Last week, the distinguished Brookings Institute hosted an event to explore how policy can help reduce housing stress on the middle class. As part of its Future of the Middle Class Initiative, Brookings assembled a panel titled, “Taxes, fees, and middle class housing costs,” which featured REX Co-Founder and CEO, Jack Ryan. Panelists also included Ben Harris, former chief economist for Vice President Joe Biden and current Executive Director of the Kellogg Public-Private Interface – Kellogg School of Management, as well as Jonas Shaende, Chief Economist for the Fiscal Policy Institute.
The entire panel discussion can be viewed below. Well-respected real estate blog Notorious R.O.B. also provides an in-depth analysis of the conversation on his site, which you can read in full here. Excerpts from the Notorious R.O.B. blog are also re-posted following the video.
Excerpts from the Notorious R.O.B. blog entitled, “Just because you’re paranoid, doesn’t mean they’re not watching you” :
The Structure of Real Estate
Jack Ryan really kept hammering on the fundamental structure of the residential real estate industry. Of course he would, since his company, REX, is betting that they can succeed outside of that structure. But even when you take his obvious bias into account, he’s not entirely wrong about a lot of what he brings up.
For example, here’s Ryan explaining one reason why the market inefficiencies in real estate persist
“People buy or sell a home once every seven to ten years on average. And it’s pretty complicated. And so they don’t spend a lot of time thinking about it for seven or eight years. Then all of a sudden, all at once, you have to think about buying a home, a broker’s fee, a mortgage rate, insurance, title, escrow, and it’s almost like it’s too much to handle and you need to move into a house by a certain time. So you just kind of pay the man, to use the phrase, right? You just get it over with and all those people along the way you’re dealing with are unsalaried totally commissioned people.
You’re the mark. They know that you need to buy a home in two months. They know that you don’t do this but once every seven years. They know everything and they’re totally commission driven.”
So it’s a very bad asymmetric knowledge battle going on there.
He’s not wrong about that. I mean, he’s a bit too hostile to real estate agents, many of whom are motivated more by helping a client achieve his dream of homeownership than by dollars and cents. But it isn’t as if there aren’t a whole lot of real estate agents who are totally commission driven. We all know this, which is why professionalism is such an obsession within the industry.
A bit later, Ben Harris says that the problem is steering:
“The question is so why do we have these persistently high Realtor fees. There is some decent evidence that there’s lack of competition in the real estate market. So there’s a couple of reasons why. So economists at Cornell looked at the impact on people when Realtors drop their fees. So all else equal, if you can sell a home for 5.7% instead of 6%, you should go with that. But the problem is one of steering. So when you had discount buyer’s fees, you saw [the buyers] being steered away from those homes and the volume went down, the likelihood of selling the home went down, and the amount of time that you would spend to sell the house went up. So there’s a certain natural disincentive towards offering a lower cost which is that the Realtor would be steered away from the home. And they looked at 650,000 transactions; this was a nationwide. And they found pretty systematic steering going on.
What’s happening too is another sort of indication there might be anti-competition in the Realtor market is that there’s bunching around certain prices. So it’s very common to have your buyers fee be 2.5%; it’s very uncommon for it to be 2.4%, right? And so when you start to see bunching around prices that’s sort of suggestive of anti-competition and that could be what’s going on here.”
Those two paragraphs might be used in the Moehrl v. NAR anti-trust case (and the others that have also been filed) that will make its slow way through our legal system. I have said from the start that the key to that case will be the extent to which Realtors engage in steering, despite that steering being against the Code of Ethics and against the law in most cases (fiduciaries do not steer their clients away because of their own financial losses). That prominent and influential economists like Ben Harris thinks the same is not good news for real estate as we know it.
Harris also points out that there is significant regulatory capture at the state level, pointing to various state laws that prohibit competition, such as anti-rebate laws. Ryan agreed, asking what the economic justification is to prevent him from giving money back to his client.
The MLS and Information Transparency
Given my audience, I think the parts where the panel (and really, it’s Harris and Ryan) discusses the MLS are going to be of the greatest interest.
At the heart of that structure is the MLS. REX is not a member of any MLS, and is explicitly out to replace the MLS-based brokerage business with something else. And Ryan points the finger directly at cooperating compensation as the cause of the problems, which means he’s pointing the finger directly at the MLS.
Here’s what he says:
“This is the peculiar thing about the industry: there’s the residential real estate agents who join the MLS and there’s one company’s not doing it to the MLS and that’s us. But why does everybody else do it the exact same way?
One is the access to data. The MLS gets the data when you sell a home. They keep it. They hold it to themselves.
Imagine if you could not know what the last share traded was for IBM — the last price and the last volume. You can only get it if you join the Goldman Sachs trading association. Well, what would have happened to the price of trading shares? It would have never gone down if you had to ask Goldman Sachs and Morgan Stanley for approval to get the information. So one is the suppression of data.
Now we hire data scientists from Harvard and Stanford MIT to help us predict things and we go around that, but if you’re a normal realtor you can’t get access to the data.
The other thing to share with you about some things why this happens. If you join the MLS, there’s a rule that if you list a home with an MLS agent, you must also offer to pay a buy-side agent’s commission at the same moment. They tie those two together by fiat. To me it’s an illegal tying arrangement: you’d like one service, you must buy another. And you’re supposed to pick the price that you will offer the buy-side agent at the moment you list the home that is never modifiable. So you have to name a price for a buy-side agent for a buyer you don’t know and guess how much they might want to pay, at the moment you sign a listing agreement months before you even met a buyer, right?
There are so many things that they’re doing to constrain competition that results in these fees that are so high relative to almost any other developed country. I can go more — there’s about 20 things that happen, but we’re not a member of it [the MLS].”
Once again, if you think this argument will not be brought forth in the Moehrl v. NAR case, you’re more of an optimist than is rational.
At one point, Ryan talked about information transparency:
“I think a lot of it has to do with transparency of information because consumers will get themselves involved in this every seven years and they don’t know a lot and all the information is being husbanded by those who does every day for a living who are totally commission driven people. Not that they’re bad people, but the incentives are totally different. The focus, the attention, the knowledge asymmetry is dramatic for the people buying and selling a home.”
It caught my ears because what he was saying was so reminiscent of some of the questions that the FTC and DOJ staffers were asking people at last year’s workshop. There were a lot of questions about sold data, about private remarks, about whether consumers could see commission rates, etc. that I thought were a bit odd. Now I know why they were asking those questions.
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