Agent commissions are getting more transparent — but critics still say the real estate industry operates as a ‘cartel’

Criticisms around the structure of the industry center on the notion that Americans pay too much to buy and sell homes.

Jeff Ostrowski | (TNS) Bankrate.com

When the National Association of Realtors (NAR) and major brokers last year lost a federal antitrust suit, the verdict unleashed new scrutiny of the industry and its practices. With new commission rules set to go into effect in August as a result of the settlement, critics — even some inside the industry — are growing louder, saying the National Association of Realtors is a “cartel.”

One vocal broker, Mauricio Umansky, head of the national real estate brokerage The Agency, thinks so. “It’s a monopoly,” says Umansky, who’s challenging NAR by heading an alternate organization, the American Real Estate Association. “They control everything.”

NAR disputes such a characterization. After all, the trade group is not just a small circle of powerful individuals: NAR has more than 1.5 million members across the U.S., and barriers to entry are relatively low. In most states, getting a real estate agent’s license requires no college degree and about 60 hours of classroom training.

Lawrence Yun, NAR’s chief economist, points to those modest requirements as evidence that healthy competition is alive and well. “Real estate is a perfectly competitive industry,” Yun said at a convention at the end of last year.

Criticisms around the structure of the industry center on the notion that Americans pay too much to buy and sell homes. The total pot of real estate commissions is estimated to be $100 billion a year.

As for the cartel allegations, “The statement is not true,” says NAR spokesman Mantill Williams. “NAR is a trade association that provides its members benefits such as educational opportunities, leading economic research, national property data and first-in-class advocacy, among other benefits. In addition, NAR serves as a champion and advocate for consumers — both homebuyers and sellers.”

Why some critics call the National Association of Realtors a cartel

The commonly accepted definition of a cartel describes an organization of independent producers who collude to boost the profitability of market players. This cooperation can include restriction of output or control of price. Members of a cartel typically operate separately while engaging in cooperative policies — like a shared monopoly.

Classic examples of cartels include OPEC, a group of oil-producing nations that exert influence to tighten supply in a way that boosts prices; drug trafficking organizations in Mexico and Colombia, which control output and supply chains for illicit substances; and even Major League Baseball, which holds a century-old exemption from U.S. antitrust laws.

Unlike those cartels, though, NAR doesn’t control supply of the underlying product. The inventory of existing homes is determined by homeowners deciding they want to sell, while the supply of new homes comes from builders. NAR directs neither group.

Critiques of NAR center not on its control of the supply of homes but on its grip on information about homes for sale. Realtors market properties through multiple listing services (MLS), local organizations that are often accessible only by NAR members.

Another flashpoint for critics is the resilience of real estate commissions. While Realtor fees have declined from the once-standard 6% to today’s average of closer to 5%, skeptics note that real estate commissions are much lower in other countries. A tour of the world finds fees of 1.5% to 2.5% in the United Kingdom, 2% to 4% in Australia and 2.5% to 3.5% in Belgium, according to data from the Counselors of Real Estate.

Real estate industry opinions are mixed

Does the industry operate as a cartel? The answer depends on who’s analyzing the situation. Stephen Brobeck, senior fellow at the Consumer Federation of America, says NAR clearly qualifies as a cartel.

“They ceased using price schedules after being sued successfully by the Department of Justice in the 1940s,” Brobeck says. “But they’ve been able to successfully maintain 5% to 6% commissions, mainly through widespread informal collusion in a cooperative industry where most agents and brokers are desperate for clients, so are strongly supportive of high commission levels.”

Indeed, NAR is no stranger to investigation by the DOJ. And other critics of the industry — including the editorial board of The Wall Street Journal and the founders of discount brokerage REX — agree with the cartel characterization.

“A cartel is an organization that keeps prices high and restricts competition,” says Lynley Sides, co-founder of REX, which is headquartered in Austin, Texas. “There are multiple rules NAR uses to keep competition out and to keep prices high. It’s clear negotiation doesn’t really happen in this industry.” (Technically, commission rates have always been negotiable.)

