My last post made it pretty apparent that contrary to my expectations, most of the real estate industry remains completely ignorant of what the U.S. government is attempting to do with its latest fight against real estate commissions. I thought maybe 50% of REALTORS were aware of the civil lawsuits and the DOJ/FTC action; most of the commenters think it’s more like 90% of the REALTOR population.
The last time I spoke about this, on a panel in Las Vegas, we had open mic Q&A with the audience… and quite a few of the comments were of the “it would be stupid to get rid of buyer commissions” variety. They may all be correct, but seeing as how none of us on stage were judges, FTC commissioners, congresscritters, or President Biden… none of those comments actually matter. But the comments themselves did reveal some lack of understanding about just how long this fight has been going on and what the motivations involved are.
I thought it might be interesting, and useful to some, to get a sense of that history. I do not pretend to have all of the history, or all of the documentation, and I am not a historian of NAR. All of this is from public records and public information found via Great God Google.
TL;DR takeaway: this fight against real estate commissions and cooperating compensation is not new. It has been going on for most of the 20th century and all of the 21st century. It may be that NAR and the industry somehow manage to escape this time around as well, but… it isn’t as if the DOJ and FTC hostility to real estate’s compensation structure is a recent phenomenon.
The Uniform Commission Committee
According to Chicago Agent Magazine, The National Association of Real Estate Board (the precursor to NAR, so I’ll just refer to it as NAR going forward to avoid confusion with the Realtists of today’s NAREB) formed something called the Uniform Commission Committee in 1939. Said Committee would “standardize commission rates across the country.” And in fact, NAR did publish commission schedules for all REALTORS to follow for years making price-competition impossible.
But it is also clear that many local Associations enforced mandatory fees long before 1939:
Many local associations of brokers bound their members to use fee schedules from their inception. For example, in 1923 the Chairman of the NAREB Committee on Commissions claimed that the Chicago brokers’ association had used a schedule for more than 40 years. (The Butters Report, see below).
NAR did this despite the existence of the Sherman Antitrust Act of 1890, partly because it wasn’t clear that the sale of real estate involved “interstate commerce” in any way, and it wasn’t clear that providing services fell under the word “trade”. In particular, the Clayton Act of 1914 made it seem as if services did not fall under antitrust law: “the labor of a human being is not a commodity or article of commerce.” One of the goals of the Clayton Act was to prevent the Sherman Antitrust Act from being used against labor unions, as it had been for a while, but a beneficiary of that were professionals who provided services.
So until 1950, REALTORS were required to charge the same commission rate. It was a violation of the Code of Ethics to not follow the schedule of commissions.
This is as clear an example of price-fixing as exists. And yet, it wasn’t clear that such price-fixing was a violation of the antitrust laws.
United States v. NAR(EB)
As you could imagine, the DOJ brought a lawsuit, including (interestingly) a criminal charge against NAR, the Washington DC Board, and some of their leaders. The criminal case did not stick, but the civil case did. Well, until the district court held against the DOJ and ruled that simply fixing commission rates was not a violation of the antitrust laws. The DOJ appealed and the Supreme Court ruled in 1950 in U.S. v. NAREB that actually, it was: “The fixing of prices and other unreasonable restraints have been consistently condemned in case of services as well as goods.”
The Court wrote:
[Atlantic Cleaners case’s] conclusion was that the term included ‘all occupations in which men are engaged for a livelihood.’ We do not intimate an opinion on the correctness of the application of the term to the professions. We have said enough to indicate we would be contracting the scope of the concept of ‘trade,’ as used in the phrase ‘restraint of trade,’ in a precedent-breaking manner if we carved out an exemption for real estate brokers. Their activity is commercial and carried on for profit. The fact that no goods are manufactured or bought or sold in the process is as irrelevant here as it was in Atlantic Cleaners & Dyers v. United States. No reason of policy has been advanced for reading §3 of the Act less literally than its terms suggest. The competitive standards which the Act sought to preserve in the field of trade and commerce seem as relevant to the brokerage business as to other branches of commercial activity.
It is, I think, important to note that no mention of “protecting the buyer’s interest in adequate representation” appears in either the District Court’s decision or the Supreme Court’s decision. For good reason, since “buyer agency” did not exist in 1950; it did not exist until sometime in the 90s.
