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The Middleman Economy: Why Realtors Just Took a Big Loss and Homebuyers Might Benefit
A shocking $1.8 billion antitrust decision by a jury against the National Association of Realtors for price-fixing could rearrange housing markets.
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Hi, it’s me, Matt, back for one issue, because of something that I’ve been meaning to write about for years - the way we buy and sell houses. One of the key dynamics in today’s economy is the overfed middleman, whether Google, Ticketmaster, Vizient, Amazon, pipeline giants, or any other mediator that controls an industry. This week, a major antitrust decision came down, and it’s one targeting key middlemen in our housing markets. Specifically, a jury found that the National Association of Realtors, the main lobby for real estate agents, has engaged in a multi-billion dollar conspiracy to inflate the cost of broker commissions, which has distorted our housing markets. So that’s today’s topic.
First, I’d like to point out that antitrust action is humming. Wall Street is increasingly nervous that Google will lose its case, the Antitrust Division is amping up its investigation of Ticketmaster, and the opening day of the Spirit-JetBlue merger trial seemed to go well for the government. In addition, the FTC’s complaint against Amazon was unsealed, and it shows more ugly facts for Amazon, including, as you might expect, document destruction. Also, big merger filings are down roughly 50% since 2021, back to 2015 levels (when the economy was about 15% smaller.)
Too much winning.
“No man who owns his own house and lot can be a Communist. He has too much to do.” — William Levitt, real estate developer and father of the American suburb
The home in the United States, with its imagined yard, multiple bedrooms, usable kitchen, and white picket fence, packages the American dream. The house is not only a place to live, but it’s the key vehicle for middle class savings, in many ways the epitome of American citizenship. Many of our community institutions, from tax rates in certain states to school systems, revolve around the house. Policymakers recognize this dynamic; we have a massive multi-trillion dollar financial safety net for housing finance, including loan guarantees, tax concessions, and flood insurance.
In short, the American home is iconic. And so too are the middlemen - the realtors and agents - who help us buy and sell them. Take the sitcom Fresh Off the Boat, a story of an immigrant family, where the mother, Jessica Huang, becomes a realtor, and starts to rent and buy property as part of her integration into American society. There are dozens of real estate-related reality shows, such as Million Dollar Listing, where young would-be reality TV stars sell high-priced Los Angeles homes. You can become a realtor late in life and do well, you can do it part-time, and it’s a sales job that combines civic leadership with hustle and profit.
Realtors can also be iconic villains. There’s American Beauty, a movie about a childish and manipulative advertising executive going through a midlife crisis, which won the Oscar in 1999 for best film. It’s not a good movie, and it has aged terribly, but a key character is a neurotic and grasping realtor named Carolyn Burnham, who goes on to have an affair with the local king of real estate, a personality-less drone named Buddy Kane. Burnham is as empty as she is vicious, and that emptiness is associated with trying to constantly sell property to other similarly situated people in her class. In shows such as Platonic on Apple, the realtor is a special type of villain, using an upper class sneer to throw accomplishment and money in your face.
The realtor matters in America, because the home matters. And it’s a job that takes skill and instinct, because each house, and each buyer, is unique. There are a host of intangibles every agent brings to the business, an understanding of neighborhoods, what a family might need, how to price a house, as well as a network of the endless number of businesses who handle repairs, water issues, lending, escrow, legal services, and so forth. I’ve used a bad agent who tried to scam me, and I’ve used wonderful agents who helped me at pivotal moments, and the difference is literally life-changing. Real estate is fundamental to who we are as a society, and the broker class who mediate our purchases are important civic leaders.
But realtors in America also have a unique commission structure, which leads them to charge among the highest rates in the world, roughly 6% of the home price in the U.S. versus 1% in, say, the United Kingdom or Singapore. This middleman business takes in about $100 billion a year in revenue, supporting millions of realtors but also costing Americans who buy and sell homes a non-trivial chunk of their life savings every time they buy or sell a house. Realtors were a significant part of Kate Judge’s important book, Direct, on the rise of the middleman economy, because they are a good example of how conflicts of interest can corrupt an industry on which we rely.
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Prior to digitization, a high commission for realtors might have made sense. It was expensive to collect all the information for a market like housing, all the details of all the houses in an area, the history of recent sales, who could be trusted to handle complex purchases, and then find an exchange where buyers and sellers could interact, arrange showings, and exchange large sums of money in a trustworthy manner. After all, most people buy and sell a house a few times in their lives, and naturally need some expertise to help with this transaction. Brokers and agents were the experts hired to handle this need.
Over time, the industry began listing information about housing markets into multiple listing services (MLS), which are private databases that have details on houses, such as listing price, bedrooms, bathrooms, square footage, and so forth. These MLS databases are the bloodstream of the industry, and access to them is key. Zillow and Redfin, for instance, populate their websites with information from these databases.
Now, you would think, with the internet, that commissions would have dropped over time, as happened with airline tickets and stock broker commissions. In Canada, commissions fell from 4.5% in 2002 to 3% in 2015, and in Sweden they fell from 5% to 1.5% in the same time period. But in the U.S., the commission stayed roughly the same. According to one estimate, the harm could be up to $50 billion every year.
A host of companies, from Trelora to REX to SoloPro, saw the huge margins of real estate commissions and tried to enter the market, but were thwarted by NAR and local brokerages. According to Judge, the start-up Trelora, for instance, promised low flat commissions for buyers. In addition, while realtors traditionally do all the communicating between the buyer and seller, Trelora allowing buyers and sellers to communicate directly. It was a low-cost popular service growing quickly in Colorado, until NAR and large brokers simply denied them access to the MLS data that was the lifeblood of housing markets.
