel, second panel, and third panel on the Inman News website.

For the TL;DR crowd: The event lived up to (admittedly low) expectations, especially for the first workshop. I think it set the stage for future workshops or hearings or what-have-you, and for the most part, it doesn’t look like anything dramatic is going to happen anytime soon. However, if you’re inclined towards conspiracy-theory level paranoia (of which I have been accused, from time to time), then there are a couple of areas of real concern. We’ll see what future events bring.

Let’s do this.

A Unified Front, With Cracks

The moderator told NAR General Counsel Katie Johnson to hurry up with her opening remarks, so she ended up blurting out, “We don’t need government intervention. Free market!”

That might as well be the best summary of the industry’s position on the various panels. Everyone connected to the industry more or less said that competition is robust, there are no problems with data access, the MLS is working, progress is being made, and there’s just no reason for the government to get involved.

The cracks were the outsiders — Panle Jia Barwick, Stephen Brobeck, and Joshua Hunt. We’ll return to them below.

And then there were the intra-industry cracks that showed through over and over again. As expected, the target was Zillow. Glenn Kelman of Redfin took the biggest shots, but Luke Glass of Realtor.com also took his shot, wondering out loud whether a portal could get too big, have too much traffic, and become dominant and have pricing power. (It does make me wonder what Glass thinks the optimal, non-dominant level of traffic is for Realtor.com itself.)

But apart from such cracks, the real estate industry more or less told the DOJ/FTC to back off, stay out, and there’s nothing to see here.

Overly Defensive?

Thing is, I wonder if we didn’t overplay our hand a bit. I chatted in between panels with some of the attendees, and a few were not from the industry. They were from The Hill, as they say in D.C. And one comment that sticks with me is, “What are they trying to hide?”

It’s as if we overdid it a bit by failing to point out some real problems and by trying to paint the residential real estate industry as some kind of a jungle of laissez-faire competition. It just isn’t credible that an industry that is organized at a local, state, and national levels through the REALTOR Association (and its control over the MLS), with three major portals (Zillow, Realtor.com, and Redfin – though Redfin is also a brokerage), and admitted difficulty and cost of scaling a tech company (as Brad Inman pointed out in his opening remarks) has ZERO problems with competition.

Maybe it would have been better to acknowledge at least some of the problems.

The Other 500

For example, while Art Carter of CRMLS represented himself and the MLS community superbly, would it have been damaging somehow to talk about the problems of the “Other 500”?

By that I mean this passage, reported in Inman, from the California Association of REALTORS livestream:

Acknowledging the point, Cheatham credited the 200 MLSs “that are doing a good job,” noting that the other 500 MLSs, who are often smaller and have fewer resources and staff, should be brought to the table. He suggested state Realtor associations could bring together various industry players — including the 500 smallest MLSs.

I tried to ask that question of the panel, but the moderator mangled it and made it into a question about data standards, which Art Carter hit out of the park. Oh well!

Thing is, we all know that the problem is “politics” and a “lack of will”:

Art Carter, CEO of California Regional MLS (CRMLS) which has had a statewide MLS initiative for years, told panelists that California could have a statewide database in three months if the will was there.

David Charron, chief strategy officer for one-year-old Bright MLS, added, “There are no technical challenges in doing this. It’s really human and political factors that stand in the way of greater cooperation and consolidation.”

Would it have been a terrible idea to acknowledge to the DOJ/FTC that not all MLSs are the same, and that while the “top 200” do a great job, maybe there are small MLS with fewer resources who might engage in some anticompetitive practices? That maybe some of The 500 are the problems in terms of access to data for brokers, tech companies, and consumers? And that it’s difficult to overcome the internal industry politics to drive consolidation and data-sharing and the like?

Maybe it would have been; Lord knows inviting the camel’s nose into the tent is never a good idea. But maybe the potential of the Feds getting involved might unlock some of the internal political barriers? I don’t know.

The Problem of Bad Actors

Another problem I think we could have acknowledged was the point that Joshua Hunt from Trelora brought up. From Inman:

“I have a list of over 719 brokerages in Denver alone that have flat out said ‘we won’t show Trelora listings.’ We tell sellers 40 percent of agents push hard not to sell your home if you don’t offer a 2.8 percent to 3 percent commission.”

