# Presentation: 694414

## Real Estate Brokerage Industry: Structure-Conduct-Performance

**Lawrence Yun, Ph.D., Senior Economist**
**NATIONAL ASSOCIATION OF REALTORS****®**
- Presentation at the Federal Trade Commission Public Workshop
- October 25, 2005

## Consumer Choice

- For-Sale-By-Owner
- Discount brokerage
- “Traditional” brokerage
- Internet browsing free of charge

## Perfectly Competitive Industry?

- Many service providers
- 1.25 million REALTOR® members
- 2.53 million real estate licensees
- 98,000 active firms, 236,000 local offices
- 1 million for-sale-by-owner sales
- Low barriers to entry and exit into the profession
- 253,167 became new Realtor members, while 127,877 dropped Realtor membership in 2004
- Widely accessible information
- Web browsing, newspaper, yellow pages, mailings

## Past Cycles

- Recession in 1980s
- Home sales declined by 50% from 1979 to 1983
- REALTOR membership declined by 18% from 1981 to 1983
- Recession in 1990s
- Home sales declined by 14% from 1988 to 1991
- Membership declined by 12% from 1990 to 1995
- Recession in 2001 and 2002 – Different
- 45-year low mortgage rates
- Record home sales
- Strong price increases
- Record membership

## Existing-Home Sales 

- Source: NAR

## Real Home Price Growth

- Source: NAR

- Recession Impacts

## NAR Membership 

- Source: NAR

## Concentration Ratio

- Top 10 firms had 9.1% market share
- Top 20 firms had 10.9%
- Top 100 ... 17.0%
- Top 500 ... 26.6%
- Competition for clients
- Competition for agents

- Source: Real Trends, 2004

## Market Flexibility

- 2004:  96% of office had 10 or fewer agents
- Constant economies of scale
- Zumpano (2002)
- Stigler Survivor Test

| Sales Force | 1983 | 1990 | 1996 | 1999 |
| --- | --- | --- | --- | --- |
| 1 to 5 | 51 | 55 | 51 | 60 |
| 6 -10 | 23 | 23 | 18 | 17 |
| 11 - 20 | 13 | 13 | 14 | 11 |
| 21 - 50 | 6 | 9 | 9 | 8 |
| 50 + | 3 | 4 | 4 | 4 |

## How can small firms survive?

- MLS access puts everyone on equal footing
- Agents are independent contractors
- Person-to-person and case-by-case service requiring the highest level trust
- Legal advice
- Estate planning advice
- Tax advice

## Perfectly Competitive Outcome?

- Median REALTOR Income
- $52,000 in 2002
- $49,300 in 2004, working 45 hours per week
- Is $52,0000 or $49,300 excessive or normal income?
- Falling commission rates with more members
- 5.5% in 1998 to 5.1% in 2003 (REAL Trends)
- Xyz% in 2005
- Free moving truck
- Closing cost assistance
- Commission rebates

## Desirable Performance Measures

- Economic mobility (proxied by home sales) – one of the most dynamic in the world
- Historical experience of seeking a government bailout – none – bad times were self-correcting through exits
- Taxpayer risk – none
- Social promotion of entrepreneurship and self-reliance – yes
- Social promotion of women entrepreneurs – yes
- Flexible work hours – yes
- Work stoppage through labor strike – none
- Data mining to price discriminate - none
- Subject to international regulatory jurisdiction - none

## Multiple Listing Service

- Purpose of MLS
- Facilitate home sales transaction
- Available to all REALTOR members
- $500 million investment to show homes 24/7 on Realtor.com
- Not set up to solicit clients at the expense of existing brokers/agents
- Public Utility?  Consider to incentives to
- Stadium vendors
- Shopping mall vendors
- Pharmaceutical retail

## When In Doubt, Trust ...

- Market outcomes wrought from free entry and exit
- Market not subjected to “Profits in the Long Run” – Robin Marris and Dennis Mueller’s managerial theories of the firm
- Private ownership (of MLS)
- Democratic process (for consumer protection)