I promised a Part 2 where I would treat the subject of regulation, which I think is the real Big Guns of the upcoming war between the United States and NAR. If you missed Part 1, where I dig into why the US DOJ pulled out of a settlement with NAR (which it has never done before in any case against any company or organization), you can find that here.
For the TL;DR crowd: I think the real action in terms of achieving the goals of the government is in regulation, not in litigation. That means the DOJ will do its thing through the courts, but the main impact is likely to be the “broader investigation” that it has promised, which will lead to other agencies (I think the Federal Trade Commission is most likely) actually doing the heavy lifting through regulation of the industry.
I’ve been writing for a while now on the various lawsuits against NAR stemming from the route cause: sellers paying the buyer agent’s commission, which we call cooperation and compensation. There are at least three major class action lawsuits in Moehrl, Sitzer and Leeder making their way through the federal court system. There have been smaller cases: PLS v. NAR, REX v. Zillow & NAR, and others.
The DOJ piled on in November, settled, and then withdrew… setting the stage for Act 2.
All of these lawsuits allege all kinds of various theories, all of them leading to accusing NAR of operating an anticompetitive monopoly through its control of the 600-ish MLSs throughout the U.S. That control, in one form or another, is alleged to create barriers to competition, which keeps commission rates in the U.S. between 5% and 6% consistently, while other countries have far lower rates.
Thing is, litigation is not a great tool for changing how an industry works. The recent DOJ-NAR Armistice is a good example. The government brings a lawsuit, and the industry agrees to settle. But if you look at the actual documentation, there’s a lot of “you won’t make rules” or “you will make different rules that you’ll submit to us” kind of language. There’s all kinds of details around implementation, timelines, etc. that the DOJ settlement kind of handled through requiring a chief antitrust officer be named.
Plus, litigation is expensive and very, very time consuming. You have a trial. But then you have appeals, at least one, to the Circuit Courts and possibly up to the Supreme Court. Trials are extraordinarily expensive. The lawyers aren’t cheap, even if you’re the DOJ and have unlimited budget and some of the finest litigators in the world on staff, because there are other companies and organizations the DOJ wants to go after. It will be years before the government actually sees the changes it wants to see, and maybe not even then.
Regulation is a more direct, more cost-effective, and more timely approach to getting what you want, if you’re the government. And that is what I think is really coming next.
Why Regulation of Real Estate?
General advantages of regulation over litigation notwithstanding, there are a couple of reasons why I think this is the more likely path forward for the government.
First, there is no judge involved at the outset. The FTC (for example) could simply promulgate a set of rules and regulations for how real estate brokerage must be conducted. Sure, judges will get involved when NAR and/or others bring lawsuits challenging this or that aspect of the regulation, but the government does not have to wait for a judge to make a decision as it does in litigation.
Second, the intelligentsia is all for it. The best example comes from this article, recently published on Cato Institute’s website. I was planning on writing about it, but the DOJ withdrawal dropped before I could get around to it. Having said that, I do wonder if the timing is entirely coincidental that the Cato article drops mere days before the DOJ drops its bombshell.
Let’s take a detour into the Cato Institute article as I think it lays out most of what our elected leaders, regulators, enforcers, academics, think tank types, and others who influence policy (other than those who work for NAR) think about the issue.
“Anticompetition in Buying and Selling Homes”
That’s the title of the piece, but the subtitle is equally arresting: “The National Association of Realtors’ market power is hurting Americans’ mobility.”
The piece tends to summarize and repeat most of the arguments from various lawsuits, hearings, and panel discussions that regular readers of Notorious already know. But the first few paragraphs really do succinctly summarize the academic and policy wonk perspective on real estate today:
The heart of the problem is the set of rules maintained by the National Association of Realtors (NAR), a powerful trade association representing nearly 1.5 million members. The NAR requires real estate brokers to be members of the association in order to gain access to local networks, known as Multiple Listing Services (MLSs), where houses are posted for sale. Through this requirement, the NAR imposes mandatory rules to limit competition and raise fees paid by homebuyers and homesellers.