I mean… look, would it have been a terrible idea for us to acknowledge that some brokers and agents are not necessarily the paragons of virtue and ethical behavior? We could have even spun that positively, by pointing out that such steering is against both the REALTOR Code of Ethics and the law of fiduciary agency, which means that the system we have is not anticompetitive. After all, people do bad things all the time that are against the law; that doesn’t mean the entire system is broken.

Commission Transparency

One thing I do think will get more attention in future workshops/hearings/whatever is the whole notion of commission transparency. It was kind of a theme across all three panels.

Joshua Hunt of Trelora really made that a crusade item, but others were talking about it as well.

It’s a trickier topic than one might think, since one of the articles of faith in the real estate world is to never discuss commissions out of fear of antitrust concerns. Brian Larson of Larson Skinner and Texas A&M Law pointed that out, which was very good. And there are real problems with that transparency, not the least of which is that the MLS doesn’t have the information. I think Art Carter might have pointed that out, that the MLS only has the selling commission (i.e., buy-side cooperating compensation), rather than the full commission.

Nonetheless, my sense is that the DOJ/FTC folks were awfully interested in the whole transparency and disclosure issue, so we’re likely to see more action on that front in the future.

Pocket Listings?

Another topic that the Feds expressed some interest in (or so I thought) was the whole issue of pocket or off-MLS listings. It fits in with the hypothesis with which regulators (and ITIF, which started this whole thing with its white paper) went in: that brokers and agents are limiting access to data in order to deter competition. Pocket listings fit that narrative perfectly.

Art Carter, I think, was the person who most strongly pointed out that there are valid non-competition reasons for the seller and his listing agent/broker to withhold listings from the MLS. But then the discussion went in different directions.

We’ll see whether this becomes a topic in future workshops/hearings/whatever but my sense walking out was that the issue of off-MLS listings is one that the regulators are keen to find out more about.

Conspiracy Theory Level Paranoia

The most interesting panelist, for me, was also the one who was overlooked the most. Panle Jia Barwick is a professor of economics at Cornell University. Her area of focus is the Chinese economy, which makes you wonder what she was doing on the panel. The answer is that Prof. Barwick is also a faculty research associate at the National Bureau of Economic Research (NBER), which is an immensely influential think tank.

She co-authored a NBER Working Paper called “Conflicts of Interest and the REALTOR Commission Puzzle”. I wrote about that paper in a 2015 blogpost:

In plain English, what the above says is that properties whose cooperating compensation is below the norm for a market (e.g., if 3% is standard, then a 2.5% commission) are 5% less likely to sell at all, and even when they do sell, take 12% longer to sell. The only explanation for this — according to the authors — is that buyer agents are steering consumers away from lower-commission properties and towards higher-commission properties. Given that, they think their findings support “regulatory concerns.”

What is it that she and her co-authors recommend? Let me quote myself at length:

What might this regulatory concern be all about? Well, from the Conclusion:

Our findings provide empirical support for regulators’ long-standing concern of steering behavior contributing to the lack of variation in commission rates, despite consumers’ increased access to information and lower search costs due to the internet (GAO, 2005; FTC, 1983, 2007).

Compared to other industrialized countries, commission fees in the United States are high. For example, commission rates average less than 2% in the United Kingdom and the Netherlands, compared to the typical rates of 5% and 6% in the United States (Delcoure and Miller, 2002). As highlighted by our model, unbundling commissions has the potential to eliminate steering and reduce commission fees. Given the sheer size of aggregate housing transaction values, even modest reductions in commission fees could lead to a non-trivial reduction in transactions costs. [Emphasis added]

Again, translated into plain English mixed with industry jargon, what the above says basically is this:

Why are real estate commissions so high, despite low barriers to entry and all the advances in technology that should have reduced the cost of brokerage services? It’s because cooperation and compensation keeps commissions high through steering by buyer agents. The FTC and other regulators have been and are very concerned that consumers are getting ripped off, and this study shows that they are getting ripped off.

I was wondering if Dr. Barwick would bring that up, and sure enough, she did. She flat out suggested that buyers pay for their own agents, and that buyer commissions and seller commissions be “decoupled”.

Thing is, she’s a very soft-spoken woman, and an academic whose first language is not English. She was also on a panel with two very capable and very smart lawyers: Katie Johnson of NAR, and Brian Larson (representing-but-not-representing) CMLS. The episode described in Inman where the moderator interrupts Brian actually occurred when he was questioning Barwick trying to argue that the rise in commission amounts have more to do with rise in home values… which wasn’t her main point.

