What the DOJ-NAR settlement means for me

Hello Jim. Well, painful as it will be for me, I am constrained to take exception to several things you’ve said in this post. Let me just confess my biases up front — I previously worked as a lawyer at the Antitrust Division of the Department of Justice, which is the government agency that negotiated the settlement, following a lengthy investigation, with the NAR. So, from that vantage point, a few comments.

First, you ask “what business does the government have in regulating free enterprise.” I doubt you can be fully serious about this. The government clearly has a role, for example, in making sure that “free enterprise” doesn’t kill us all by dumping poisons into the environment. That’s why the federal government regulates nuclear power, or chemical plants.

As for the kind of regulation involved in antitrust law, well, “free enterprise” depends on free markets. That is, we depend on markets driven by competition, where consumers are served by rivalry and new businesses can enter without being crushed. The federal government has an important role to play, via antitrust law, in making sure that competition, the mainspring of capitalism, remains vibrant.

Bigger point — “free enterprise” isn’t possible in the absence of regulation. A competitive economy can’t exist without antitrust. A well-functioning stock market can’t exist without securities law and enforcement. Etc. This is the central paradox of free-market capitalism. Freedom is possible only under law — including law regulating economic activity.

You also say that “anyone can start their own MLS”. Not true. MLS’s are subject to what economists would refer to as a “network externality”. That is, they are more valuable the more people look at them. For networks like these, there tends to be one dominant player — having two is inefficient. The foundational economics of the MLS, in other words, tells us that there will be one. So that one MLS had better be open to competition.

You ask how much the investigation etc. cost the taxpayer. Very little. Probably something like 15 seconds worth of our current expenditures in Iraq. In any event, the Antitrust Division is largely self-funding — it collects substantial user fees from companies that are submitting Hart-Scott-Rodino applications to clear mergers.

Finally, you suggest that this is a waste of time because the realtor business is competitive. Again, I think you’re looking past the main point. Competition among realtors is limited by the fact that online firms, which offer less service but a lower price, have been kept off the MLS by NAR fiat. In a competitive market, consumers will be free to choose between low-service/low-price online brokers and high-service/high-price traditional brokers. The point of the NAR policy, now abandoned, was to kneecap the low-service/low-price option, with the effect of maintaining supra-competitive margins for the high-service/high-price players. That ain’t good, and now it’s over.

AC

Thanks for the interesting commentary. I disagree with your comment about the gov regulation of free enterprise. Most major markets are regulated (eg. stock exchanges). Housing shouldn’t be any different. As a consumer, not a real estate professional, I have more confidence in the housing market knowing that realtors have a limited capacity to influence the market.

Also, I think the DOJ action had some influence on the opening of the MLS. The settlement may be moot at this point, but the DOJ action probably helped to push things along.

I might be mistaken, but I think you are missing the boat. People want to know what they are buying. Let the public have ALL the info at their finger tips. For as long as there is active greed, envy and gluttony in people, fear is not far behind. Fear, a basic human emotion that most people can not get a grip on.

When there is fear, people will go to any lenghts to not feel it. People want other people there to help them through it, and in our case, enter the real estate agent, an experienced professional or they will get really greedy, envious or gluttonous and lose a sense of normality and become over emotional. When emotions are escalated, people make some pretty inane decisions. I have heard many times that FSBO’s will never do that again.

The home buying experience is usually fearful, especially for the first time homebuyer. And so far, I continue to see first time homebuyers. I hear it over and over again how afraid they are – from both men and women. And, when someone wants your help, they want to see you in person. A very local, hands on experience (something the internet will never do…well I shouldn’t say never, you never know). But for now, at lease, the Internet/technology is only a tool to use, not a replacement for the local agent and I can learn to use any tool. The most successful and best agent out there has a degree in Psychology and knows how to use it.

AC -

I would expect nothing less than the best in arguments from an accomplished attorney such as yourself. Thank you for that. On to the substance -

(2) The idea that government has only a “small, minimal, tiny, absolutely regrettable” role in regulating the economy is one we’ve been living with for a while. It’s brought us the debt crisis and the resulting foreclosure crisis. It’s brought us Enron, Worldcom, Tyco and a large number of additional corporate scandals large and small. Like, for example, the airlines underfunding and then simply “canceling” employees pensions. If we had an active federal government pension regulator, rather than the feeble one we’ve got, we wouldn’t have that.