After the U.S. v NAREB decision, NAR dropped a formal commission schedule and requiring local Associations to follow it. Instead, NAR began “recommending” or “suggesting” commission rates — kinda like a MSRP system for cars I guess? It goes without saying that local Associations that had mandatory fee schedules had no problems “recommending” fee schedules. And whodathunk that the recommended rates were identical to the formerly mandatory rates?
So in 1971, NAR had to issue something called “The Fourteen Points” that told the local Boards and their MLSs to stop setting commission rates whether through requirements or suggestions. In relevant part, the Fourteen Points reads:
- MLS shall not: Fix, control, recommend, suggest or maintain commission rates or fees for services to be rendered by Members.
- MLS shall not: Fix, control, recommend, suggest or maintain any percentage division of commissions or fees between cooperating Members and between Members and nonmembers.
The historical record does mention numerous lawsuits brought by the DOJ against REALTOR organizations for price fixing violations, so one imagines that the Fourteen Points was a move to prevent more and more lawsuits from the government. One of the more entertaining ones I found was this one:
In upstate New York, a federal grand jury indicted ten corporations on charges of conspiring to fix commission rates during the period 1972 to 1974. All defendants pleaded “no contest” to the criminal charges and paid fines totaling $156,000. In the companion civil action, the Syracuse Board of
Realtors and nine brokerage firms settled the price fixing charges by agreeing to an order prohibiting, among other practices, the fixing or recommending of commission rates.
Yeah, federal grand jury. Criminal indictment. Like these brokerages and the Syracuse Board of REALTORS were La Cosa Nostra.
The 1983 FTC Study: “The Butters Report”
Much of what I know about the history of commission rates, industry practices, and structures comes from a 
1983 study by the FTC called “The Residential Real Estate Brokerage Industry” sometimes referred to as The Butters Report. (This report can be hard to find, so I’ve uploaded it to Scribd in case you want to read hundreds of pages of ancient history. You’re welcome.)
The FTC conducted this study from 1978 to 1981, and it did so because of complaints from within the brokerage industry from low-cost competitors who were complaining of “harassment and boycotting” because they charged less than the “customary” commission rate.
We also get this fascinating paragraph explaining why they did this study:
Other brokers had criticized to the FTC various practices of such institutions in the industry as local multiple listing services (which are real estate brokerage exchanges), trade associations, or state real estate regulatory agencies.
It is quite impossible to do justice to a 600+ page report from 1983 in a blogpost. But there are a few key takeaways from this document.
One, the FTC has been skeptical of the real estate industry and its commissions for… well, at least 70 years:
Critics of the industry have said that commission rates for the sale of residential real estate are so uniform in most markets that they must not be determined by competitive forces.
Our investigation indicates that while there is some variation in commission rates contracted for and paid in every local community surveyed, commission rates in all markets do tend to be roughly uniform from sale to sale. The gross dollar amount of fees collected on any individual transaction also have generally increased so much faster in recent years than the rise in both the general cost of living and in wages for other services as to suggest that the market for real estate brokerage service does not accord with the customary model of competitively functioning markets.
Pricing of brokerage services appears, on the surface, to present a paradox. There are so many firms in the industry and ease of entry is so simple, that coordinated price determination would seem to be very difficult. On the other hand, fee schedules often were successfully utilized by brokers’ trade associations in the past. An apparent lack of much price competition persists and uniformity in commission rates is the general rule (except in cases such as the sale of an unusually expensive home or for a contract to sell multiple properties over time, situations where a flat or maximum fee may be arranged), whether a local market is characterized by increasing house prices and increasing demand for houses (and hence less time and effort needed to make a sale and greater profits per transaction) or decreasing house prices and decreasing demand for houses (and hence greater difficulty in finding buyers and less profits per transaction).
Two, the FTC had identified the unique features of the real estate brokerage industry. The big one, according to the report, is “the degree to which individual firms are interdependent.” The report says:
Interdependence of brokerage firms and brokers is a function both of their need to cooperate with each other, usually through a MLS, in marketing houses and their individual incentives as established by the form of their compensation. Of homes sold through brokers, about 90 percent are listed on a MLS. Perhaps as many as 53 percent of all sales involve the services of two brokerage firms, and 66 percent of sales may involve two individual brokers or salespersons. Many observers believe that most firms, and especially small firms and new entrants, are dependent upon the MLS and cooperative sales and cannot take any risks that might lessen the cooperation they will receive.
