Death Throes of the Old REALTOR Ways

How do you know when an industry is dying?

Simply look for the Luddites.

As in the 19th century, when technophobes sought to smash the emerging factories who were “taking their jobs, the the spectacle we have seen in the past few years across the REALTOR community is not much different, as it tries to use MLS rules to smash challengers to its Old Ways. That’s the only way to explain why the U.S. Department of Justice announced it was suing the Consolidated MLS of South Carolina for restraint of trade.

Regular readers of my columns know that I’m no fan of government interference in the economy. The free market is the best regulator of freely competing companies. Consumers, through free market mechanisms (choosing to purchase services or not) are quite capable of protecting themselves. And in cases of fraud, there are plenty of legal remedies that don’t require Uncle Sam’s preemptive strike. But in the case of the REALTOR Luddites versus the Industrialists, I’ve got to say: The DOJ has it right for a change.

The DOJ’s lawsuit is correct because the purpose of government is to protect one’s rights from harm from others. Consolidated MLS’s attempt to create artificial barriers to working with all consumers was exactly that: harming some people’s right to make a living (their right to life, exactly). Let’s look at the case.

The DOJ claims that Consolidated MLS was trying to impose “minimum standards rules” on their members. Essentially, the MLS was attempting to set a standard of performance for all members to practice “the same way” (at least same way minimally). The rules would impose subjective whims that abrogated the rights of some members to do business the way they see fit. And the only purpose of imposing these rules was to restrain the practice of some other members.

Essentially: One rival gang got control of the system and was using the rules to beat up on another gang. The “full (or more) service” brokers were preventing “less” or discount service brokers from participating in the marketplace.

According to the DOJ:

By providing an efficient means of exchanging information on home listings, MLSs can benefit consumers, but that same role makes access to the MLS database – and therefore MLS membership – critically important for any broker seeking to serve clients efficiently in the MLS’s service area, the Department said. Consequently, the rules adopted by CMLS governing who can be a member and how members must run their businesses have a significant impact on competition among brokers in the area served by the MLS.

http://www.usdoj.gov/opa/pr/2008/May/08_at_373.html

Al Capone would have been proud.

In his day, it would have been cleaner. Want to take out the competition? Use a Tommy Gun or just burn down his headquarters. Today, it’s much more subtle; cloaked in double-speak and the veil of “consumer protection,” the REALTORS actually believe themselves when they said they were doing it “to protect consumers.”

The DOJ continues:

In its court filing, the Department said that the rules that real estate brokers in Columbia have adopted through CMLS unreasonably restrict competition among brokers in the area. For example, unlike brokers elsewhere in the country, CMLS members are prevented from offering home sellers the opportunity to avoid paying a broker’s commission if the seller locates a buyer on his or her own. CMLS rules also require brokers to perform a prescribed set of services [emphasis added] – such as being involved in the negotiation of a home’s sale price and attending the closing – even if the broker’s customer would prefer to perform some of these tasks on his or her own in order to save money on the real estate broker’s fee [emphasis added].

The Department said that CMLS’s rules also give Columbia real estate brokers the ability to exclude rivals from outside Columbia who might offer local consumers innovative brokerage options that save them money or provide services that better match their needs [emphasis added]. The Department’s lawsuit challenges these and other CMLS rules that unreasonably restrain competition among real estate brokers and thereby lead to reduced consumer choice and higher fees paid by consumers.

So, why should the DOJ get involved?

First, if it didn’t, it would be sanctioning the formation of a price-distorting cartel. And while the government doesn’t mind when it sets up these cartels itself (see the Old Airlines or the Old Telephone System or the Current Cable Television Market), it won’t stand for it when some other gang tries to do it on its own.

Second, CMLS is clearly trying to create a “regulation” of the marketplace outside of the legislative process. This is because the “rules” of CMLS don’t just affect their members (like, everyone who attends the club must wear a tie) but the brokers outside of the club are affected without recourse. The CMLS rules would permit it to exclude certain rivals from access to the marketplace. And while restricting membership to a private organization like MLS isn’t per-se a problem, doing so to prevent competition (essentially on price) is a problem.

Side note: let’s dispel the little lie that the DOJ is really trying to protect the consumer, though, shall we? The DOJ certainly doesn’t have a record of wanting to “help” consumers. It sued Microsoft for giving away software for free.

No, the DOJ is correct - and only correct - in this case because it’s job is to protect the right of “non CMLS brokers” to make a living within the legal environment setup by the duly elected legislators of the state and Federal governments. Minimum standards would be a form of illegal regulation of real estate licensees by a non-governmental trade association.

Note that if some or all of the Brokers of CMLS wanted to only offer “full service” brokerage, there’s nothing to stop them - other than the consumer, that is. But the license law - which is the only standard of being a sanctioned real estate broker in South Carolina - doesn’t mandate “full” service or “discount” service or “any” service other than following the law. After that: the sky’s the limit in how licensees apply that law through business models.

