Real Estate Brokerage

Real Estate Br okera ge Industr y: Str uctur e-ConductPerfor mance Lawrence Yun, Ph.D., Senior Economist

NATIONAL ASSOCIATION OF REALTORS ®

Presentation at the Federal Trade Commission Public Workshop October 25, 2005

Consumer Choice • For-Sale-By-Owner • Discount brokerage • “Traditional” brokerage • Internet browsing free of charge

Perfectly Competitive Industry? • Many service providers – 1.25 million REALTOR® members – 2.53 million real estate licensees – 98,000 active firms, 236,000 local offices – 1 million for-sale-by-owner sales

• Low barriers to entry and exit into the profession – 253,167 became new Realtor members, while 127,877 dropped Realtor membership in 2004

• Widely accessible information – Web browsing, newspaper, yellow pages, mailings

Past Cycles – Recession in 1980s • Home sales declined by 50% from 1979 to 1983 • REALTOR membership declined by 18% from 1981 to 1983

– Recession in 1990s • Home sales declined by 14% from 1988 to 1991 • Membership declined by 12% from 1990 to 1995

– Recession in 2001 and 2002 – Different • 45-year low mortgage rates • Record home sales • Strong price increases • Record membership

Existing-Home Sales Total existing single-family home sales

7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000

19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04

0

Source: NAR

Real Home Price Growth Home price growth minus CPI inflation 15 10 5 0 69 9 1

-5

75 9 1

81 9 1

87 9 1

93 9 1

-10

Recession Impacts Source: NAR

99 9 1

05 0 2

NAR Membership members

1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000

Source: NAR

20 05

20 00

19 95

19 90

19 85

19 80

19 75

0

Concentration Ratio •

Top 10 firms had 9.1% market share

•

Top 20 firms had 10.9%

•

Top 100 ... 17.0%

•

Top 500 ... 26.6%

•

Competition for clients

•

Competition for agents

Source: Real Trends, 2004

Market Flexibility Sales Force 1983

1990

1996

1999

1 to 5

51

55

51

60

6 -10

23

23

18

17

11 - 20

13

13

14

11

21 - 50

6

9

9

8

50 +

3

4

4

4

• 2004: 96% of office had 10 or fewer agents • Constant economies of scale – Zumpano (2002) – Stigler Survivor Test

How can small firms survive? • MLS access puts everyone on equal footing • Agents are independent contractors • Person-to-person and case-by-case service requiring the highest level trust – Legal advice – Estate planning advice – Tax advice

Perfectly Competitive Outcome? • Median REALTOR Income – $52,000 in 2002 – $49,300 in 2004, working 45 hours per week – Is $52,0000 or $49,300 excessive or normal income?

• Falling commission rates with more members – 5.5% in 1998 to 5.1% in 2003 (REAL Trends) – Xyz% in 2005 • Free moving truck • Closing cost assistance • Commission rebates

Desirable Performance Measures • Economic mobility (proxied by home sales) – one of the most dynamic in the world • Historical experience of seeking a government bailout – none – bad times were self-correcting through exits • Taxpayer risk – none • Social promotion of entrepreneurship and self-reliance – yes • Social promotion of women entrepreneurs – yes • Flexible work hours – yes • Work stoppage through labor strike – none • Data mining to price discriminate - none • Subject to international regulatory jurisdiction - none

Multiple Listing Service • Purpose of MLS – – – –

Facilitate home sales transaction Available to all REALTOR members $500 million investment to show homes 24/7 on Realtor.com Not set up to solicit clients at the expense of existing brokers/agents

• Public Utility? Consider to incentives to – – –

Stadium vendors Shopping mall vendors Pharmaceutical retail

When In Doubt, Trust … • Market outcomes wrought from free entry and exit • Market not subjected to “Profits in the Long Run” – Robin Marris and Dennis Mueller’s managerial theories of the firm • Private ownership (of MLS) • Democratic process (for consumer protection)