Aaron Farmer
In 2000, the housing market was hot, the internet was just hitting its stride and real-estate agent Aaron Farmer was starting a career in what he thought was one of the most open of free markets.
Farmer, based in Austin, Texas, came up with the idea of offering an a la carte fee-based “menu” of services to attract clients rather than providing the same all-inclusive service, for the standard 6% fee, to everyone. For instance, he’d submit a property to a listing database in one city for a certain amount, or to two for a slightly larger amount. If clients wanted, say, a lockbox for the home, that would be another fee.
But just after Farmer went into business, the state-run Texas Real Estate Commission passed rules establishing what they called minimum levels of service that real estate agents had to meet — effectively making Farmer’s idea illegal.
In 2002, Farmer sued the commission and got some help from an unexpected source: the U.S. Department of Justice and Federal Trade Commission. Both were investigating ongoing misconduct in the real-estate brokerage world, where powerful incumbent players were blocking newer entrants, usually those who wanted to harness new technologies to sell services more cheaply or in a more customized way.
In 2008, after years of wrangling, the Justice Department struck a deal with the National Association of Realtors, the mighty Washington-based industry group that represents individual realtors and local real estate associations around the country. The settlement limited anti-competitive practices like the one Farmer experienced — bans on new business strategies — as well as a more common abuse, in which some agents were denied access to the listing data that tells real estate professionals which properties are for sale.
‘The Redfins of the world do not pose an existential threat to the traditional industry. That’s the surprise.’
The 2008 settlement was designed to last for 10 years, and as its Nov. 18 expiration draws closer, it’s rallying real-estate market participants and their representatives in Washington to re-assess the state of the industry and consider what comes next. Two members of Congress have written to Justice and the FTC to request that they consider extending the 10-year consent decree, and may hold hearings.
The big question now, many industry participants say, isn’t whether NAR affiliates will go back to practices that critics say hobbled individuals like Farmer before the settlement came into force. It’s a more existential question: if the full weight of the Justice Department and a 10-year stretch of time during which the internet became the de facto way of doing most business hasn’t dislodged the traditional practices still entrenched in real estate, is there anything that can?
Among those industry participants watching closely is Stephen Brobeck, executive director of the Consumer Federation of America, an advocacy group that investigated real estate brokerage practices in the early 2000s. “The residential real estate brokerage industry functioned as a cartel, effectively controlling services and prices,” Brobeck told MarketWatch.
Brobeck’s organization advocated for changes to the minimum levels of service issue that had derailed Farmer. That requirement keeps commissions artificially high, Brobeck said — usually 6%, whereas in many other countries they’re as low as 1.5% to 2%.
| Country | Buyer commission | Seller commission |
| Austria | 3.0% | 1.0 - 2.0% |
| France | 4.5 - 8.0% | |
| Germany | 2.0 - 6.0% | |
| Greece | 0 - 2.0% | 1.0 - 5.0% |
| Spain | 1.5 - 6.0% | |
| Switzerland | 3.0 - 5.0% | |
| Thailand | 3.0 - 5.0% | |
| United Kingdom | 0.5 - 3.5% | 0.5 - 3.5% |
| United States | 2.0 - 6.0% | |
| Source: Tranio | ||
But as new technology enabled entrepreneurs to set up new types of online marketplaces, the issue of access to listings also became important.
Realtors depend on what’s called the Multiple Listing Service, a system that gathers all available data on properties that are for sale. NAR describes it this way: “The MLS is a tool to help listing brokers find cooperative brokers working with buyers to help sell their clients’ homes. Without the collaborative incentive of the existing MLS, brokers would create their own separate systems of cooperation, fragmenting rather than consolidating property information.”
(Complicating the issue is that there is no single MLS. Instead, there are more than 800 throughout the country, each with their own data, their own practices and their own leadership.)
‘Changes at the margin’
In the mid-2000s, a new company called Redfin, which offered a steeply discounted model for sellers, was “particularly threatening to traditional brokers,” as Brobeck put it. Its CEO told Congress in 2006 that competitors had threatened his agents with violence, intimidated their customers and tried to block their offers.
But 10 years on, those worries have abated. “The traditional brokers thought that the technology was going to be extraordinarily disruptive, but it hasn’t,” Brobeck told MarketWatch. “The Redfins of the world do not pose an existential threat to the traditional industry. That’s the surprise.”
(In the late 1990s, the NAR established Realtor.com, an online portal on which all MLS data would be instantly available. News Corp., the owner of MarketWatch, owns and operates Realtor.com under license from the NAR.)
