Thoughts on American Antitrust Institute’s Virtual Roundtable on Real Estate

Wednesday morning, I found myself staring at the monitor waiting for the Zoom meeting to start going. It was the American Antitrust Institute’s Virtual Competition Roundtable: Competition in Real Estate – Taking Stock of the “American Dream” event. Since AAI is a legit think tank in DC with a 13 year history, I figured the audience would be largely policymakers and enforcement officials and private antitrust attorneys — the people who could have an outsized impact on the real estate industry. I also figured that most of the industry would ignore it, and thought a summary might be called for.

Unfortunately, my note taking skills suffered greatly as I was listening more than taking notes, and had some audio issues on my end. I hope AAI will publish the recording of the event at some point, even if behind a paywall or something.

So instead of a summary, I thought I would offer my takeaways from the three hour virtual event.

Jack Ryan, Opening Remarks

The CEO of REX, Jack Ryan, whom I have profiled multiple times here (and have written an extended profile of) opened the Roundtable. I realize many of you don’t like him and what he has to say… but all I can say to that is you are free to like or not like whomever you want, but you do yourself a grave error if you dismiss Jack Ryan. A lot of what he laid out is difficult to answer, and is extremely influential in policy and academic circles.

I can report that a lot of what he discussed is in line with what he said at the Brookings Institute conference a couple of years back, so feel free to listen to that:

During Wednesday’s event, he made mostly the same points:

• Real estate agent fees are too high, and too stable. It doesn’t change with the market, with price of the home, with the economy, skill level of the agent, etc. etc.
• The “labor inputs” are far lower, due to technology, but costs haven’t dropped.
• The high fees suck for consumers, eat up a lot of their gains, lower the number of transactions, and harm the people working in related industries like contractors, electricians, landscapers, etc.
• The reason is because of a cartel that keeps prices high.
• The two mechanisms that the cartel uses are (a) mandatory compensation, and (b) steering of buyers. The steering of buyers leads to paying the highest marginal price.

The couple of new things I hadn’t heard before are…

1. The average days on market in Austin right now is two days. TWO. Jack pointed out that if you put up a yard sign, the home sells in two days, but the fees stay the same 5.5% to 6% as they were when DOM was 60-90 days.
2. Jack played a couple of recordings as evidence of steering. Yeah, the recordings are bad. In one, the agent learns that REX does not pay compensation and tells the REX agent, “I’ll just tell the buyers the home is sold.” That’s a clear violation of fiduciary duty and of the Code of Ethics, but… there it is in clear audio.

Frankly, because I’ve been listening to Jack Ryan for years, have been paying a great deal of attention to what he’s been saying and doing via REX, none of it was particularly surprising. Again, you don’t have to agree with Jack; you can disagree vigorously. But it’s a mistake to dismiss the points he’s raising. I’m pretty convinced that the attendees found his arguments compelling.

I tuned in to hear the panel discussions, both the industry panel and the enforcer’s panel. Let’s turn to those.

Industry Panel

I had helped put the event together by recommending two of the panelists: James Dwiggins of NextHome and Joe Rand of Broker Public Portal to represent the industry’s perspective on the first panel. These two are among the smartest people in the industry, and I thought they’d do great. The third panelist was Dr. John Hatfield from UT Austin.

Here are the key takeaways and comments:

• Joe Rand made a very strong defense of the value of the agent and of the MLS. The MLS lets everybody know what is for sale, and the buyer is represented by a professional, who then levels the informational disadvantage playing field.
• Cooperation between brokers, and the MLS that facilitates that cooperation, helps create a clear, fluid, and transparent market for housing.
• Hatfield talked about steering and mentioned empirical research showing lower commission offered leads to longer DOM and lower prices. I think he was referring to this paper by Panle Jia Barwick of Cornell and Maisy Wong at Wharton.
• James really hammered the point that the real estate industry does a very poor job of educating consumers on the behind the scenes work that the agent actually has to do in order to bring the transaction to a successful closing. “We shelter the client from all of the drama, all of the process behind the scenes.”
• A key moment was when Joe Rand said that there are a lot of bad agents in the industry, referencing those agents on Jack’s phone recordings who refused to do the right thing for the buyer because of compensation. But the existence of bad agents doesn’t mean the entire system is the problem.
• What is needed is more brokerage oversight and control over independent contractor agents.
• The central issue that the moderator and Hatfield brought up, however, wasn’t really addressed in full. It was kind of addressed, with Joe saying that buyers like having their commission rolled up into the purchase price so they could finance it.

The panel was a bit contentious, and I felt like the moderator had to step in multiple times to get things under control. But it ended with each panelist mentioning the one thing they’d like to see change:

• Joe Rand: better training and better oversight, so that agents provided far superior service to consumers.
• James Dwiggins: create a more transparency to show consumers what the agent is actually doing, everything that is going on in the transaction. That will help consumers see who the good agents are and who the bad agents are, and let brokers know what their great agents are doing and what kind of service they’re providing. Transparency will lead to higher or lower prices for consumers.
• John Hatfield: have buyers pay the buyer agents directly. Surprisingly, there was general consensus on this at a high level, but details would need to be worked out.