The most problematic of these rules is the requirement that sellers pre‐determine, before even knowing the buyer, the commission paid to the buyer’s agent. This constitutes a “tying” practice, which fixes brokerage prices and stifles competition for commissions. Also, homeowners seeking to sell a home outside the MLS system, including a sale without a real estate agent, must at times overcome a tacit effort by realtors to discourage their clients from buying homes that are not represented by an NAR member. Finally, the rules stifle innovation and promote artificial barriers to entry for nascent online competitors.
This anticompetitive framework has serious consequences. The tying arrangement inflates realtor fees above their market value, resulting in a massive transfer of wealth from consumers to real estate professionals. Higher realtor fees also impose larger transaction costs, thereby decreasing geographic mobility, deteriorating household wealth, and reducing homeownership. Furthermore, because of the anticompetitive restrictions, real estate agents have little incentive to differentiate themselves and compete on price. The rules of the realty market also lower state and local tax revenues while depressing attendant markets like mortgage brokerages, moving services, and home renovations.
The authors then argue that the MLS suppresses competition via “tying” (forcing the seller to pay the buyer agent), via “steering” (buyer agents not showing low-commission homes), and via “steep obstacles” to FSBO and assisted-sale.
All three have been and continue to be debated inside and outside the industry. This post isn’t where we debate them.
What is unique about this essay is that the authors specifically call for regulatory solutions to these problems:
There are three primary avenues through which a free market can be established: forced untying of realtor fees, regulatory action against anticompetitive steering, and repeal of state anti‐rebate and “minimum service requirement” laws. In addition, barriers to entry erected by the MLS need to be eliminated to provide free competition and allow for greater market penetration by innovative competitors.
In terms of the “tying” problem, the authors want the government to force the “untying” of seller and buyer agent commissions — in other words, eliminate cooperation and compensation by law. Here’s the key graf:
As long as the MLS remains a prominent feature of the housing market, it is essential for the law to restore competition within the network. To do this, realtor tying requirements need to be eliminated so brokers will compete with each other on commission fees. The optimal way to eliminate tying would be a court‐ordered injunction or regulatory action that eliminates the tying arrangement. By using one of those options, the government can make it clear that antitrust law does not permit conditioning MLS access on agreeing to an anticompetitive conspiracy to keep commissions high. If realtor fees were untied, competition between the MLS and online platforms would produce downward pressure on price while promoting innovation and consumer welfare. Real estate agents, too, would have more freedom to offer various fee structures and service levels to their clients. [Emphasis added]
They don’t clarify what kind of regulation would eliminate the “tying requirement.”
As for the “steering” problem, the authors write:
Regulation eliminating the practice of steering from FSBO and other non‐MLS listings would provide a downward pressure on home prices because buyer brokers would not be guaranteed commissions. To achieve this, regulators should take action to eliminate the practice of buyers’ agents steering their clients away from FSBO and non‐MLS listings so that sellers do not face discrimination simply because they are selling a property without an agent or outside of the MLS network.
Regulation targeting steering would also address potential violations of fiduciary duty. Brokers have a duty to act in their client’s best interest and find optimal housing options. The current guaranteed commission structure motivates brokers to buy and sell properties that pay the best commission for the time expended. This creates perverse incentives that encourage steering to higher‐priced properties with higher commissions. [Emphasis added]
I find myself wondering what specific regulations could do this.
Finally, the authors do make two specific recommendations: get rid of state anti-rebate laws, and the state minimum service requirement laws.
Why We Should Care
Think tanks publish articles and essays and studies all the time. They make arguments for policy changes all the time. Why should we care that some think tank published an article recommending regulation of the real estate industry?
I think we should care that a major think tank like Cato Institute published this article in the first place. But if that’s not enough, I think we should care because of one of the authors: Ben Harris, Executive Director, Kellogg Public–Private Interface, Kellogg School of Management, Northwestern University. Well, that’s the position he held when he authored this paper.
I became aware of Ben Harris in this panel at Brookings Institute, and I wrote about that here in May of 2019:
I got to know him a bit better since that panel, having been on a podcast with him, and spoken to him a few times over the last couple of years. He’s very nice, very smart, and very influential. As I mentioned in my 2019 post, Ben Harris was Chief Economist to then Vice President Joe Biden. According to this New York Times profile, he is the architect of the Biden economic plan:
In his efforts, people in and outside of the campaign say, Mr. Harris has become a sort of policy avatar for Mr. Biden, molding new ideas into the candidate’s longstanding brand of middle-class economics and changing his sales pitch to meet his audience. Before Mr. Biden even announced his campaign, Mr. Harris was attending senior staff meetings at the vice president’s home to help develop an economic platform.
