Franchise brokers are growing. Market share by top firms is shrinking. Competition is growing. Those are the results of studying a cross-section of 12 residential real estate markets across the U.S.

Researchers at Pennsylvania State University have found that despite substantial growth of the real estate business in recent years, competition for customers among real estate brokerage firms in local markets is fierce, says the National Association of Realtors.

In seven of the 12 markets, and four of the six largest, franchised firms have a larger percentage share of the market than do the other locally-owned firms. All markets are growing, but growth is greater and competition is more intense in larger markets. No single firm dominates any of the 12 markets; there are changes in relative market share of the top firms in each of the 12 markets, market entry of new firms, and market exit of existing firms, says the study.

The central finding is the intense competition in local real estate markets. This high level of competition in real estate is striking given that the combined volume dollar growth across the many local real estate markets would suggest that competition might be lessened (as growth provides a means for all participants to gain).

Five additional points bear on this finding:

1. Patterns of competitive activity vary across local real estate markets

   • In 10 of the 12 markets, the percentage of market share held by top firms is shrinking.
   • There is steady to substantial growth in each of the 12 markets
   • In seven of the 12 markets, and four of the six largest, franchised firms have a larger percentage share of the market than do the other locally-owned firms.

2. Few patterns of competitive activity are common to all local real estate markets

   • Smaller markets are more concentrated than are the larger markets.
   • There are market share position changes among the top firms in each market.

3. Within each local real estate market inter-firm competition is fierce.

   • There are changes in relative market share of the top firms in each of the 12 markets, market entry of new firms, and market exit of existing firms.

4. Smaller markets are seeing the least growth.

   • The smallest markets (in terms of population) are seeing the least growth (relative to annualized dollar volume sales increase).

5. Increased access to information is redefining how consumers engage real estate.

   • Consumers are more knowledgeable regarding house prices, brokerage alternatives, and their expectations for services provided by real estate agents.
   • It may be that online access to listing data is what enables each of these local real estate markets to grow even as it drives competition.
   • We found no evidence that alternative business models such as discount brokerage or for-sale-by-owner (FSBO) sales are increasing in any of these local markets.

According to the report, the structure and function of the local real estate markets making up the U.S. residential industry are similar. This similarity makes it easy to confuse the collective action of thousands of local markets with the underlying commonalities of a real estate market. The differences in the ways in which the basic principles of a market get enacted in complex ways in each local real estate market make it difficult to ascertain effects of large scale structural and policy changes.

"What we find is that selling real estate is intensely competitive. Consumers have more information, they demand more services, and they have more agents and business models to choose from than ever before. Consumers are demanding more services and agents are responding by providing an ever-widening range of services," said Professor Steve Sawyer of Penn State's School of Information Sciences & Technology.

The study suggests that increased consumer access to real estate information online is redefining how consumers engage real estate services and may be contributing to growth of real estate markets and a high level of competition.

Not only are potential sellers more knowledgeable about property values, there are more alternatives and service options. Access to multiple listing service data may be creating better consumers who demand more of their real estate agents and other value-adding service providers. The study found evidence that national on-line access to local real estate MLS data may be a critical factor in the surge in property values by acting as a "market-maker" -- enabling sellers and buyers in each local real estate market to better access locally-relevant information.

"We note that even with the substantial growth in real estate based on the number of units sold and dollar volume, agents still report that competition is even more intense. This is surprising because we expected that such growth would lead to a less, not more, competitive environment. The increased competition seems to be due, in part, to consumers' increasing access to information (probably including via the internet)," said Sawyer.

In other works, the researchers argued that real estate agents are less valued for their information control than they are for the professional contact and their ability to bring parties to a fruitful transaction (the closing). Local real estate markets are driven by the social networks and social capital that real estate agents bring. Networks of professional social activity were the vehicles that made local real estate markets happen, say the researchers.

This is significant, as critics of the real estate industry, particularly the Justice Department, believe that the Internet is a tool being used by brokers to limit competition, instead of expand competition. Realtors have found that in addition to enabling consumers with information, they still mow the grass, give advice, or tie up the dog during a showing, tasks the Internet is never required to do. Yet, the Internet is playing a role in decreasing commissions to Realtors.

"This is big news for consumers. Home sellers and buyers are in the driver's seat today when it comes to finding real estate services on attractive terms," said NAR Chief Economist David Lereah, "This is a great time to look for a Realtor who will deliver the best service and the best price."

Interestingly, the Penn State researchers found no numerical evidence of discount brokerage or for-sale-by-owner (FSBO) sales increasing even in the fastest growing of the 12 local markets studied. The discount brokerages involved in these areas account for less than one percent of the total market share.

Markets included in the study were St. Louis, MO; Tampa, FL; Columbus, OH; Madison, WI; Lima, OH; Baltimore, MD; Culpeper, VA; Cumberland, MD; Charlotte, NC; Easton, MD; Hagerstown, MD; and Wilmington, NC.

The study is believed to be the largest of its kind using data from local multiple listing services as well as information from interviews and other secondary sources.

The study was funded by a grant from the National Center for Real Estate Research of the National Association of Realtors.

Published: September 15, 2005

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