Could the fight between bankers and brokers over the future of the real estate industry be enough to wake the sleeping giant of the consumer movement?

With nearly a trillion dollars in sales and $110 billion in annual revenues, the real estate industry is bigger than the soft drink industry, on par with the telecommunications industry and about half the size of the computer industry. As Congress prepares to debate whether banks and financial holding companies should provide residential brokerage services, it’s essential to evaluate the Fed’s proposed regulatory change from the consumer’s perspective.

Studies of the real estate industry by consumer groups have been few and far between. A decade ago, the 50-million-member Consumer Federation of America found that commissions were overpriced, quality of service bears no relation to commission levels, agents face serious conflicts of interest, and most buyers are inadequately represented. Little has changed since then, at least from the consumer’s perspective, except the amount of money at stake.

In 1991, CFA called for a Federal Trade Commission investigation on the grounds that "the residential real estate industry functions as a cartel that overcharges homebuyers and sellers over $10 billion a year." By 1998, McKinsey & Co. concluded that "restructuring" the real estate industry could save consumers up to $30 billion annually – $10 billion from real estate commissions, $10 billion from mortgage fees and $10 billion in other new efficiencies. Unfortunately, guest editorials last week from opposing sides of the issue failed to address ongoing consumer complaints or the potential for consumers to save billions of dollars annually.

Dan Forte, executive director of the Massachusetts Bankers Association, argued that large real estate agencies already offer one-stop shopping and the proposed change would merely level the playing field for banks and FHCs. (The assumption that one-stop shopping has some inherent consumer benefit is flawed and begs further investigation.) To his credit, Forte noted that home equity is a fundamental to the nation’s wealth, echoing a CFA report coauthored by Primerica which found that the typical household has a modest net worth of just $35,500, the majority of which is home equity. Without explicitly stating that banks would charge lower commissions to help consumers preserve equity, Forte concluded that the proposed change would provide greater choice and more competition in a marketplace where real estate firms have a virtual monopoly today.

While MBA fell short of building a convincing case for consumer advocates, David Walsh, president of the Massachusetts Association of Realtors, failed to substantiate his opening claim that the proposed change will cause consumers real disappointment. He then makes repeated statements that are either wrong or – in the words of DeWolfe’s Paul Harrington, who agrees with the bankers’ position – hypocritical.

Walsh argues that the proposed change will concentrate market power, raise conflicts of interest, and limit consumer choice. Wrong, wrong, wrong. First, while only one mortgage lender in Massachusetts has more than a 2 percent market share, Cendant – the parent company of Century 21, Coldwell Banker and ERA – has a 41 percent market share nationwide. There are a number of communities in Massachusetts where one real estate agency has a more than 25 percent market share, resulting in more in-house sales and difficulty for buyers with their own agent to win a bidding wars. Second, it’s amusing to hear Realtors protesting about potential conflicts of interest, when Realtors have sponsored legislation in state after state to paper over actual conflicts of interest inherent in dual agency, a business practice NAR’s own pamphlet called an act of fraud 15 years ago. Third, on the question of limited consumer choice, surveys by Gomez.com reveal that 50 percent of sellers and 75 percent of buyers want alternatives to traditional brokerage services. A survey conducted by The Real Estate Cafe at the New England Home Show last month yielded similar results. One in three consumers wants the limited menu most Realtors offer: full service, full commission.

In a letter to President Bush, Richard Mendenhall, president of the National Association of Realtors, wrote, “According to the GLB Act, the Federal Reserve Board may authorize new activities only as a result of changes in the financial services marketplace or in technology used to deliver financial services … Since the enactment of GLB in November 1999, no such changes have taken place.” Wrong again.

In October 2000, the first Consumer-Certified Real Estate Consultants graduated from the “Train the Trainer” program in Orlando, Fla., with the goal of developing a nationwide network of fee for service real estate consultants. “Real Estate A La Carte,” a book written by Julie Garton-Good, founder of the National Association of Real Estate Consultants, appeared in retail book stores last week. While commission-based real estate agencies will be slow to offer this new, money-saving business model, bank and financial holding companies are eager bring it into the marketplace, as Walsh’s comments indicate, and are likely to uncouple buyer agent and seller agent fees, a reform first proposed by CFA some 10 years ago. That action alone will save consumers billions.

On the technology front, the E-Sign legislation became law in October 2000 as well. Freddie Mac estimates that digital signatures will save real estate consumers an average of $1,000 per closing or another $5 billion per year. Bankers are not only poised to embrace these new money-saving technologies, but their trade association, American Bankers Association, is part owner of Digital Signature Trust, one of the leading vendors.

Other new technologies promise money-saving consumer benefits as well. Extensible Markup Language-based transaction managers will create an open platform for different players in the real estate transaction, including buyers and sellers, to collaborate at every step in the process. XML-based listing tools will give buyers the ability to aggregate listings from multiple sources, including banks, brokers, builders, nonprofit housing organizations and “for sale by owner” properties using their own browser. Privacy-enhancing technologies will give consumers the ability to own and control access to their financial profiles, including listing information and search criteria.

This new generation of information technologies, new business models and new players will raise a wide variety of consumer issues. Without an organized consumer effort, the future of this trillion-dollar industry will be defined by two titans: NAR, which ranks No. 15 on Fortune magazine's list of the most powerful lobbying groups; and ABA, which ranks No. 11.

As a counterbalance, a coalition of consumer groups could be formed to coauthor a long-overdue Real Estate Consumer Bill of Rights, both to correct ongoing problems and guide the industry’s evolution. This Real Estate Consumer Alliance, or RECALL, could include a variety of groups including CFA, Consumers Union (publishers of Consumer Reports), National Consumer Law Center, National Consumers League, American Council on Consumer Interests, Privacy Rights Clearinghouse, Electronic Privacy Information Center, Consumer Project on Technology, USPIRG and AARP. Because homebuyers and sellers have the most to gain – an average savings of $6,000 per transaction, according to the Wall Street Journal – RECALL could be self-funded through online donations from the anticipated $30 billion annually in savings. That kind of savings should be enough to wake the average consumer. But time is running out to wake the sleeping giant.

Editor's note: Wendel also points out that consumer savings from reforming the real estate industry could have an even broader impact. Home buyers and sellers could be encouraged to pass on some of their online savings to build affordable housing in third world countries through a program sponsored by RECALL called “Buy 1, Build 1.” Few realize that 1.5 billion people on the planet make less than one dollar per day--or less than a single ATM fee. Many are also surprised to learn how little it costs to build a home in third countries like Haiti and Kenya: $600 or one tenth the average consumer’s saving. Donations to fund nonprofit housing providers, like Habitat for Humanity, could be collected through an industry-wide network of bank and broker sites using an online check off box similar to the check off box on your tax return. With just one click, the next generation of real estate consumers, who collectively will save $30 billion annually, could have a GIANT impact on the world.

Published: April 30, 2001

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