Enforcers Panel

The first panel wasn’t particularly surprising, since I’ve heard most of these points over the years and have read Barwick and Wong’s paper, among others. It was the second panel of antitrust enforcers that I really wanted to hear. The panelists:

• Melanie Aitken was the former Commissioner of Competition for Canada, and is an attorney at Bennett Jones.
• Samer Musallam is a partner at Ropes & Gray, but was Senior Counsel at the Dept. of Justice and worked on the recent lawsuit and settlement between DOJ and NAR. So his experience is directly on point and very recent.
• Scott Hemphill is a professor at NYU Law, but was also the antitrust bureau chief for the New York Attorney General’s office.

Most of the discussion was really only relevant to regulators, enforcement agencies, and lawyers… but there are a couple of big takeaways for me.

• Hemphill said “keep the open inputs open” but what he meant was that the MLS is not the only way that buyers can find homes for sale and get information on them; he called out Zillow specifically.
• The linkage between sell side and buy side commission needs to be unbundled, and Hemphill said he was encouraged by what appeared to be consensus in the Industry panel.
• Hemphill suggested that the FTC investigate and do research on actual raw numbers on commission rates across time, across markets, with discounts, with whatever. I had always imagined that this research was being done, since the DOJ issued the Demand Letter to CoreLogic… but I guess not. That data would help show us just how big a problem this is. I suspect that if anyone from the FTC was on the Zoom, he or she is taking that idea to superiors.
• There is a big problem in demonstrating harm, because the targets of enforcement are national organizations (like NAR and CREA), but they have to show harm to consumers and pricing effects in thousands of local markets. The question is whether the harm is to a specific competitor or to competition in general.
• Aitken also said she was disappointed that nothing really changed as a result of the two cases the Canadian Competition Bureau had successfully brought. And she expressed amazement at how “sticky” the price of real estate services is.
• All of the enforcers agreed that cooperation between brokerages — i.e., the MLS — numerous pro-competitive effects. They all wanted to get rid of the negative effects but preserve the pro-competitive effects: sellers benefit by having a single place to list, buyers benefit by having a single place to find homes for sale, and the MLS lowers transaction costs.
• “You don’t want to destroy the incentives of those who contribute to the MLS.” Melanie Aitken agreed that balancing the two are important. Hemphill’s take was that the MLS as a whole might be valuable, but specific rules might be problematic.
• Musallam: the MLS has immense market power, but the rules of the MLS are set by brokers, so it’s possible for a dominant group of brokers to create rules that favor them and disfavor others.

The second panel was nowhere near as contentious or argumentative, which is to be expected, since the panelists are all former enforcers who went after the real estate industry.

My Thoughts and Questions

The above is a summary from my notes and impressions. If anyone else heard the whole thing and have notes that I got something wrong, or missed something, please let me know.

Since I’ve been tracking this issue for quite some time now, I have a few thoughts.

Consensus Building?

One, it seems to me that a general consensus is building that buyers should pay for the buyer agent. Even James and Joe did not dismiss that idea out of hand. We just have to figure out how to make that possible, because as James pointed out, the issue is that home prices are out of control and having buyers pay for buyer agent fees might price many of them out of the market entirely.

Now, I’m not sure that James and Joe speak for the entire industry. But they’re smart, thoughtful guys, and if they’re open to ending cooperation and compensation, then we’re not that far from that happening. Plus, at one point Joe talks about how if you’re a buyer’s agent in today’s market and you’re not getting an exclusive buyer agency agreement with a clear “you’ll pay me X if the seller doesn’t” clause in it, you’re an idiot. That’s a big step towards buyers paying their own agents.

Current Model is Indefensible

The real trouble is that the current model is actually indefensible. I found it interesting that neither James nor Joe actually tried to defend the current system we have. Instead, they defended things in and around the current system.

For example, they defended the value of the agent, the value of the MLS, the value of broker cooperation, etc. But they never addressed some key criticisms of the current system of unilateral offer of compensation. Let me explain.

There were questions that Jack and the two academics raised that really weren’t addressed, and they’re the real problem for defenders of the status quo. The three that really jump out at me are:

1. The commission rate does not change for a $300K house vs. a $1.3M house (maybe it changes for the $10M+ super luxury houses),
2. The commission does not change for a complex and difficult transaction vs. a simple and easy transaction,  and
3. The commission rate does not change by skill or expertise of the agent.

There is no logical defense why an agent who helps a buyer purchase a $300K house only deserves $9K commission, but the agent who helps a buyer purchase a $1.3M house deserves $39K commission. The negotiations, the paperwork, the thousand things that the agent has to do behind the scenes that James mentioned is not 4x more for the more expensive house.

Similarly, both Joe and James talked about difficult transactions and how much the agent has to work those. All true. Some deals will have the agent making $10/hour after it’s all said and done because of the enormous difficulty. But that ignores the fact that some transactions really are simple and easy and straightforward.

It’s that last point about agent quality which is rarely addressed, but might be critical for how the industry wants to change with various external changes happening. Joe and James are 1,000% correct that in a complex and emotional transaction like selling or buying a home, having a great agent help you is invaluable. John Hatfield said as much during his panel.

