When President Trump addresses the National Association of Realtors on Friday afternoon in Washington, the mood in the ballroom at the Marriott Wardman Park Hotel no doubt will be celebratory. But the bonhomie at the gathering will mask troubles in the residential real estate industry, one of the last meaningful sectors of the U.S. economy yet to be radically transformed by advances in computing and communications.
Instead, the industry remains one in which many of the nearly 1.4 million realtors in the United States struggle to make a decent living. Big brokers such as Coldwell Banker, Century 21 and Re/Max are struggling with slowing growth and a worsening tug of war with their agents over commission income. And consumers, when they buy or sell a house, pay fees of about 6 percent, which is sometimes triple the rate in other countries, such as Australia (2 percent), Singapore and the Britain (both 1.5 percent).
Residential real estate’s organizational and incentive structure reflects a different era, when most business was local and consumers weren’t empowered by technology. The industry has protected its interests through the Multiple Listing Service, or MLS, a collection of local organizations that control physical access and data relating to homes for sale. Through a phone-book size set of bylaws, the service requires both sellers and buyers to work through realtors and shun those who don’t abide by its rules. These MLS organizations are controlled by local realty boards and, ultimately, the National Association of Realtors.
Over the past few weeks, two class-action suits have been filed against the association, MLS and big brokerages such as Realogy, Re/Max and Keller Williams. The homeowners’ suits argue that MLS has used these rules to keep fees at 6 percent, the same level as in 1960, despite the huge rise in the value of real estate over the same period, even adjusting for inflation. MLS rules and regulations, the suits say, inhibit competition, thwart innovation and are in violation of the Sherman Act.
The Realtors’ association says that plaintiffs are “wrong on the facts, wrong on the law and wrong on the economics” and that the Multiple Listing Service promotes efficiency and “is in the best interest of home buyers and sellers.”
Why should people care? Residential real estate is a $1.5 trillion annual industry in the United States. When people buy or sell a house, which they do every seven to 10 years, the process is highly stressful (right up there with getting married and divorcing). When presented with the terms of a real estate transaction, buyers and sellers understandably have gone along with them — as they must, in the absence of ready alternatives, but billions of dollars in homeowner equity have been sacrificed along the way.
High fees charged by realtors also suppress transaction volume, and the economic knock-on effects are considerable in the related mortgage, insurance and contracting industries, while also limiting labor mobility and reducing the tax take by municipalities.
Ironically, though the Multiple Listing Service keeps fees high, that hasn’t translated into handsome returns for many realtors. Drawn by glamorizing TV shows such as Bravo’s “Million Dollar Listing,” there are far too many realtors for the number of homes being bought and sold. There are more realtors in the United States now than in 2008, during the last housing peak.
Because the number of existing homes sold in the United States has been stuck at 5 million to 6 million annually for the past decade, the median gross income of realtors has been falling, down from $55,000 in 2012 to $39,800 in 2017, according to the national association. The lion’s share of profit seems to be going to realtors handling luxury properties in New York, San Francisco, Los Angeles, Seattle and Miami … the kind depicted on Bravo and HGTV.
As the class-action suits wind through the courts, Internet-age companies that aren’t part of the MLS, such as Zillow, Opendoor and my own company, are slowly chipping away at the status quo from a variety of angles. The residential real estate industry might not be a tear-down, but it’s definitely overdue for a complete renovation.