So it was easy to misunderstand what she was saying, and also to overlook her points. She didn’t do herself any favors by talking about American Airlines and Orbitz.

Her main points were these (I think):

1. Cooperating compensation results in steering and high commissions (compared to other countries);
2. Real estate commissions are too high from a price-cost margin standpoint, which suggests lack of competition;
3. Solution is to decouple the commissions: seller pays the listing agent, buyer pays the buyer agent.

The problem was that she was talking “up here” in rarified academic air, citing studies and papers with which none of us are familiar. Brian Larson is a very smart guy, but he’s no economist, and he’s definitely not an econometrician (think lots and lots of math, with greek letters, which he referenced… which means he read her paper and couldn’t understand it, which is the same for me).

What was really necessary is a debate between economists, who understand what this means: 1(TopRevlmt) = γ frcRtL25lm,t−1 +Xlm,t−1β +μmt +εlmt, (1). I wished that Lawrence Yun or Leslie Appleton-Young were on the panel.

Even the price-cost margin thing was misunderstood, because none of us are trained economists. So it went into a discussion about cost of lead generation, etc. when Dr. Barwick was really talking about the Lerner Index:

Do you understand that? If so, that makes one of us.

Despite all the talking-past-each-other, here’s why the issue that Dr. Barwick raised is an issue from a conspiracy theory level paranoia: an economist is most powerful and influential in writing. Dr. Barwick may not be ideal on a non-economics panel, but her paper is damned compelling. Plus, her paper isn’t from some random ass organization–it’s from the frikkin’ NBER, the people who declare when a recession has begun and ended. I can’t think of a think tank with more influence in Washington DC in the area of economics.

Seeing as how the DOJ and FTC invited her to the workshop, they’re aware of her and her work. Absent some economist armed with data and numbers (and greek letters in complicated statistical formulas) providing a counterargument to her paper, it’s going to be easy for the DOJ and FTC to look at regulating commission sharing as a way to eliminate steering and reduce commission fees.

Our answer, at least on yesterday’s panels, came from Brian Larson (once again!) who briefly mentioned that the reason for sellers paying the buy-side commission has to do with how mortgages work. That’s a valid reason, but it would be fairly simple to allow banks to finance the buy-side commission directly (in exchange for higher interest rates given the increased risk from lower LTV).

While unlikely, that is a possibility when it’s all said and done.

Maybe decoupling the commissions would be good for everybody in the long run, but there’s little doubt that it would be massively disruptive to the industry. For starters, what would happen to the MLS if there is no compensation? What happens to buyer agency?

Thankfully, there’s no hint of such a thing on the horizon. Yet. So we won’t spend more time on speculative nothings. But for the more adventurous? twisted? doom-mongering? of us, it’s interesting to think about.

One Last Thing…

Finally, I was somewhat surprised that no one talked about the prohibition on banks entering real estate. Inman reported that Assistant Attorney General Makan Delrahim hinted at taking another look at that prohibition in a recent speech:

Another significant area in which regulation can impact consumers is in real estate. Buying or selling a home is the largest financial transaction most Americans will ever undertake, and in many cases the largest single investment. The Division has made it a priority to protect consumers in real estate markets, in part because regulators have been aggressive in preventing new business models and protecting incumbents from entry. For example, the National Association of Realtors states on their website that they were key in securing a rider in the 2009 Omnibus Appropriations Act that imposes a blanket ban on financial institutions from entering into real estate brokerage and management businesses. The Antitrust Division’s website on competition and real estate describes the Division’s multifaceted work in this area—the next installment being our joint workshop, next Tuesday, with the Federal Trade Commission to explore competition issues in the residential real estate brokerage industry.

Seeing as how he oversees the Antitrust Division, Mr. Delrahim’s comments sent red flags racing up flagpoles in Chicago and DC offices of NAR.

So it was a bit surprising that none of the panels even touched on this issue. Maybe that’s good, maybe it’s not good (because the DOJ already made up its mind). Who knows?

We just know that there was a significant silence on this here topic of banks in real estate.

Anyhow, those are just some of my initial, disconnected thoughts from yesterday’s workshop. Your thoughts are welcome, particularly if you attended the Workshop or watched the livestream.

-rsh