Anticompetition in Buying and Selling Homes: The National Association of Realtors' market power is hurting Americans' mobility.

• Author: Alford, Roger P.
• Position: REAL ESTATE

The purchase of a home is one of the most important events in a person's life. To many, the market for buying and selling homes may appear competitive, allowing current and aspiring homeowners to freely buy and sell their properties according to market-based principles. In truth, a stringent set of rules and norms dominates the residential housing market, dictating how real estate agents are compensated and whether one can practically sell a home without paying a small fortune in fees. The cost of all this to consumers amounts to tens of billions of dollars a year.

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.

But there is good news. Developments in the industry are slowly eroding the NAR's dominant position. New entrants provide alternative avenues for consumers to buy homes, reducing the dependence on the existing system. These innovations have slowly chipped away at realtor commissions. In addition, consumers have brought class action suits in federal court to challenge the NAR's practices. These suggest a trend toward greater competition, but they are not enough; without enforcement or regulatory action, widespread threats to competition will continue.

THE PROBLEM

At first glance, the realty market in the United States appears highly competitive. In March 2020, well over 1 million realtors and almost 90,000 brokerages competed for business in local markets. Internet penetration and technological advances have transformed the market, providing consumers the freedom to perform online property searches, instantly receive property estimates, and gather quotes for a range of realty-related services. Large-scale discount brokerages such as Redfin have entered the market and proven viable, often sharing buyers' commissions with consumers. And more recently, alternatives to traditional realty transactions, such as "ibuyers" that offer quick sales at steep discount to home values, have gained a small share of the market.

Even with these advances, evidence suggests that the U.S. realty market suffers from a widespread dearth of competition. Unlike traditional monopolies, where willing entrepreneurs face high barriers to entering a market, the realty market is dominated by a consortium of local cooperatives enforcing a series of mandatory rules that keep prices high and suppress more efficient ways of doing business. It is a market where anyone can play as long as he or she adheres to a particular set of anticompetitive rules.

The MLS network enforces these rules through a network of over 800 local cooperatives under which, according to the NAR, "brokers share information on properties they have listed and invite other brokers to cooperate in their sale in exchange for compensation if they produce the buyer." In other words, the MLS serves to coordinate both information sharing and compensation arrangements.

The result is a market dominated by a particular network mandating a way of doing business. To be clear, innovations are occurring: Online listing services such as Zillow, Trulia, and Homes.com give consumers a greater role in searching for homes and lower the value of the labor inputs provided by brokers. Largescale discount brokerages offer...