The Shape of Regulation to Come, Part 1: What Might Come Our Way

Longtime readers know that I am constantly wondering about, worried about, and in some cases, excited about future regulation of residential real estate. This is already a heavily regulated industry, but until there is some kind of an unexpected libertarian moment in American politics, there could always be more and different regulation.

The immediate aftermath of the DOJ pulling out of the NAR settlement, and the Biden Executive Order on competition is speculation. I wrote a VIP post engaging in just that: speculation. There’s a lot of speculation, along with argumentation about what should and should not be done, which is perfectly natural when the government has made it so clear that they intend to expand regulation.

I thought long and hard about whether I have anything useful or interesting to add to that mix beyond what I’ve already written. I am not privy to any special knowledge; I don’t work for NAR’s lobbying team, nor am I a policymaker in the FTC or elsewhere. I’m just a guy who has studied some things, paid attention to some things, and have some moderate skill in pulling threads together.

And yet, with the caveat that predicting the future is a fool’s errand, I thought I might be able to provide some service to my readers, provide something to think about further, or provide direction for more research (to validate my thinking, or to counter it). The reason is that unlike so many others in this space, I don’t have a particular agenda to protect or to push. My mind goes where the facts lead.

What follows here, then, is pure speculation… but based on as much rationality and as much evidence as I can pull together. It makes a number of key assumptions, many of which may prove to be wrong. But it is, to the best of my ability, what I think the shape of future regulations will be.

Key Assumptions

Let us get some of the key assumptions out of the way.

First, I assume that the government primarily seeks power. Every government of every age in every situation seeks more power to do more, to influence more, to affect more… in short, to rule. Increasing competition, greater consumer benefit, or whatever else is cited may be a genuine motivation to seek more power, but the fact is that our government will select a course of action that will maximize their own power above all.

Second, I assume that the vast network of influencers from academics to think tanks to policy wonks to media to consumer advocates to whatever other busybody do-gooder will array itself against the interests of the real estate industry. There’s enough evidence piled up over the years if you look at academic research into real estate and if you look at stories and narratives that emerge from media coverage, from YouTube videos, and think tank gatherings to suggest that the intellectual elites in North America lean against the interests of the industry.

Third, I assume that the consumer does not care about regulation of the real estate industry, and will not care… until made to care by the media. I further assume that to the extent the consumer does care about things like price of brokerage services, tying arrangements in listing services, and so on, the consumer will be generally negative towards the industry because he thinks that real estate agents make too much money.

Fourth, I assume that within the industry, the large and successful companies will have the people and resources to deal with whatever regulation comes, no matter how disruptive. That’s simply the nature of any regulation in any industry. Compliance costs are more easily borne by the $100 million a year big corporation than by the $1 million a year small mom-n-pop.

Fifth, I assume that all people are fundamentally human beings with human needs and wants. I do not assume either heroism or villainy; people are simply people and will act as people have and done for millennia.

The Obvious Regulations

To start off, then, I believe that the FTC’s first set of rules will directly address the four items in the original DOJ lawsuit:

• Searching by compensation offered;
• Disclosure of cooperating compensation;
• Prohibiting advertising that buyer agency services are free; and
• Open lockbox access to all licensees.

Seeing as how the U.S. already went after these four items and got NAR to settle on them, it seems too obvious that any rule or regulation from the FTC or someone else will include these four items.

However, Section (5)(h) of the Biden Executive Order reads, in part, as follows::

(h) To address persistent and recurrent practices that inhibit competition, the Chair of the FTC, in the Chair’s discretion, is also encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority, as appropriate and consistent with applicable law, in areas such as:

…

(iv) unfair competition in major Internet marketplaces;
(v) unfair occupational licensing restrictions;
(vi) unfair tying practices or exclusionary practices in the brokerage or listing of real estate; and
(vii) any other unfair industry-specific practices that substantially inhibit competition.

All four of those bullet items could relate to and affect the residential real estate industry.

Cooperation & Compensation

The most relevant, of course, is “(vi) unfair tying practices or exclusionary practices in the brokerage or listing of real estate.” Since that language of “unfair tying practices” appears in all of the commission lawsuits of Moehrl, Sitzer, Leeder and others, it seems obvious that the FTC will be coming after the practice of having the seller pay for the buyer’s agent.

How the FTC will do so is as yet unknown, but that the FTC will do so seems like a sure bet.

The authors of the Cato Institute article (which I had linked to in that earlier post) call for regulation to eliminate the tying arrangement, and since one of the two authors is an incredibly influential policymaker in the Biden Administration now, I think it’s safe to say the FTC will do just that.

So let’s say the FTC prohibits sharing commissions by fiat. But what happens afterwards? We’ll dig into that below, because that one regulation requires a number of other regulations to make it real.

