Comments:

Slide 1

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

Slide 2

Consumer Choice

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

Slide 3

^{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

Slide 4

^{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
  

Slide 5

Existing-Home Sales

[D]

Source: NAR

Slide 6

Real Home Price Growth

[D]

Source: NAR

Slide 7

NAR Membership

[D]

Source: NAR

Slide 8

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
  

Slide 9

Market Flexibility

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

• 2004: 96% of office had 10 or fewer agents

• Constant economies of scale
  
  -Zumpano (2002)
  -Stigler Survivor Test
  

Slide 10

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

Slide 11

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
    

Slide 12

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
  

Slide 13

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
  

Slide 14

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)