Redfin RDFN, +0.05% was unable to make its CEO, Glenn Kelman, available for an interview before this article’s deadline. But in a November release, the company said it had market share of just 0.71% in the third quarter of last year — representing what Brobeck calls “changes at the margin.”
In some ways the player that’s been more unsettling, if not outright disruptive, to the real estate market isn’t a real estate company at all. Most analysts call Zillow ZG, +0.45% a media company, offering housing market content and trends over hard-and-fast figures. The company describes itself this way: “Zillow Group is committed to empowering consumers with unparalleled data, inspiration and knowledge around homes, and connecting them with the right local professionals to help.”
Over the past few years, Zillow has pushed back against regulator attempts to block it from allowing real estate professionals to jointly market their services, a campaign many housing experts interpret as the company doubling down on traditional models that benefit realtors, rather than innovating new ones.
Read: Zillow advertising under CFPB fire sets real estate industry on edge
But real-estate agents in the field have what Farmer calls a “love-hate” relationship with Zillow. “Love-hate might be too nice, the more I think about it,” he added.
He described Zillow’s presence in the market this way: Local brokers form relationships with homeowners who want to sell their property. They ready the home for selling, stage it for appeal, photograph it and create a listing. Then Zillow aggregates that listing into its web site, and tries to sell leads of interested buyers back to the listing agent. What’s worse, at least according to Farmer, is that Zillow’s information about what’s actually available for sale isn’t always accurate—sometimes skewed by nearby, but otherwise not comparable, listings—and leading to buyer (and seller) confusion.
In response to MarketWatch’s request for comment on its views of the end of the 2008 consent decree, Zillow emailed this response: “We believe a fair, open market that is transparent and encourages innovation benefits everyone — from home buyers, sellers, to real estate professionals. We are closely watching the news developing in Congress and appreciate lawmakers’ desire to ensure we have an industry that is competitive and consumer-friendly.”
Lessons learned
One of the Justice Department lawyers deeply involved in the mid-2000s real estate antitrust enforcements, David Kully, thinks it’s only natural for companies like Zillow and Redfin to be concerned about what comes next.
“Given what happened in the past, I’m sure that those who have built businesses around the internet display of listings might have some concern about what might be around the next corner,” Kully told MarketWatch. Kully is now a partner with the law firm Holland and Knight, and he concedes that the industry that’s grown up on the internet, and homebuyer expectations that they be able to find property listings online, may be enough to stave off any temptation by MLSs or other entrenched players to try to restrict access.
Brobeck agrees. “If Justice doesn’t extend the consent decree, what happens? There may be some bad things that happen slowly, but it would not be aided and abetted by the NAR. They learned their lesson. Zillow and Redfin are not discriminated against right now.”
Still, Brobeck thinks it’s worth extending the consent decree “as a precaution.”
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For its part, NAR says the lessons of the settlement have been taken to heart. “I know there’s been a lot of speculation about how the world’s going to turn upside down [as the deal sunsets] and MLSs will do all kinds of wacky things,” the group’s acting general counsel, Ralph Holmen, said. Holmen has spent the past 10 years traveling the country to coach MLSs on the provisions of the settlement.
“If we think some modifications to the policy embodied in the decree are helpful and lawful, we may consider implementing them, but we’ll do that carefully and lawfully,” Holmen said. “If we think a change is important but it’s not as clear that it’s lawful, we may go to the Department [of Justice].”
While national policy and outreach are important, the Austin agent Farmer said the lesson he’s learned is that “all politics is local.” In 2016, he was elected president of the Austin Board of Realtors, despite being what he calls “an outsider,” because he’d sued the state.
“I tell people an entity like that can have more impact on your life than the president,” he said of his work with the local board.
Service sells
Farmer also began to realize that the customized, lower-cost fee-for-service system he’d invented wasn’t working for him or his clients, and he went back to the full-service traditional model, placing him in good company among other early internet pioneers whose business wound up looking much the same it had for decades.
“One thing that would shake things up would be a really good servicer web site in which brokers were evaluated,” Brobeck said. “There isn’t enough pressure to lower commissions — consumers aren’t demanding it.”
And more to the point, consumers are willing to buy plane tickets, trade stocks and browse home designs online, but still seem to want a human to walk them through the process of making the biggest purchase of their lives — even if they rely on informal word-of-mouth recommendations for those professionals from friends and family.
“You just need help,” Brobeck said. “You want a person, you don’t want a robo-advisor. You want somebody who will walk you through the whole thing and give you confidence and who you think you can trust.”