The great defeat of real estate agents – The New York Times

Free market economic theory suggests that the American housing market should not have been allowed to exist as it has for decades.

Americans have long paid unusually high commissions to real estate agents. The typical commission in the United States was nearly 6%, compared to 4.5% in Germany, 2.5% in Australia and 1.3% in Britain. As a recent title The Wall Street Journal wrote: “Almost no one pays a 6% real estate commission except Americans.”

If housing functioned as an efficient economic market, competition would solve this problem. Some real estate agents, recognizing the possibility of winning business by charging lower commissions, would do so. Other brokers would have had to reduce their commissions or lose customers. Eventually, commissions would stabilize at a reasonable level, high enough for agents to make a profit but in line with the rest of the world.

This did not happen. Instead, the average home sale in the United States cost between $5,000 and $15,000 more than it would have cost without inflated commissions. This money was similar to a tax, collected by real estate agents instead of the government.

The situation, however, finally seems to be coming to an end. The National Association of Realtors, the industry group that enforced the rules that led to the 6% commission, agreed on Friday to change its behavior as part of a deal to settle several lawsuits.

The agreement is important in itself. Today, Americans spend about $100 billion a year on fees. That figure will likely fall to between $20 billion and $50 billion, Steve Brobeck, former head of the Consumer Federation of America, told my colleague Debra Kamin.

There is also a broader meaning to the agreement. It is a case study in a central flaw in free market economic theory. This theory suggests that capitalist competition can almost always protect consumers from businesses that charge too much.

To be clear, competition is indeed a powerful force that often improves the situation of both consumers and businesses. This is why capitalist economies perform better than communist or socialist economies. Just look at South Korea and North Korea. (Are you familiar with satellite images comparing the two Koreas at night?) Or consider Venezuela’s recent economic difficulties.

Market competition, however, is not the panacea that free market advocates claim. Sometimes, companies can amass enough economic power to crush the competition, as real estate agents have done.

Decades ago, the National Association of Realtors set the standard commission at 6%, to be split between an agent representing the seller and an agent representing the buyer. If a home seller attempted to negotiate, an agent would often issue a veiled threat: You won’t find a good seller’s agent to work with you, and buyers’ agents won’t show your home to clients.

Joanne Cleaver, for example, tried to negotiate with agents when she sold her home last year in Mint Hill, North Carolina, a suburb of Charlotte. “They laughed at me,” Cleaver told the Times.

The hardline tactics of real estate agents have been successful because they manage much of the network that is crucial to the real estate market, such as the listing database. They could exclude agents who would compete on prices.

The solution to this concentration of economic power often requires political power—that is, government enforcement of antitrust rules. After years of refusing to change tactics, real estate agents agreed to a deal now because they were vulnerable to government action.

A turning point was last year’s federal trial in Kansas City. The jury found that the Realtors Association and several large members had conspired to keep commissions high and ordered them to pay at least $1.8 billion to home sellers in the Midwest. The verdict quickly led to more than a dozen other lawsuits. The Department of Justice also investigated the real estate agents.

This investigation is part of Washington’s new focus on problems related to the concentration of economic power.

Since the 1980s, antitrust enforcement has been out of fashion in the United States. Free market economic theory, however, has been on the rise. But the results of this laissez-faire era have been disappointing to most Americans. Businesses got bigger and corporate profits emerged. Incomes and wealth for most Americans have grown only slowly.

In response, both liberals and conservatives have recently shown interest in antitrust (as I described in a recent newsletter). The Biden administration is on board a competition program to reduce credit card fees, drug prices and more. The administration has also become more aggressive in fighting mergers. Some Republicans They also fear that big business has become too powerful.

This new movement is still in its early stages and it is too early to know how successful it will be. But the real estate deal looks like the movement’s biggest victory yet.

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