That’s the government’s job: to prevent extra-legal cartels from skewing the marketplace through “rules” that are outside the legal boundaries set by legislators. If a broker has followed the law in becoming licensed and in setting up a legal business practice, he should otherwise be allowed to engage consumers unfettered by outside interference. Competition is not interference. But any “non legal” rules that prevent him from working with consumers or other business entities in the market is interference.

It’s not that the “non CMLS” brokers wouldn’t be able to compete in the marketplace, even if CMLS rules were allowed to stand. It’s that the CMLS brokers wouldn’t engage the non-CMLS brokers in the cooperative selling and buying of homes. And that’s a cartel; a form of “boycotting” that’s no worse than OPEC or other price fixing groups that regularly skew the marketplace. Clearly such policies harm consumers (once they figured it out, they’d probably be unhappy with CMLS brokers’ practices, too, considering it would inhibit their ability to have options of brokerage services within the MLS arena). Yet even that’s not the point; Consumers who don’t read the fine print or learn more about who is representing them have only themselves to blame: Caveat Emptor, if you please.

But let’s put aside the finer points of the law, shall we? Do we really need to worry about “who” is harmed by these “minimum standard” rules - consumers or non-CMLS brokers? No, we do not need to worry about harm, if we remember the simple facts of economics: Every time any organization can create artificial “standards” that lock out competitors, it’s always for the purposes of artificially maintaining high prices. Great examples from history and today include the Betamax/VHS war, where Sony tried to lock in more expensive tapes and machines, even though consumers wanted the cheaper, longer recording times of VHS. IBM tried it with their proprietary Microchannel architecture. IBM could price it’s MCA cards at many times higher than standard ISA cards because they controlled the licensing model for peripherals. Once again, minimum “standards” were introduced by IBM ostensibly to benefit the consumer (faster PC bus) but more likely because IBM had been losing control of the hardware business for years. Even Apple seems to be learning this lesson, as French lawmakers challenge it to accept all music standards on the iPod.

Ironically, in all of these cases, casual observers can note the same mistake made over and over: one that it doesn’t take a Department of Justice to fix. Sony forgot to ask the consumer what they wanted. IBM forgot to ask consumers how much they’d be willing to pay - and learned quickly when consumers gobbled up the cheaper EISA models introduced by competitors. Apple finally accepted non DRM music files. And REALTORS, finding themselves at the end of their reign over the Medieval real estate brokerage model. REALTORS, too, have failed to listen to consumers, who ask for alternate models of service because they’re clearly looking for options. If REALTORS were honest, they’d look in the mirror and note that they, too, like options, lower price options for sure (just try to get a REALTOR to buy anything full-price and you know what I mean…)

Consumers are the ultimate “standards of performance.” REALTORS just don’t seem to be able to learn this lesson. For decades, REALTORS were the Sacred Keepers of the Book, whose pages revealed to them the mysterious inventory available in the Overwhelming Marketplace. The Priests of Real Estate would often speak in tongues - babbling incoherently that only an anointed GRI could interpret the information on MLS, so that the consumer wouldn’t end up with PMI if their HUD wasn’t correct. Like feudal lords, they considered the consumer their “charges” and vowed to “protect them” under Exclusive Agency, like some sort of noblesse-oblige. How quaint!

What we’re seeing recently, because Consolidated MLS isn’t the first REALTOR guild to have tried this approach in the last few years - is the end of the REALTOR Mercantlist Era. While they profess their admiration for Mr. Smith, they really prefer the protection of Her Highness, Fannie Mae and His Majesty of Bailouts, Uncle Federal Reserve. It’s a time of revolution for the industry - not industrial, but informational this time - and the Old Guard is still hoping the future will go away. Like the Luddites, some REALTORS will try anything to prevent the transformation. They fear new models of real estate brokerage: they see new models of “partial” brokerage much like General Ludd and his Redressers saw the replacement of “skilled” workers with semi-skilled machine operators. In the Glorious Days, REALTORS needed to know all the spells and incantations; today, the discount-broker can simply click the mouse.

To anyone who has read history, this isn’t a new story. Consider this quote:

In the depressed state of agriculture for the last twelve months, some relief was absolutely necessary. Numbers of persons had been turned out of employment, and the pressure of the poor rates was become intolerable… Most enormous losses had been suffered in the last year; and if some speedy remedy was not administered by the wisdom and firmness of the legislature, the agricultural interest of the country might soon be completely ruined. (Parliamentary Debates, 1st Series, vol.29, (l8l5) Col. 984)

It would be very easy to substitute “real estate” for “agriculture” in that quote - from the Corn Laws debate of 1815 England. The farmers wanted laws to prevent the price of corn from falling further and the “industrialists” from gaining advantage over them by using “machinery.” Sounds remarkably like today, don’t you think? A sagging real estate market, a challenge by new men with new machinery, an attempt to use regulations to prevent competitors from entering the market.

Thankfully, we know how it’s going to end. Eventually, the Luddites disappeared: many actually went to work in the factories they despised. Even they ultimately enjoyed the benefits of a better life, as the cottage spinning wheels gave way to the revolutionary water wheels of change.