In a heavily publicized report released last week, the Consumer Federation of America has timed its findings to appear just ahead of congressional hearings -- that real estate commissions are dominated by (gasp!) practicing real estate brokers. The intention is maximum damage to the real estate industry.
The CFA accuses state regulators of failing to "adequately inform, educate, and protect home sellers and buyers using brokerage services, and in some states these regulators have acted to restrict competition and consumer choice."
Suggesting that the real estate industry should be overseen by independent commissioners as the utility and insurance commissions are, the CFA notes, without irony, that it is statutes (state laws) which establish regulatory agencies that make the rules for real estate licensees to follow.
Those rules include what qualifications commissioners must have to serve on the regulatory board. More than two-thirds of all real estate commissioners are required by statute to be active real estate salespeople, brokers, or licensees. "Four states -- Idaho, Louisiana, Mississippi, and Nevada -- require all commissioners to be active real estate brokers or salespeople," says the CFA. "An additional eleven states -- Colorado, Kentucky, New Mexico, Ohio, Utah, West Virginia, Georgia, Indiana, Missouri, Oklahoma, and Washington -- require at least four-fifths of commissioners to hold real estate licenses."
Most damning is the CFA finding that broker participation is more extensive than that required by law -- four-fifths (79 percent) of all commissioners are active in the real estate industry, and another 9 percent are affiliated with businesses that have ties to the industry, such as developers, appraisers, title agents and real estate attorneys. More than one-fourth (26 percent) work for one of the three brokerage services including Cendant's NRT, RE/MAX or Prudential. Not surprisingly, the CFA findings include the fact that nearly one in ten work for large regional firms that dominate their local markets.
The conclusion is that independent regulation of real estate brokers is "badly needed" says the report.
What's badly needed are the sources and proof for some of the accusations the report makes -- like when it says consumer complaints against brokers are increasing rapidly, and that complaints suggest that many of the new and inadequately trained agents suggest that they serve only their own interests and not those of consumer clients. This follows an accusation that several real estate commissions have supported minimum service laws to "restrict the services offered by nontraditional Internet-based or discount brokers."
The main accusation that the CFA makes is that the "industry-dominated commissions are just part of a cartelized system that was characterized as "cockamamie" by a CFA report released in June 2006."
There are multiple problems with these blanket accusations:
- The CFA doesn't seem to truly define with whom it really has a problem -- state regulation of the real estate industry or the real estate industry itself.
- The CFA doesn't list but one "source" in all its statements -- a white paper called, "Redefining Realtor Relationships and Responsibilities: the Failure of State Regulatory Response," by Ann Morales Olazabal, an assistant professor of business law at the University of Miami School of Business Administration.
- There is already a "checks and balances" in place. It's called the state legislature, which creates statutes. Saying state commissions are part of a cartelized system is nothing short of accusing state legislatures of being part of the real estate cartel. If CFA has a problem with the way brokers and salespeople are licensed, then this article is a thinly disguised effort to help the federal government overturn state oversight.
- As with Federal Trade Commission suits, an injured party isn't named. Who are these consumers who are complaining against the real estate industry? What are their specific complaints? Does the CFA consider complaints only against traditional brokers? Can nontraditional Internet-based or discount brokers operate with impunity?
- Doctors and lawyers are also licensed by the state. Does the CFA propose removing practicing doctors and lawyers from their regulatory commissions?
- If real estate licensees have grown to 2.5 million, doesn't that shoot out of the water the CFA's claim that real estate commissions have acted to "restrict competition and consumer choice?" And if many of those are inexperienced or untrained, doesn't that also support an open door policy that welcomes anyone who passes minimum requirements to become a licensee?
- Doesn't it stand to reason that dominant brokers, having larger offices and affiliations, would also have more visibility on regulatory bodies? Also, CFA is wrong when it calls Cendant (now known as Realogy), RE/MAX and Prudential brokerage services. They are franchisors, providing services to brokers, not to consumers. And again, if they are dominant, wouldn't it stand to reason that more Realogy, RE/MAX and Prudential-affiliated brokers would serve on commissions?
- Would CFA care to distinguish what is a "traditional" broker and what is a nontraditional Internet-based or discount broker? These are categories that defy description since almost all "traditional" brokers use the Internet, engage in nontraditional services like referrals and fee-for-service and discount their own commissions to consumers on a case-by-case basis.
- Do real estate agencies have a right to charge what the market will bear? Is the CFA upset that the industry has earned $60 billion in commissions the past year? And if the industry is so poorly liked, as it indicates with its Harris Poll that states that real estate practitioners are trusted less than most other service professionals, why do 87 out of 100 sellers use them? If that were a criteria for change, lawyers and politicians would be put out of business too.
No, what this really is, is a feeble and underhanded attempt to make the real estate industry look bad -- ahead of congressional hearings scheduled for today. There's a reason why this opinion piece, masquerading as fact, appeared on Friday, July 22, 2006.
The hearings, held by the U.S. House Subcommittee on Housing and Community Opportunity, are to focus on competition and technology in the real estate industry. The committee hearing is titled, "The Changing Real Estate Market," and it "will focus on the changing real estate market and the growing role of the Internet in real estate transactions and its impact on home ownership and consumers," according to a statement by U.S. Rep. Bob Ney, R-Ohio, subcommittee chairman. "Specifically, this hearing will address such topics as new and innovative brokerage business models, multiple listing services, and the implications of state-imposed minimum-service requirements."
The subcommittee operates under the U.S. House Financial Services Committee, which is led by Rep. Michael Oxley, R-Ohio. Oxley is pro-banks, and anti-real estate industry. He ordered a U.S. Government Accountability Office investigation of price competition in the real estate industry last year and he also sponsored The Fair Choice In Housing Act, which has failed to raise more than one other supporter, also on the House Financial Services Committee.
The Fair Choice In Housing Act would allow banks into real estate.
Why does this dovetail so well with CFA's complaints about licensing at the state level? Banks are under federal oversight -- not state oversight.
If Congress can take state oversight of real estate licensing away by putting it under federal oversight, there will be no more need for state licensees.
What would that do? It would significantly reduce the cost of labor in the real estate transaction, which consumers would like. And it would put control of the real estate transaction in the hands of banks, which the banking industry would like. And with real estate under federal oversight via banks, the Feds could usurp the state transfer tax and make it Federal instead, putting lots of money into Federal coffers instead.
And that's what this is really all about.