While brokers might attract many listings by advertising low commission fees, those brokers might encounter problems in operatively selling their listings. Cooperating brokers usually are compensated by the listing broker’s splitting his or her commission with the cooperating brokers. “Discount” or “alternative” brokers may offer potential cooperating brokers substantially less compensation than that provided by “traditional” brokers. For this reason (and also because a cooperating traditional broker who charges the higher prevailing commission rate will be a competitor of the listing discount broker for future listings) many traditional brokers are alleged to, quite understandably, steer potential buyers to homes listed by brokers charging the prevailing commission rate and offering the prevailing split. Steering may make discount brokers less successful in selling their listings through the MLS. Alternative brokers charging less than the prevailing commission rate, therefore, may find that while competition in price facilitates the acquisition of listings, it often hampers efforts to sell those listings. This, in turn, may make price competition a potentially unsuccessful competitive strategy, and it is our belief that this is the most important factor explaining the general uniformity of commission rates in most local markets. [Emphasis added]
Those two paragraphs could have come straight out of the filings of the antitrust lawsuits, of the more recent FTC studies, of academic studies over the years, and of whatever report the DOJ and FTC release in the coming years.
Three, the FTC noted both the extraordinary growth in commissions as well as the social waste resulting from such… 50 years ago:
The rate of growth of aggregate commission fees is noteworthy. The dollar amount of gross commissions increased by an average of at least 615 percent between 1950 and 1979, a growth rate nearly twice that for all white-collar wages during the same period, and nearly three times the officially acknowledged increase in consumer prices (215%).
Because commissions are gross receipts, this obviously does not mean that individual brokers made $6.15 for every dollar earned thirty years before.
Rather, statistics on licensing trends indicate a tremendous growth in the number of brokers and salespersons in the industry, and suggest that the average broker may be handling fewer successful transactions per year. Statistical evidence on the difference in the number of active real estate brokers and salespersons as contrasted with total sales of housing units between various periods of time is incomplete, but what there is suggests that brokerage productivity, measured as transactions per licensee per year, declined through 1980 as a result in large part of an influx of new entrants. The aggregate volume of labor services provided appears to have increased beyond even the growth in aggregate fees. The prospect of the skillful broker or salesperson’s being able to earn high revenues paradoxically appears to attract more resources into the industry than apparently are necessary to accomplish efficiently the function of brokerage.Inefficiently high brokerage commissions may have serious consequences both for consumers and for the industry.
Why, that could have been written in 2021 as transactions went up by 9% and prices went up by 18%, but per-agent productivity remained flat at 7.8.
I could go on and on. I could see doing a multi-part treatment of this one document from the FTC, because it is so rich, so well-researched, and so exhaustive… and it’s from 1983. But if you’re that interested, consider reading or skimming the report yourself. It’ll be eye-opening in many ways.
A Tale a Hundred Years in the Making
What’s the point of all this history?
It is simply to note that today’s fight is merely the latest chapter in a story that’s been going on since perhaps the 19th century if the Chairman of the NAR(EB) Committee on Commissions from Chicago is to be believed. The DOJ is well familiar with NAR and REALTORS generally, having sued them since the 40s (and probably earlier as well, but the historical record we have says the 1940s). The FTC is extremely familiar with NAR and the residential real estate industry, and they have been a source of concern for the FTC since the 1940s, enough to be documented in the extremely detailed study of 1983: The Butters Report.
That the DOJ intervened on the side of civil litigants in every lawsuit involving NAR — Moehrl, Burnett, Rex v. Zillow, PLS v. NAR, etc. — is no longer surprising. That the DOJ walked away from its negotiated settlement with NAR as soon as the Administration changed from Trump to Biden is not at all surprising. That the FTC (or somebody) managed to insert regulation of real estate brokerage and listing services into Biden’s Executive Order on Competition makes all the sense in the world.
NAR is the ancient foe of the DOJ and FTC. It has lost a few fights, but managed to stay one step ahead of the government, and kept commissions at more or less the same level in 2022 as they were in 1939.
