In 1996 the Department of Justice unsettled Wall Street as it dismantled a hidden system of price fixing among stock traders on the NASDAQ. I was there. I worked at Goldman Sachs as a partner at a time when we realized this entire system was holding back consumers’ access to personal wealth and limiting the overall market’s success. The case remade the American public’s relationship with the stock market and allowed companies new levels of freedom to raise capital and innovate.
The DOJ investigation began with an academic article from two finance professors studying an odd convention within the NASDAQ pricing system: stocks were never priced at eighths. Instead of pricing at the more accurate $20.125, for example, a stock was priced at $20.25. As new traders learned the system, “professionalism” served as rationale for the “pricing agreement”. A dealer would be disparaged by peers or supervisors for the “unprofessional” appearance of a stock price at an eighth. Professionalism was all pretext — the practice slyly dramatically increased stock spreads and broker profits.
The convention that was designed to and continues to succeed in quelling price competition resembles what the National Association of Realtors (NAR) does every time a home is bought and sold in America. Practices like NAR’s rules against price competition are the driving cause behind the Department of Justice’s antitrust lawsuit just filed against the NAR; the filing alleges that the NAR “established and enforced illegal restraints” on the industry. Who is the NAR? It is made of the firms that you may think as your friendly local realtors: Coldwell Banker, Keller Williams, Redfin, Compass, RE/MAX, Century 21 and the others.
The DOJ’s recent lawsuit and others brought by private plaintiffs across the country are at long last initiating a reckoning with the painful reality that U.S. home buyers and sellers— at all income levels— are forced to pay a 5 to 6 percent brokerage fee on home transactions. This is two to three times on average the rate in other developed countries. REX sells homes at 2 to 2.5%, which is in line with the standard in most other developed countries, which also provides plenty of revenue for awesome service that exceeds that of our peers.
Put into perspective, the median American family gives up around half of their yearly income to sell a $500,000 home. Many accept these fees as necessary. They are not. Like the stock spreads of 1980s Wall Street, high real estate fees are the product of a well-organized, influential cartel whose sole purpose is to line its own pockets at the expense of consumers.
Fortunately, parallels to the early days of the securities investigation are happening in the various federal cases targeting the residential real estate market cartel.
In addition to DOJ’s lawsuit, consumers are taking NAR’s practices in court and they are winning, as shown by the game-changing ruling by federal Judge Andrea Wood earlier this month. In Moehrl v. NAR, Judge Wood reviewed claims made by home sellers who assert that they paid tens of thousands of dollars too much when they sold their homes. After a close examination of the record, Judge Wood flatly rejected NAR’s motion to dismiss, explaining that currently industry practices “effectively concentrat[e] power in the hands of the NAR,” rather than consumers. Ouch.
As if that were not bad enough for NAR, Judge Wood continued to dissect the bloated fees and collusive practices that make the residential real estate industry a major antitrust problem. “But-for [NAR’s] conspiracy,” Judge Wood found, “each Plaintiff would have paid ‘substantially lower commissions.’” She further noted the fees that home sellers pay due to NAR’s practices are “assuredly of a type that the Sherman Act was designed to prevent,” referring to the hallmark federal statute that DOJ also used to require competition in the OTC enforcement.
On top of Judge Wood’s decision, NAR has taken it on the chin in a parallel federal case, brought by home sellers in Missouri. Again NAR motioned to dismiss the case, and again their motion was denied. Making matters worse for the real estate cartel, DOJ filed briefs opposing the NAR in both cases and launched its own probe into anti-consumer practices across the industry. Serious tailwinds are forming behind a major reformation of the real estate industry.
Leading economists have also begun to scrutinize residential real estate’s anticompetitive practices. Late last year two Ivy League professors published, in conjunction with the Brookings Institution, a thorough expose of the lack of price competition in the industry. Professors Barwick and Wong concluded that despite the “remarkable technological innovations” of the past decade and a “proliferation of new business models in the real estate sector,” the potential of these innovations remains unrealized. They identify the “persistently high” commission fees of real estate brokerage firms as hurdles to progress.
These long-unconfronted fees limit competition and lead to many of the adverse effects that the same “persistently” unreasonable fees in the NASDAQ caused. When it ended, the cost to the American public to buy and sell stocks compressed; the market was democratized. With increased stock liquidity, companies faced less risk, lower capital costs, and a greater ability to innovate and optimize.
Incredible analogues exist in the benefits to American homeowners and the economy if a similar dismantling of the anticompetitive residential real estate practices occurred. More houses would be bought and sold. More families and first-time home owners could enter the market. Homeowners would receive “more house” for the same price, just as stockholders received “more company” in the stocks they purchased, along with higher liquidity and lower risk.
The upward shift toward greater home equity will drive wealth creation and job mobility, which is especially important as COVID-19 shifts Americans’ working lives and patterns. Not just modernization, but genuine improvement could finally take hold in an industry that has remained unchanged and stagnant for decades. These savings affect more than the home buying market, just as the NASDAQ changes rippled through more than the stock market at its face, but the economy at large.
Hundreds of interviews during the NASDAQ investigation found that the practice wasn’t the result of an express contract reached among the market makers in a “smoke-filled room,” it was just a “tradition,” a “practice,” and a “convention” among traders, one that existed for over 30 years. But the origins of this practice did not mitigate its effects. However the practice came to be, it “hardened over time” into the behavior directly prohibited by the Sherman Act.
The fees perpetuated by the NAR are no different. Whether or not they are borne from express agreement, they have an undeniably negative effect on consumers, extracting tens of thousands of dollars from home buyers and sellers in every transaction.
Running in parallel - and often times out in front of - the legal and policy discussions about real estate reform, REX, the company I co-founded and lead alongside brilliant colleagues and subject matter experts, is unravelling decades of anti-competitive practices in real estate. In the fall of 2020, we launched AllHomes, a new technology tool that reduces the price of every home in the United States by thousands of dollars by allowing users to search every listing and reducing the often hidden buy-side fee. AllHomes immediately enhances job mobility, helps families move their children closer to better schools, and creates wealth through home investment. I am proud to see REX growing in leaps and bounds by building a consumer-first model.
The legal and academic foundation for a reckoning with the residential real estate system and the NAR exists, and the technology at REX is in place to replace the outmoded structure that protects anti-competitive behavior. The next steps are clear: the public, media, and policymakers must finally pay attention to the anticompetitive practices that harm real estate consumers, particularly those at lower and middle-incomes. It is, in Mark Twain’s words, history rhyming with itself — an ugly rerun no one wants to watch.