On the other hand, instead of flat prohibition, we might see something more like seller control over the commission. That is, I think we could see some rule that requires seller approval/sign-off on any buyer’s compensation at the closing table, after the work on the transaction has been done. Perhaps it becomes something that could be negotiated, like any other seller’s concession, and negotiable right up to the actual closing itself.

This way, if the seller genuinely believes that the buyer’s agent was valuable to the deal getting done, and the buyer is tapped out of cash, then the seller is free to pick up the costs of the buyer’s agent. So it won’t be a flat prohibition; it would allow for a post-transaction “tip for great service” to be paid, if you will, by the seller who is about to be flush with cash.

This more relaxed rule also has the benefit of allowing the commission to be capitalized into the mortgage of the house without requiring changes to mortgage regulations.

REALTOR MLS No More

In the Biden Executive Order, I thought the inclusion of the clause “or listing of real estate” was both interesting and unexpected. It’s interesting because none of the commission-related lawsuits ever raised “unfair tying practices or exclusionary practices” in the listing of real estate.

Where those issues have been raised is elsewhere. For example, in Findling v. Realcomp II, the plaintiff alleged that tying association membership to participation in the MLS was a violation of antitrust laws. The court disagreed, and dismissed the case. There’s also Platinum v. KCRAR, which raised slightly different issues, but nonetheless, at the heart of it was the requirement to be a REALTOR in order to access the MLS.

Of course, startups like REX and Trelora before them have been complaining about this tying of REALTOR membership to MLS access for years and years now. For that matter, quite a few brokers and agents grumble about needing to become a REALTOR, which they don’t want to do, in order to access the MLS, which they need.

NAR itself has a great digest of all of the actions to try and unlink REALTOR membership and MLS access. That has been going on since 1966. And NAR has won most of the lawsuits, which results in an awkward split between the 11th Circuit (the so-called “Thompson States”) and California (which relied on state law) and the 1st, 5th, 6th and 7th Circuits. Normally a “split in the circuits” is resolved by the Supreme Court, but no litigation has reached that far… so the FTC might simply decide to create a national rule.

That language in the Executive Order takes on new shades of meaning with that background in place, doesn’t it? The wording seems to suggest that we might see FTC action on the REALTOR requirement for MLS access.

Right this minute, as I write this, that feels very likely to me. Not only because it would resolve a disagreement amongst federal courts, and not only because it would help companies like REX and Zillow (which probably became a REALTOR to gain access to MLS IDX data), but also because it would be one clear way for the federal government to get back at NAR for refusing to play ball with the DOJ earlier this year, which led to the withdrawal of the settlement agreement.

State Law Barriers

(v) and (vii) of the Executive Order opens the door to something that the DOJ and FTC have been and are involved with constantly: overriding state regulations that inhibit competition.

(vii) is directly implicated in all of the state regulations against rebates and for minimum services, which is the subject of yet another lawsuit by REX against Oregon. But that topic has come up over and over again.

(v) which deals with licensing is usually not raised in the real estate context, but it could come up for things like licensed assistants and showing agents. I don’t think there’s a lot of energy or interest outside of libertarian ideologue circles in removing licensing from real estate. But there could be some interest in limiting what kinds of activities need a license at all. It’s simply not clear that a showing agent or some kind of an assistant sitting at an open house needs a real estate license to protect consumers.

I think it quite possible, perhaps even likely, that the federal government will try to override state regulations in real estate that they think is anti-competitive.

Regulating Zillow

Of course, (iv) raises the real possibility that the FTC might look at Zillow. “Unfair competition in major Internet marketplaces” is vague enough that a lot of what Zillow does could fall under that language.

We don’t know how that language would be applied to major Internet marketplaces like Amazon and Ebay, so we can’t say how it might be applied to Zillow and what practices/policies might run afoul of the FTC’s determination of what is and what is not “unfair competition.”

But with all of the attention being paid to how Big Tech leverages data collection for a bunch of purposes, I think the FTC might want to poke around beneath Zillow’s infrastructure to find out how it does what it does and decide which practices they will and will not allow.

The Not So Obvious Regulations

As I mentioned above, these obvious regulations lead, I think, to less obvious regulations or actions or other moves in order to make the obvious ones effective. Let’s speculate a bit on what those might be by looking at what problems are caused immediately by any first-order regulation.

Prohibition on Commission Sharing

Start with the Big Kahuna: prohibition of the seller paying the buyer’s agent. Let’s say that the FTC flat out bans such sharing. In addition, let’s further stipulate that the three things that were at issue between the DOJ and NAR — searching by compensation, display of compensation, and advertising buyer agency as free — are also put into place via regulation.

How do you enforce any of this?

