Participating brokers use an  MLS to “list” the homes they have for sale, providing other brokers with  detailed information on the properties (“listings”), including how much of  the commission will be shared with the buyer’s agent. While  comprehensive price data are lacking, evidence from academic literature  and industry participants with whom we spoke highlight several factors  that could limit the degree of price competition, including broker  cooperation, largely through MLSs, which can discourage brokers from  competing with one another on price; resistance from traditional full- service brokers to brokers who offer discounted prices or limited services;  and state antirebate and minimum service laws and regulations, which  some argue may limit pricing and service options for consumers. In  addition, the industry has no significant barriers to entry, since obtaining a  license to engage in real estate brokerage is relatively easy and the capital  requirements are relatively small. While real estate brokerage has competitive attributes, with a large  number of players competing for a limited number of home listings, much  of the academic literature and some industry participants we interviewed  described this competition as being based more on nonprice variables,  such as quality, reputation, or level of service, than on price. Comprehensive data on brokerage fees are lacking. However, past  analyses and anecdotal information from industry analysts and  participants indicate that, historically, commission rates were relatively  uniform across markets and over time. But some economists have noted that in a competitive marketplace, real  estate commission rates could reasonably be expected to vary across  markets or over time—that is, to be more sensitive to housing market  conditions than has been traditionally observed. Thus, with the increase in housing prices, the brokerage fee (in dollars) for  selling a median-priced home increased even as the commission rate fell. A discount broker may  advertise a lower commission rate to attract listings, but the broker’s  success in selling those homes, and in attracting additional listings in the  future, depends in part on other brokers’ willingness to cooperate (by  showing the homes to prospective buyers) in the sale of those listings. However,  some brokers and industry analysts noted that the growth of firms offering  lower commissions or flat fees has made an increasing number of  consumers aware that there are alternatives to traditional pricing  structures and that commission rates are negotiable. Some State Laws and Regulations Can Affect Price Competition

Although state laws and regulations related to real estate licensing can  protect consumers, DOJ and FTC have expressed concerns that laws and  regulations that restrict rebates to consumers or require minimum levels  of service by brokers may also unnecessarily hinder competition among  brokers and limit consumer choice. As of July 2006, at least 12 states appeared to prohibit, by law or  regulation, real estate brokers from giving consumers rebates on  commissions or appeared to place restrictions on this practice. Sellers of properties can also  benefit from the Internet because it can give their listings more exposure  to buyers. Although Internet-oriented brokerages and related firms represented only  a small portion of the real estate brokerage market in 2005, the Internet  has made different service and pricing options more widely available to  consumers. Wider Use of the Internet in Real Estate Brokerage Will Depend on the Availability of Listing Information and Other Factors

Several factors could limit the extent to which the Internet is used in real  estate transactions. Finally, other factors, such as the lack of a uniform  technology to facilitate related processes—such as inspection, appraisal,  financing, title search, and settlement—may inhibit the use of the Internet  for accomplishing the full range of activities needed for real estate  transactions. Bibliography

This bibliography includes articles from our review of literature on the  structure and competitiveness of the residential real estate brokerage  industry. Federal Trade Commission. The Residential Real Estate Brokerage  Industry, vol.
Why GAO Did This Study

Consumers paid an estimated $65.7 billion in residential real estate brokerage fees in 2005. Observing that commission rates have remained relatively uniform--regardless of market conditions, home prices, or the effort required to sell a home--some economists have questioned the extent of price competition in the residential real estate brokerage industry. Furthermore, while the Internet offers time and cost savings to the process of searching for homes, Internet-oriented brokerage firms account for only a small share of the brokerage market. This has raised concerns about potential barriers to greater use of the Internet in real estate brokerage. In this testimony, which is based on a report issued in August 2005, GAO discusses (1) factors affecting price competition in the residential real estate brokerage industry and (2) the status of the use of the Internet in residential real estate brokerage and potential barriers to its increased use.

What GAO Found

The residential real estate brokerage industry has competitive attributes, but its competition appears to be based more on nonprice factors, such as reputation or level of service, than on brokerage fees, according to a review of the academic literature and interviews with industry analysts and participants. Although comprehensive data on brokerage fees are lacking, past analyses and anecdotal information suggest that commission rates have persisted in the same range over long periods, regardless of local market conditions, housing prices, or the cost or the effort required to sell a home. One potential cause of limited price variation in the industry is the use of multiple listing services (MLS), which facilitates cooperation among brokers in a way that can benefit consumers but may also discourage participating brokers from deviating from conventional commission rates. For instance, an MLS listing gives brokers information on the commission that will be paid to the broker who brings the buyer to that property. This practice potentially creates a disincentive for home sellers or their brokers to offer less than the prevailing rate, since buyers' brokers may show high-commission properties first. In addition, some state laws and regulations may also affect price competition, such as those prohibiting brokers from giving clients rebates on commissions and those requiring brokers to provide consumers with a minimum level of service. Although such provisions can protect consumers, the Department of Justice and the Federal Trade Commission have argued that they may prevent price competition or reduce consumers' choice of brokerage services. The Internet has changed the way consumers look for real estate and has facilitated the growth of alternatives to traditional brokers. A variety of Web sites allows consumers to access property information that once was available only by contacting brokers directly. The Internet also has fostered the growth of nontraditional residential real estate brokerage models, including discount brokers and broker referral services. However, industry participants and analysts cited several potential obstacles to more widespread use of the Internet in real estate transactions, including restrictions on listing information on Web sites, some traditional brokers' resistance to cooperating with nontraditional firms, and certain state laws and regulations that prohibit or restrict commission rebates to consumers.