That idea of minimal government invasion in the economy IS one we’ve been living with for a while — thank God for that. Because the alternative would have been European-style retro-growth policies that choke off business and economic growth.

Yes, “lax” governmental oversight brought us Enron, Worldcom, Tyco and the like. At the same time, it’s also brought us a vibrant economy that is the envy of the world. If we had an active federal governmental pension regulator, then the tiny molehill of Enron might have been avoided, but at the cost of stifling every other company in the country.

That you note with happiness that politically, we’re trending more and more towards socialism is not suprising, since as an attorney, it is unlikely that you have ever created a single job or run a company or been responsible for payroll or had to make consumers and clients happy (or else go out of business). Particularly as a government attorney. Do forgive my assumption and presumption, if in fact you are now engaged in manufacturing widgets and are clamoring for more governmental oversight into your business.

Nonetheless, that line of argument starts to get into the realm of politics and proper scope of government, and is perhaps better taken up elsewhere.

3) The idea that you can start an MLS in your garage is, well, optimistic. Of course you can bang together a website, but who’s going to list there? And why would anyone look at it without listings?

Optimistic? Hardly. Cost of hardware for a typical MLS is fast approaching nil (see, Amazon Cloud Computing, for example). Cost of software — of a simple database like an MLS — is not extraordinary. Why would anyone list there? For the same reason that anyone lists at any MLS, or sends listings to Google — it’s a matter of marketing, lower membership fees, etc.

That I do not start an MLS has little to do with difficulty, and everything to do with opportunity cost — why invest in an outdated business in a rapidly changing industry, when for the same level of effort and cost, I could start a promising company that has a chance to grow?

(4) What Zillow and others are doing is great, but it’s not yet (and may never be) a replacement MLS. It’s not an answer to say, well, in 10 years none of this will matter. As a particularly dismal economist said, we’re all dead in the long run.

What you’re leaving out, of course, is that Zillow et.al. doesn’t need to be a replacement MLS. They merely need to create market forces that create change in existing MLS as well. And that they have done, and are doing, not in 10 years time, but right now and today.

You’re paying too much attention to forms and words, rather than actual business impact. Trulia, Zillow, etc. have forced giants like Realogy to do a 180 on their approach to online listings. The MLSes that do not comply with market reality find themselves rapidly shedding members and revenue. All of this was happening before the DOJ got involved, and continue to happen while the DOJ tinkers around the edges with things like VOW’s.

(5) Yes, I’ve seen the settlement. The effect will be to open MLS to online brokers. I think that will be significant.

You think that will be significant… why?

What were the revenues of “online brokers” in 2007 in the post-Trulia/Zillow era? What market share do they have? How many of them are strictly online? What percentage of consumers are electing to use these “register-to-view-listings” models as opposed to “don’t-register-and-see” models currently en vogue? How’s their year-over-year revenue growth, especially in a down market?

If you think their low market share is the result of anti-competitive practices, then you have to have some idea of what their growth rate would have been, and will be now that the MLS is open to them. What do you think that is? On what do you base that?

Sure, the effect will be to open MLS to online brokers. And that sound you hear is the collective yawn of 1.5 million Realtors. Why, it’s as if the buggy whip manufacturers have finally been forced to sell to the two-horse phaeton makers. That’ll create some competition in transportation!

(6) Finally, the DOJ has in fact been working with the states to get rid of these pro-realtor/anti-comepetition policies. DOJ can’t sue the states, b/c the states have immunity from antitrust liability for their official policies. But DOJ does take positions on state realtor regulation, and it prepares briefing papers for state legislatures. Which are often ignored, I would add.

And here is the one area where I can get 100% behind you and your friends at the DOJ. Markets and businesses can solve market and business problems; they can’t solve governmental problems. Only government can do that.

If state legislatures are going to continue to engage in legal shenanigans to protect existing realtors, as much as I dislike government intervention, I would support federal legislation banning such practices (assuming that passes constitutional muster vis-a-vis federalism) or imposing a uniform scheme of regulation (thereby preempting state action in the field).

With that said, the DOJ can’t sue the states, but it can utilize the bully pulpit, no? In the housing crisis we have, where are the DOJ spokespeople on various news programs denouncing these anti-competitive state regs?

Regards,

-rsh

PS: i’ll try to stay on top of this thread, but I don’t often visit the Central VA site. So do bear with me if I don’t respond quickly to points.