Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Real estate brokers face mounting antitrust threat

It has been a while coming, but a recent court case from Missouri may signal the beginning of a shakeup in how real estate brokers charge for their services. A Federal court jury in Kansas City found the National Association of Realtors and two large national brokerage firms guilty of violating Federal and state antitrust laws in a conspiracy to inflate sales commissions. The jury awarded the plaintiffs $1.8 billion, a sum likely to be trebled due to the nature of the violations.

The antitrust case involved what the jury found were systemic anticompetitive practices and policies imposed by the NAR on its members regarding the use of local Multiple Listing Service (MLS) cooperatives and the method by which buyers’ agent commissions are determined. But more significantly, while the damages in this case were substantial, there are more and bigger cases queuing up at the courthouse including a $40 billion national class action lawsuit that could permanently disrupt broker sales practices.

Antitrust law seeks to promote free markets by limiting excessive concentration that can result in unfair practices like price fixing and collusion that impede competition and harm consumers. The term traces back to the late 19th and early 20th century “trust busting” movement that arose in response to the emergence of dominant business combinations that effectively controlled major industries like oil, steel, and railroads, subsuming competitors and artificially driving up prices. To evade extant state laws limiting business concentration, industrialists created a legal structure that allowed owners of individual companies in an industry to pool their assets into a trust that evaded state regulation and created effective monopolies. Perhaps the most familiar example was Standard Oil, a trust assembled by John D. Rockefeller that gained near monopoly control until it was broken up in the first successful national antitrust action.

Recognizing the need for federal legislation, Congress adopted the Sherman Antitrust Act of 1890, the eponymous bill championed by Ohio Senator John Sherman, the younger brother of Union General William Tecumseh Sherman. The bill passed the Senate vote of 51-1 and unanimously in the House by 242-0, evidence of the recognition that action was necessary. The Sherman Act became the lynchpin of vigorous trust busting by Presidents Theodore Roosevelt and Milliam Howard Taft and remains a central tool of antitrust enforcement today. The Clayton Act regulating mergers and the Federal Trade Commission Act were added in 1914 to round out the legal arsenal.

The Missouri case as well as the pending class action allege violations of the Sherman Act, which prohibits “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce…” The jury found that the long-standing practice of requiring sellers to pay the buyers’ agent commission has artificially kept fees higher than would be the case if buyers hired their own agents.

The NAR requires members who list homes for sale on one of the local MLS cooperatives to state in advance the commission offered by the seller to the agent representing a potential homebuyer, even though neither the buyer nor the agent are known to the seller at the time, and that the arrangement represents an inherent conflict of interest since the opposing agents are adversaries during the negotiation process. Typically, the payout is 5%-6% split evenly between seller’s and buyer’s agents as it has for over half a century, despite the deployment of technology like widespread access to internet listings of available properties. Meanwhile, compensation for other agency transactions like stock brokerage or travel services has fallen dramatically or disappeared altogether.

The National Association of Realtors decried the verdict, insisting that brokerage commissions are negotiable. While this is technically true, the jury agreed with evidence suggesting that many listing agents resist reducing commissions while buyers’ brokers frequently engage in “steering”, directing their clients toward listings with juicier payouts.

Sellers are certainly free to hire a broker not affiliated with the NAR or no broker at all (For Sale by Owner or FSBO), but these sellers are presented with few realistic options in practice since the MLS is so dominant and 90% of all sales are through NAR member Realtors.

Several discount brokerage firms have entered the fray but struggle to gain a foothold. One workaround attempted by these some discounters was to rebate a portion of the agent’s commission to the homebuyer, but even this tactic has met NAR opposition; 8 states including Tennessee have bowed to industry pressure and outlawed rebates of sales commissions.

NAR President Tracy Kasper promised in a statement to appeal the decision. “The NAR presented evidence that consumers are better off and business competition is able to thrive” due to the trade group’s policies, adding that “the NAR cooperative compensation rule for local MLS broker marketplaces ensures efficient, transparent, and equitable marketplaces.” This claim contradicts substantial academic research dating back to the 1980s, and it took the jury less than 3 hours to agree. Meanwhile, the US Justice Department is petitioning a federal court to reopen a 2020 antitrust investigation. And research from Keefe, Bruyette and Woods suggests that a broad injunction from a trial judge in a national case could shave as much as 30% off the $100 billion in annual real estate commissions.

The appeals process could take years, so don’t expect any drastic shifts in the near term, but change is coming. Stay tuned.

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