Consider that RESPA exists to prohibit quid pro quo arrangements between agents and mortgage lenders. Flat out prohibition is not the end of the story, right? The government needs more regulation specifying what does and does not constitute a prohibited arrangement. Fair Housing Act has been the law of the land for decades… but that doesn’t mean that violations don’t exist, and that there aren’t additional regulations around what does and does not constitute steering and discrimination. These are live controversies right now as I write this.

Say the FTC bans sharing commissions. Okay. Well, after a big closing on a $3 million house, the listing agent gifts the buyer agent with a Mercedes Benz… which just so happens to be the car that the buyer agent was talking about buying on social media?

Is that a violation? Sure feels like a violation of the spirit of the prohibition, doesn’t it?

What if the listing agent invites any buyer agent who brings him a buyer to a two-week all-expenses paid trip to his vacation house in Maui? Is that a violation?

What about a big fancy dinner for the buyer agent’s whole team? Is that a violation? How about a very nice thank you note attached to a $1,000 bottle of wine? What about a very nice thank you note attached to a $100 bottle of wine?

What if nothing changes hands between the listing agent and the buyer’s agent, but over time, it becomes obvious that that listing agent and that buyer’s agent has a “special relationship” such that they somehow bring 80% of the buyers to each other’s listings? Somehow, magically, those two know just how to make the best possible offer? Is that a violation of the prohibition?

Other Regulations

The FTC regulations will prohibit enabling searching by compensation. Okay, how will the FTC know whether the MLS has or has not enabled that search? What if the MLS completely eliminates that field altogether and tells subscribers to contact the listing agent to find out what the compensation is? Is that a violation of the regulation or not?

What about the “display of compensation” rule? If the MLS allows for display of cooperating compensation, but not the entire compensation, is that good enough under the FTC’s regulation? What if the MLS allows for display, but the font used cannot be larger than 6pts? Is that kosher? What if the MLS prohibits the display of compensation once a property goes under contract? Is that okay or not?

The MLS is required to provide access to lockboxes to non-subscribers. Fine, that’s the law. The MLS provides access, but conditioned on the listing agent who is a subscriber being present for the showing, unless the buyer agent is also a subscriber to the MLS. And it just so happens that the listing agent is awfully busy and the first availability is in three weeks to schedule a showing by the non-MLS agent. Is that a violation or not?

The point here is that the first-order regulation leads to a host of questions and challenges and problems. People are smart. Human beings are very, very good at figuring out ways around rules and regulations. Tax law as a field would not even exist if that were not the case.

Which means that the FTC would be faced with not only having to promulgate a host of second-order rules and regulations to make sure that the first-order rules and regulations are effective, but that the FTC would face the very real challenge of having to enable enforcement of its rules and regulations.

And the first step to enforcement is to know that a violation has occurred. The only way to do that, if you’re the government, is to get the data from the industry.

The End Result: Government Oversight of the MLS

However I think these things through, I can’t escape the fact that any government regulation of these rules and policies requires if not regulation of the MLS, at least direct oversight of the MLS. At a minimum, it requires data collection and/or reporting from the MLS to whatever enforcement agency to make sure that the rules and regulations are being followed appropriately.

Just like mortgage banks and health insurance companies are required to submit information and reports to regulators, the MLS will have to be required to submit information and reports to regulators. And that’s at a minimum. At the maximum is total government control, a government-operated listings exchange.

The reality will likely fall in between. And I think I see the shape of that. But seeing as how we’re already over 2,500 words, let’s do that in the next part.

In Summary…

Since there will be a Part 2 for sure, let’s see if we can’t summarize the thinking here.

• There will be regulation of the real estate industry, likely by the FTC as the Executive Order lays out. That regulation will be focused on both brokerage practices and listing practices.
• Cooperation and compensation — having the seller pay the buyer’s agent — will be regulated; either prohibited out of existence, or some kind of control being put into the seller’s hands.
• The link between REALTOR membership and MLS access will be broken by fiat.
• Various state laws and regulations that the FTC considers to be a barrier to competition, such as anti-rebate laws or minimum service requirements, are likely to be removed through national regulation.
• Zillow is likely in for additional heightened scrutiny as to its business practices, data collection methods, and data usage, because it is a “major Internet marketplace.”
• Numerous additional regulations will be necessary to make the above first-order regulations possible and to make enforcement realistic.

The end result will be some sort of a middle-ground between minimal reporting requirements by the industry to regulators and government takeover of the MLS. We’ll address what that is likely to look like in Part 2.

-rsh

Phil Collins – In The Air Tonight LIVE HD

Phil Collins – In The Air Tonight LIVE HD (I don’t know what’s wrong, the video used to be 1080P, it now only has 720p, sorry for that) Taken from “Finally…The First Farewell Tour” DVD, upscaled to HD. Unfortunatly with the wrong program so audio is a bit “screwed” up..