Today, NAR blocks low-cost entrants through its cooperative commission rule, which is a conflict of interest based on corrupting the incentives of the agent for the buyer. (Indeed, many of the most obvious problems we have in the economy right now involve such corruption where an agent for a buyer is controlled by a seller, or vice versa. This is the basic problem in pharmaceuticals.) In the real estate agent business, someone trying to buy a house doesn’t pay a broker upfront to represent him or her. The commission is baked into the price when the sale closes. For the last twenty five years, the National Association of Realtors, the main lobbying body for the industry, mandated that the selling agent split the commission with the buying agent.
This rule makes it easy to get a realtor without paying upfront, but it also creates an incentive for a buyer’s agent to steer their client away from any house where the selling agent offers a low commission. For instance, when people sell their own house, a “For Sale By Owner” arrangement, they get much less foot traffic on showings, because buyer agents don’t take their clients to homes if they know they aren’t going to get a good commission. According to mandatory NAR rules, the commission amount is listed in the MLS, so buying agents know which houses to steer their clients away from, even if it would otherwise be in their clients’ interest to look at them. This is from the NAR MLS handbook.
Since nearly all MLS services have such a rule, antitrust lawyers saw it as a price-fixing arrangement, and took NAR to court.
Earlier this week, the nightmare scenario for the industry came true. After a brief trial and a two and a half hour deliberation, a Missouri jury awarded $1.8 billion in damages in a class action suit to hundreds of thousands of homeowners who bought homes in the state.
It has been closely watched in the industry because of its potential to upend the longtime process by which homes are sold, with sellers potentially no longer being expected to also pay for the buyer agent’s commission.
The Chicago-based NAR has contended that the system provides an efficient marketplace accessible to all consumers. But the complaints, including the one for the lawsuit resolved in Kansas City, alleged that the practice is anticompetitive because it requires NAR-member agents to list all properties on regional multiple listing services, with broker commissions agreed to before a home is listed for sale.
The jury ruled that the NAR and the other defendants, Keller Williams and HomeServices of America, had conspired to maintain high commission rates, leaving home sellers with few realistic options to negotiate lower rates.
It’s an astonishing amount, just one claim in one state amounting to almost two billion dollars. And because antitrust law provides for treble damages, the judge - a former plaintiff’s lawyer appointed by Obama named Stephen Bough - could award over $5 billion, if he chooses. Moreover, the judge has authority to offer injunctive relief, which is to say, he can simply order NAR to change its rules, or to modify them in any way he chooses. (Bough is one of the few plaintiff lawyer’s on the bench, and those kinds of lawyers aren’t afraid of taking big swings.)
There’s another case in Chicago going to trial early next year, with potential damages in the amount of $40 billion. And the lawyers who just prevailed in Missouri filed a national class action lawsuit against NAR and major brokerages just hours after their victory in Missouri. In total, damages across the economy could amount to $400 billion, which would bankrupt NAR and every MLS brokerage in the country. In addition, the Department of Justice has been trying to bring a case, though a Trump judge, Tim Kelly, blocked the Antitrust Division from going forward, saying that an older settlement precludes doing so (though Kelly’s decision is being challenged.)
NAR is going to appeal, and realtors I’ve spoken with think that the case will “take forever.” But it does seem likely that the way we buy and sell real estate in this country is going to change radically, with new firms coming into the market competing on commission price, and offering different kinds of brokerage services. The older model won’t go away; there are a lot of realtors who provide immensely valuable services, and work extremely hard. But one study shows that $30 billion of the $100 billion in revenue will disappear, and the number of realtors will shrink dramatically. It’s likely that sellers will keep more when they sell, and buyers will pay a bit less when they buy. I could see an explosion of startups trying to change the home buying process now that the market is open, or firms like Google trying to enter. I would also assume there will be an attempt at consolidation, to reproduce via merger what had been done through cartel arrangement. So it’ll be important to ensure that whatever new structure emerges isn’t a new monopoly. But that’s for a different day.
Going forward, what of the realtors themselves? Most are hard-working and honest. How much will they lose? Well as it turns out, the inflated commission structure isn’t much of a benefit, but more of a treadwheel that forces agents to run faster and faster for a smaller number of clients. The reason is that an excessively high commission brings in too many agents into the market, which reduces the productivity of each one. In the early 2000s, two economists compared real estate agents in Minneapolis and Boston over ten years and found that high commissions didn’t raise incomes. In 1980, the typical agent sold about six houses in Boston and seven in Minneapolis.
Over the next ten years, housing prices in Boston went way up but stayed flat in Minneapolis, which doubled the amount of revenue in the real estate agent business in Boston while keeping it even in Minneapolis. So you would think the income of a real estate agent would go up in Boston. But it didn’t. Instead, a bunch of new agents came into the market, the average number of houses sold per agent in Boston dropped to three, and income per agent stayed the same. The whole industry simply became more wasteful. The main beneficiaries of the existing model, it seems, aren’t the agent, but the large brokerages who run the MLS systems in conjunction with the National Association of Realtors. (One of these brokerages is owned America’s folksiest predator, Warren Buffett.) And they are the ones who are going to be squeezed by this decision. We can already see some of the repercussions, as the CEO of NAR, seeing the writing on the wall, just resigned.
The housing market is likely to come out much cleaner in the end, with good realtors still doing great business. All in all, these cases are great examples of the importance of private enforcement of antitrust law, and why appointing lawyers with a sense of political economy as judges is meaningful. That said, if there is a much lower commission structure, a lot of agents will end up leaving the business, which will be painful, though the process will likely play out over years. Still, real estate is a cyclical industry, so that tends to happen anyway. In the meantime, it’ll be a messy transition, but Americans will be able to keep a bit more of their savings when they buy and sell homes. Lower commissions work in other countries. I don’t know why they wouldn’t work in America.
Thanks for reading!
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