This is my friend Sue Adler, who was also my listing agent when I fled New Jersey. I’ve written about that experience on this blog. I can testify that she and her team made my transaction as easy and as smooth and as drama-free as possible. Whatever she made on my deal, she deserved every penny of it.

Sue has been a top agent for decades. She has forgotten more about Millburn/Short Hills/Maplewood market than most people ever learned. She’s seen great markets, bad markets, terrible markets, dealt with all kinds of scenarios over her years and years in the business.

Sue is going to get paid the same for her work as the newbie agent who just got his license last week. She is going to get paid the same commission for her expertise as some hobbyist with a license who doesn’t know the first thing about marketing a property or structuring an offer.

There is something deeply unfair about that, not just to the consumer who is paying the same rate and amount to get crappy advice and service, but also to the agent who has spent years honing her craft, learning the market, and delivering superior service to buyers and sellers.

The trouble is, those of us in the industry know full well that there are many, many, MANY incompetent agents who don’t know jack shit. Joe Rand said so, but his big point was that while there are a lot of bad agents in the industry, that doesn’t mean that the system is broken.

I don’t know. If the system allows so many bad agents to infest the industry, is it really not broken? Isn’t there some kind of a problem when a highly skilled expert agent who really can make the transaction smooth and easy (and I’ll give an endorsement to James’s big idea of greater transparency so consumers know what the agent is doing behind the scenes) gets paid the same as a total moron who does shit like racial steering and doesn’t know the contract and doesn’t know the area and doesn’t even behave in an ethical fashion? Of course there is.

James wants to solve that by providing transparency, and then possibly adjusting pricing based on the quality of service. That might work… but the current system doesn’t really allow for that, since the commission rate is set in advance by the seller and can neither be lowered nor raised. I can go on social media right now and find dozens of complaints from agents about the agent on the other side of the deal, yet no one can say at the end of the deal, “You almost screwed the pooch on this deal; you don’t deserve your 3%.”

What is needed is some kind of a compensation model that allows great agents to be paid what they’re worth, and allows less great agents to be paid what they’re worth, and for the consumer to somehow control that in some fashion. If an agent goes above and beyond the call of duty, there has to be a way to reward him for that; conversely, if an agent screws things up, there has to be a way to punish him for bad work.

Contingency alone does not provide either one; if the deal falls apart because one agent sucks ass, the other agent who was competent is also punished. If the deal is rescued through the heroic efforts of one agent, the other benefits.

Limits of Enforcement

The last big thought/question I have is from the enforcer’s panel where they all admitted to the limits of enforcement, difficulty of enforcement, and the difficulty of balancing the desire to preserve the pro-competitive benefits of the MLS with the desire to eliminate the anti-competitive effects.

The three specific pro-competitive benefits mentioned were:

• Sellers can more easily market their homes via the MLS;
• Buyers can more easily locate a home via the MLS;
• The MLS lowers transaction costs.

On the other hand, the negative effects mentioned are things like Samer Musallam talking about how dominant brokerages can set the rules of the MLS to favor themselves and disfavor others, or persistently high and sticky prices, or whatever.

Seems to me that the way to balance the two might not be through enforcement mechanisms, but through regulatory mechanisms. I know this is something I’ve brought up over the years (to the point where some people think I’m just raising a bogeyman) but listening to the enforcer’s panel and thinking about the people in the audience, it seems to me that they’ll eventually reach the same conclusion.

What I mean is that at some point, the academics, the policymakers, and the enforcers will start to think that DOJ lawsuits and consent decrees with NAR and with MLSs are not the way to go. Instead, the way to go is for HUD or CFPB or each state or whatever to just regulate the MLS directly and remove the rules and decisions from “dominant brokerages” who might foul things up. The pro-competitive benefits can be had under government control, while the anti-competitive behavior can be curtailed under government control.

As a libertarian, the thought is abhorrent to me; less government, the better as far as I’m concerned. Yet, it’s not about what I want, but about what the authorities want, and I do think that the regulatory mindset leans that way.

Wrapping Up

I hope this rough summary is somewhat useful. Hopefully there will be a recording made available at some point, but who knows.

All in all, I thought the event was very, very useful for those who tuned in. I’m glad to have heard all of the speakers and panelists, and gotten some insight into how enforcers think about real estate. I thought we all are arriving at some kind of a rough consensus around compensation and around problems and issues with compensation, although there remains a great deal of disagreement on details.

I thought AAI did a bang-up job of putting on a virtual event, and the moderators did a great job overall and the panelists were really excellent. Even the contentiousness of the first panel was entertaining and useful.

And Jack Ryan’s speech made a lot of points and raised a number of questions that cannot be dismissed and swept under the rug. Ad hominem attacks aren’t going to do a thing, except make observers (especially in the enforcement communities) think something is going on. Those points need to be engaged in directly and substantively argued, one way or another… especially when the status quo we have today is indefensible.

It’s high time we all thought about a defensible system, before one is imposed on us from the outside. We ought to switch it up already.

-rsh