And in March of 2021, President Biden nominated Ben Harris to serve as the Assistant Secretary for Economic Policy at the Treasury Department.
I’m 99.99% positive that he wrote the Cato Institute paper before being nominated, but… does anybody think Prof. Harris has no influence in the Biden Administration whether he has an official position or not?
Now… prior to being nominated by Pres. Biden, Ben Harris was a consultant to REX. Dots. Connect.
Then there’s this additional factor: Cato Institute is a right-leaning think tank. From their About Us:
For more than 40 years, Cato has led the charge for liberty in our nation and around the world. The Cato Institute is a public policy research organization—or think tank—that creates a presence for and promotes libertarian ideas in policy debates. Our mission is to originate, disseminate, and advance solutions based on the principles of individual liberty, limited government, free markets, and peace.
This is not a left-wing progressive organization who wants to get rid of private property rights. This is not a natural home for a Biden economist to opine about regulation.
For that matter, the co-author of this article, Prof. Roger Alford of Notre Dame served in the Antitrust Division of the Trump DOJ from 2017 to 2019 as deputy assistant attorney general. I don’t know his politics, but it doesn’t strike me as being likely to be extremely left-wing.
What that signals to me is that there is broad consensus across the political spectrum that something needs to be done about real estate commissions, and at least two incredibly influential and powerful people agree that something should be regulation.
What We Can’t Know… Yet
So, given the type of people calling for regulation, and the amazing never-before-done withdrawal by the DOJ from a negotiated settlement agreement, I wouldn’t bet against regulation coming our way and soon. Question is… precisely what?
The Cato Institute essay is light on details, likely on purpose; there’s no point in laying out detailed regulatory proposals in advance of any agency picking up the regulation baton. Even the most specific recommendations — get rid of anti-rebate and minimum service requirement laws — are not… practical in a regulatory form. Federalism does mean that Congress would likely need to pass some kind of federal legislation that supersedes state laws, but legislation is not regulation.
And since the DOJ just promised “broader investigation” and the FTC hasn’t spoken about real estate at all, none of us will know exactly what rules and regulations the FTC would issue… until they’re issued. But we can reasonably speculate on some directions.
First, the four issues that NAR settled with the DOJ on (publicizing commissions, not saying buyer agent services are free, not searching by commission, and non-MLS access to lockboxes) can all be addressed through regulation of each individual MLS. NAR MLS Policies cannot trump FTC regulations, after all. It’s not clear that the DOJ would need to keep pursuing litigation against NAR if its goals can be achieved via FTC regulation.
Second, from the Cato Institute essay, it seems obvious that the FTC will go after cooperation and compensation and go after “steering” somehow. I can’t imagine how just yet, but I expect that the investigation by the DOJ and the subsequent regulation by the FTC will focus on these two areas. Again, the FTC can achieve results not by going after NAR, as the DOJ does, but by directly regulating the MLS and brokers and agents.
Third, timing is as yet known and unknowable. But I would expect it to be sometime in 2022, based on the fact that the DOJ did a ton of investigation leading up to its 2020 lawsuit, and that it will start the broader investigation soon. Recall that in June of 2018, there was a joint DOJ-FTC workshop on real estate. I wrote about that here. We haven’t heard anything from the FTC since that panel, but we have heard a lot from the DOJ. So I think a 2022 or perhaps 2023 timeframe makes sense for regulations to be proposed.
But do remember… I could be wrong, and I usually am when it comes to timing.
The Guns of Navarone
In my last post, I suggested that the real big guns do not belong to the DOJ, but to regulators. The big guns that the industry faces are not lawsuits, but direct regulation. The FTC is the likeliest agency to get involved, though I suppose HUD might play a role as well.
NAR can, should and will attempt to either counter regulation altogether, or shape the regulation to minimize the damage to the industry. But it goes without saying that this would be one of the most disruptive things to happen to the industry in quite some time.
It is not all darkness. In the coming days and weeks, I’d like to explore the silver lining playbook. Supposing that regulation is headed our way, is it all bad news? There may be real opportunities in this crisis that can improve the fortunes of the real estate industry.