The FTC specifically has known since 1983 that the key unique feature that makes residential real estate so resistant to change is the interdependence of brokers on one another, and that the MLS is the mechanism that alleviates that interdependence, creates the interdependence, and maintains the interdependence.
Second, look at the overall 100 years of war from the FTC and DOJ’s perspective.
We now know that local REALTOR Boards used to have mandatory fee schedules and mandatory split schedules that were published and enforced. We know that NAR created a Committee and published recommended fee schedules, and it was a violation of the Code of Ethics to charge less than the suggested fee. That mandatory fee schedule happened to be 6% of the sale price. We know that after the 1950 Supreme Court decision, NAR stopped publishing a fee schedule and merely suggested one, and local REALTOR Associations continued to mandate them. The 6% commission remained dominant. We know that the DOJ and FTC brought lawsuit after lawsuit against a number of local Associations, and yet commissions stayed at 6%. It got to a point where NAR had to publish the Fourteen Points prohibiting local Associations and MLSs from “suggesting” fee schedules. The commissions ranged between 6% and 7% across the entire country, large or small markets, urban or rural.
DOJ sued NAR in 2005 and settled in 2008 on the theory that NAR was preventing innovative brokerages who were using the newfangled internet thingamajig to provide lower cost services. Commissions remained at 6%. After the ten year consent decree period ended in 2018, DOJ and FTC started looking into NAR and commissions once again, and brought a lawsuit in 2020, reached a settlement, then withdrew in 2021. After some two decades of the internet becoming more and more the norm, commissions are now between 5% and 6%… and remarkably uniform across the country.
They keep winning cases and nothing has changed. They keep winning battles, and keep losing the war. It is because none of the DOJ’s actions and none of the FTC’s actions have done anything about the core unique feature of residential real estate: the interdependence of brokers, mediated by the MLS.
So the third point is to encourage thinking about what happens next.
The DOJ and the FTC both know that lawsuits do not create fundamental change. They’ve been there, done that and got the T-shirts to prove it. But here we are in 2022, and they’re at it again both as principals and as behind-the-scenes helpers to the civil litigations in Moehrl and Sitzer/Burnett (and others).
So… one of three things will happen as the current fight goes forward:
- The DOJ/FTC will lose;
- The DOJ/FTC will win but the impact will be negligible; or
- The DOJ/FTC will win and figure out a way to break the interdependence of brokers on one another.
All of today’s REALTORS upset that the DOJ, the FTC and the civil litigants are going after commission sharing should at least understand the history of how we got here. They raise all kinds of policy issues — how will buyers be able to afford representation? What about a uniform database of what’s available for purchase? But this fight isn’t a new one; it is an ancient grudge.
It is entirely possible — perhaps even likely given historical patterns — that the DOJ and FTC will win once again… only to see no actual changes to industry structure and to the commission rate. That is what has happened throughout the entire history of NAR; why would it change now?
On the other hand… the DOJ/FTC of 2022 has a powerful tool in its arsenal that the DOJ/FTC of 1983 did not have. It’s called the internet.
The existence of the internet does many things, but one of the things it does is reduce the interdependence of brokers on one another. Advertising a home for sale is no longer about listing it in the MLS, but getting it on the internet for potential buyers. Finding homes for sale is not something that most agents do anymore; consumers do that using the internet. Showing homes used to be something that brokers and agents controlled entirely; today, more often than not, it is the buyer who tells the agent which homes he wants to go see, and sometimes, the buyer uses internet-based tools to schedule showings directly and possibly even view the home on his own.
We know this because within the industry, pocket listings and off-market activity continue to rise. Were it not for Clear Cooperation Policy, it might be the dominant way to sell houses in 2022. And speaking of CCP… the DOJ intervened in the case of PLS v. NAR, resulting in an astonishing reversal at the 9th Circuit Court of Appeals. We’ll see where that goes.
So maybe things will be different this time around. Maybe not. But whatever happens, it is merely the latest battle in a war that has been going on for a hundred years or more.
We live in interesting times.
-rsh
Billy Joel – We Didn’t Start the Fire (Official HD Video)
Official HD Music Video for “We Didn’t Start the Fire” by Billy Joel In 1989, Billy Joel released his album Storm Front, a successful album that hit #1 on the Billboard 200 charts and went quadruple platinum.
