Trustbusters surround industry

May 10, 2005

News analysis: Behind the charges of real estate antitrust

By Jessica Swesey
Inman News

Editor's note: The U.S. Justice Department is clearly determined to take on the Realtor community, stepping up its activity relating to alleged antitrust practices within the real estate industry. The DOJ is preparing to sue the National Association of Realtors over policies the federal agency believes will illegally restrict competition and harm online competitors, the Wall Street Journal reported today, citing lawyers close to the case. And the DOJ has been warning states not to pass policies that would curb limited-service or discount brokerage. In this special three-part report, we analyze what's happening beneath the antitrust debates. (See Antitrust victims: consumers, innovators, old industry suffer and Trustbusters surround industry.)

Never before in the history of the real estate industry have there been so many claims of antitrust. And the claims have reached beyond irrational victims launching lawsuits against competitors.

The U.S. Justice Department has issued two warnings to the industry in the last month, pointing the antitrust finger at states' attempts to pass real estate rules the department says are restrictive to consumers. And the DOJ in March filed a lawsuit against the Kentucky Real Estate Commission, charging that the state's rules prohibiting real estate rebates are anticompetitive.

In addition to the latest actions, the DOJ's antitrust division is still investigating the National Association of Realtors' virtual office Web site policy governing how brokers can display each other's home listings online. That probe started in late 2003.

The DOJ is not alone in cracking the antitrust whip at real estate. The Federal Trade Commission has joined the department in warning Texas regulators not to adopt a rule that would mandate a minimum level of services brokers must offer in the state. And Rep. Michael Oxley, R-Ohio, chairman of the U.S. House Committee on Financial Services, in March called for a federal investigation of price competition for real estate brokerage services.

Oxley's latest probe also follows a request he made in November for the General Accounting Office to look into how the real estate industry is evolving as a result of e-commerce, what barriers it may have created and how consumers and real estate professionals are affected.

The real estate industry hasn't changed significantly since the advent of the multiple listing service. But now the Internet has spurred challenges to the status quo, and many traditional brokerages are resisting the change. Underneath the antitrust accusations is a great divide between old and new. Federal agencies seem to be warning the traditional industry that it can't keep pushing back new competition forever. At some point that resistance becomes anticompetitive and negatively impacts consumers.

But the real estate industry is not alone in this struggle.

"Through the ages, we've seen industries try to get legislative assistance to try to protect their advantage," said Albert Foer, an antitrust attorney and president of the American Antitrust Institute, an independent group that supports antitrust enforcement and increased competition for consumers.

Foer said it is common for industries to build barriers when someone new attempts to enter their market with new technology. He noted the auto industry as one example, pointing out a situation with Chrysler dealers in Idaho about eight years ago. The offline car dealers tried to keep the Chrysler manufacturing company from providing autos to online dealers, but the FTC stepped in and stopped the offline dealers' efforts, calling their actions an illegal group boycott.

"In the case of real estate, the prices of houses have been zooming upwards and the commissions Realtors have been taking for transactions have been going up precisely the same, even though the quantity and quality of work has not changed," Foer said.

"The question is why are these prices not being competed away?...It's estimated that if some of the electronic rivals could gain a foothold, they could bring down the price of a transaction by half," he said. "That would be a huge gain to consumers and it would be at the expense of Realtors."

The music industry also struggles with the clash of old and new. Record companies starting losing their grip in the late '90s when file-sharing networks made it possible for people to trade music with strangers online. The corporations responded by suing 14-year-old kids, an irrational action which hasn't ended the practice or put them in any better place. Indeed, underground file-sharing networks are still alive and well, and companies outside the industry such as Apple and Wal-Mart have since seized the opportunity to build an online business model for music downloading.

The Justice Department taking notice of actions in the real estate industry potentially could have a large impact on what's happening, Foer said, noting a situation in the airline industry. When airlines saw that online travel companies like Travelocity and Expedia were going to take away a lot of their business by selling cheaper tickets, they got together and formed Orbitz, with the intention of giving deeper discounts and becoming the dominant online force. The Justice Department quickly turned an eye to what was happening to make sure all were playing by the antitrust rules.

Shubha Ghosh, a law professor at the University at Buffalo Law School, said that the DOJ could just be acting cautiously in sending warnings to the real estate industry.

"My guess is that there is some concern here that some of the Realtors are trying to prop up the pricing by limiting the price competition in the market," Ghosh said.

For the DOJ to take action, he said, there would have to be some harm to the market place like prices being higher than they should be, or some deterioration in quality.

Copyright 2005 Inman News

Contact ALTA at 202-296-3671 or