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Comment No.: REW-0406
Received: 10/25/2005
Organization: National Association of REALTORS
Commenter: Yun, Lawrence
State: CA
Attachments: None


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
Source: Real Trends, 2004

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)