1 thought on “DOJ, FTC & NAR: A Hundred Year War”
Rob
Excellent commentary on these issues
Yes, the DOJ and FTC have more tools to analyze the industry and affect change. However, years of potential litigation and lobbying will likely force a settlement. Will it be in favor of the public or the industry remains to be seen. Hopefully both. I believe it is the civil litigation that will be the driver of change, regardless of the settlement dollar amount there will be compromise in business practices. The attorneys involved are not controlled by PAC dollars, and have done their due diligence prior to filings; probably millions invested. Certainly have the background for war.
Why now. Well, like any industry that is left to self oversight and a lack of real supervision, it allows for a sense of confidence that there are no consequences. The real estate industry as a whole is also very much a mystery to the public in how it operates. There is much blind trust by principals. Think in terms of The Great OZ. Before drawing back the curtain, there was much fear and angst. Sooo, think in instead the four people peering in on OZ, you have the many peering in on this industry. It takes one Dorthy to question the norm, and lead others to a new reality; paradigm shift.
I truly enjoy being a Broker. However, Brokering has become so easy due to the technology and resources that we have today (aside from commercial work which I find more cerebral), it truly does not make sense that anyone is paid 5%+- to represent the sale of property with todays values. (To be clear, value is driven by the current market, not agents – hence reductions everywhere you look at the moment). There is also no reason to have so many Brokers/Agents. Due to dual agency, which is allowed in many states, there is no need for a Buyer Broker. The Seller has a product to sell to a Buyer. A Broker, or attorney, can represent both for an hourly fee or a percent of the sale. My fee is $500. an hour – Brokering or as an expert witness. A fair return on my time, which I can also control. Yes, I also will work on a percentage if that is what the client dictates.
The current system in some ways makes the transaction more complex than it needs to be.
I know I will get flack for my opinions, but I have represented many clients as a paid consultant by an hourly rate or % as a representative of both parties. All worked out fine.
The biggest complaints I hear from experienced Brokers is that there are too many people in the business and most do not know what their doing. Maybe why god created the transaction coordinator.
Business practices are quite different in geographic locations. As a Broker in San Francisco I must fill out an Agent Visual Inspection Disclosure (similar the a sellers disclosure), present any inspection reports to a seller|sellers agent, provide a copy of all city records re permits, provide geographical reports of hazards, rent control docs, …; the list goes on. This provides the Buyer and Seller a clear understanding of the issues, if any and ALL are on the table this allows for a better experience and easier dual agency; makes complete sense for all parties. As a Principal Broker in Portland Oregon (similar to a Broker in SF CA) I do not provide anything of this nature. As a matter of point, the Oregon contract specifically denies the Buyers Broker or Buyer from forwarding any inspection reports to the Sellers Agent or Seller. There is a repair addendum that one can ask for repairs, without forwarding any report or part of a report if not allowed by the Seller. A bit like going to a gun fight without bullets; certainly diminishes the skills of negotiation – hard to negotiate a phantom inspection or document. I can not speak for other states, but I can say with regard to fair play and Buyer protections California has it right. Also, if a Broker is responsible in California to do so much as a listing or buyer Broker it can be argued that the Oregon Broker has much less to do, but still gets paid the same commission. Hence, is there discussion as to national standards. In the industry one measure of a discount Broker is one who provides less service. Oregon is certainly less service if compared to California. The other is one who provides the service for a discount commission. However, there is no discount commission since commissions are not standard. Less service is debatable; less cost??? One can charge an hourly fee, or a % (1%/2%???) and provide the same service as someone charging 5% or 6%, but concentrate on volume and low overhead. Technology has created this reality.
People are getting very comfortable with self service for banking, travel, ordering food …. in many cases it’s forced. QR codes in restaurants or 1.5 hours to wait on the phone to talk to a live person.
It’s a matter of time before there is a platform for selling your property directly. The tools are all here used by the RE industry, just need to be put in the hands of the public with the option of having the guiding hand of a Broker (RP Responsible Broker) at an hourly rate. And saving tens of thousands for the trouble is a certain insentive to saving a few bucks on a cheaper flight or hotel. Yes, more work but bigger return.
There will be a future and it will be guided by technology and service on demand. However at the moment the so called diruptors are poaching on the industry and not formenting change.
RBM
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