As for the large number of agents in the industry, Sides isn’t swayed by that argument. She notes that more Realtors mean more revenue — the nonprofit organization reported $285 million in dues for 2022, the latest year for which NAR’s tax return is publicly available. “It’s in NAR’s interest to have more dues-paying members,” she says.

But Ken H. Johnson, a housing economist at Florida Atlantic University, draws the opposite conclusion.

“Cartels are typically a small group of producers that hold market power over consumers of their products,” Johnson says. “NAR is a trade association with over 1.5 million members that share housing information, individually hold no market power and do not collude. NAR is not a cartel.”

In fact, Johnson agrees with Yun’s assertion that the real estate industry is highly competitive.

“In perfectly competitive markets, participant producers are price takers,” Johnson says. “Said another way, one (commission level) and method of practice are a common trait of perfectly competitive markets. Uniform fees and practices by real estate brokers is a sign of a competitive market, not collusion.”

RE/MAX co-founder Dave Liniger doesn’t believe NAR is a cartel, but he does think the industry’s missteps have opened it to criticism. “Like any mass group of people that’s got monopoly power, they’ve taken advantage of it,” Liniger says. “If you don’t have access to the MLS, you’re out of business.”

If NAR advocates for its customers, is it really a cartel?

Cartels have a negative connotation — the word signals unfair competition and cutthroat practices at the expense of consumers.

But NAR’s defenders say the group is on the same side as American homeowners. NAR is one of the biggest lobbying groups in the U.S., and it often pushes for legislation and administrative policies that would boost homeownership.

“The National Association of Realtors represents Realtors, but they also represent the United States homebuying market,” says Eddie Blanco, a Miami broker and chairman-elect of the Miami Association of Realtors, the nation’s largest local Realtor group. “There’s so many things NAR has helped to put in place for Realtors, and for homebuyers. We take it for granted — 30-year mortgages, 3.5% down payments, tax deductions.”

NAR’s critics see the trade group’s lobbying power as another example of its cartel-like muscle. “There is such a powerful lobby,” REX’s Sides says. “They put a great amount of effort into maintaining the size of the pool of Realtors.”

But Blanco sees NAR’s lobbying efforts as benevolent. For instance, the settlement of the federal antitrust suit led to new industry rules that could put homebuyers on the hook for paying their own agents. That led to concerns about the U.S. Department of Veterans Affairs (VA) loan program, which prohibited buyers from paying agents or financing buyer agent commissions.

“We were the first ones to go to the VA and say, ‘Look, these changes are coming around,’ ” Blanco says.

As a result, the VA has been moving toward an accommodation of the looming commission rules. And Blanco raises an intriguing point: Can NAR be unfriendly to consumers if its goals often are aligned with tens of millions of American homeowners? The answer, apparently: It’s complicated.

How new commission rules affect buyers and sellers

The debate about NAR’s structure comes against the backdrop of a high-profile challenge to the way Realtors do business. In March, NAR settled a federal antitrust suit brought by home sellers in Missouri. The trade group agreed to pay $418 million in damages and to change a longstanding rule about how commissions are paid, an outcome that has invited new scrutiny of the industry.

What’s changing:

—Buy-side commissions no longer will be posted in the MLS. For decades, the seller determined pay for both the listing agent and the buyer’s agent. The buyer’s agent compensation was listed in the MLS and was typically 3%. These days, the average is more like 2.5%. But that number is set to disappear from the MLS altogether in August. Buyer agents will still be able to advertise pricing on their websites, on social media and in other advertising, though.

—Buyers will negotiate how much they pay their own agents. Because the seller no longer sets the buy-side fee, now buyers and buyer agents will work that out in their own conversations about compensation.

—Sellers can still agree to pick up the buyer’s commission. It’s an age-old question: Who pays the commission? For decades, the fee has come out of the seller’s proceeds at closing — but because it was typically included in the price, the buyer still essentially paid. Now, sellers have a choice. They can decide to cover the buyer’s commission costs as a concession.

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