An alert reader in New York City sent in a link to this Wall Street Journal article, U.S. Sues Realtors, Claims Web Rules Limit Discounting. The suit alleges illegal restriction of competition, which in turn costs consumers substantial amounts of money. The suit cites reductions in transaction costs due to efficiencies of the Internet in the travel, brokerage, insurance and other markets. So why not real estate? Why do most home sales involve a 6% commission? Restraint of trade, says the DoJ, with good reason. Most folks who have bought a home recently probably used the internet extensively. Some agents know nothing about homes, neighborhoods, and add little value to a transaction. Why are they still getting 3% of the transactional cost, when there are lower cost alternatives? (The agent I worked with actually knows a ton about real estate, and talked me out of buying a house I really liked, even after looking at dozens of houses with me.)
For more reading on the real estate market, try this earlier post, on why existing pricing models do not encourage agents to act in your best interest.
Another interesting result of the real estate boom is that while the number of people going into real estate is surging, individual agents’ commissions are fairly flat. (See this Slate article on “Why most real-estate agents aren’t getting rich“.) In other words, the folks who control real estate firms may benefit from receiving a constant percentage of rapidly appreciating transaction prices. However, because the barriers to entry are so low, almost anyone can become an agent with fairly minimal investment. Compare this to other, more exclusive professional clubs, like doctors, lawyers, or United States senators, which require much more exhaustive preparation. In return, members receive much better compensation (and in the case of senators, I’m not just talking about the official salary).
Anyway, we’re off on a tangent here, but there is substantial merit to the suit. The Bush DoJ, generally very pro-business, is taking on a powerful, previously untouchable lobby. After all, this is a market Microsoft wanted to own when the internet revolution came, and they got nowhere. And they know a little about monopoly pricing.