Washington, D.C. – The Consumer Federation of America (CFA) supports the lawsuit filed by REX, a discount broker, against the State of Oregon for prohibiting the payment by real estate agents of rebates to home buyers.
“The Oregon prohibition on rebates is blatantly anti-competitive, denies home buyers financial relief, and supports the charging of high and near-uniform commissions,” said Stephen Brobeck, a CFA senior fellow. “The U.S. Department of Justice has objected to anti-rebate laws and so, hopefully, will the Oregon District Court,” he added.
Anti-rebate prohibitions currently exist in ten states and restrictions are present in several others. These prohibitions reflect the political power of the industry, which dominates state regulatory bodies. In Oregon, the real estate commissioner and seven of the nine members of the Oregon Real Estate Board must be active real estate licensees. The current commissioner, the state’s chief real estate regulator, is a past president of the Oregon Association of Realtors.
The industry supports the anti-rebate policy because of its desire to preserve high and near-uniform commissions of 5-6 percent. A commission on the sale of a $500,000 home would typically be $25,000-$30,000, the cost of many new cars. The linchpin of this high-priced system is industry rules effectively requiring listing brokers to set commissions for buyer brokers when they list properties on local Multiple Listing Services (MLSs). In Oregon, a large majority of buyer broker commission “splits” range between 2.5 and 3.0 percent. Sellers who ask their listing agent to lower the buyer commission split are accurately informed that buyer brokers would then be less likely to show their property.
Discount buyer brokers have no choice but to accept these 2.5-3.0 percent commission splits offered on MLSs. But in most states the brokers can compete on the price of their services by offering rebates of a portion of their commissions. In most states they are now able to do so, in part because in 2005 the U.S. Department of Justice successfully sued the State of Kentucky for its prohibition on rebates. Following that settlement, four other states also agreed to legalize rebates. However, the general immunity of state legislation from federal antitrust enforcement has limited DOJ efforts to eliminate anti-rebate prohibitions in the remaining ten states, which include Oregon.
Eliminating the rebate prohibition in Oregon would immediately allow real estate licensees such as REX and Redfin to allow discounts to customers. These discounts would not only benefit those customers. They would also put some pressure on the near-uniform rates charged by other real estate brokers. In 2010 research, two academics estimated that removing rebate bans would reduce total brokerage costs by nine percent.[1]
While removal of the rebate prohibition would help Oregon consumers, the most effective way to increase price competition nationwide would be successful resolution of two class action lawsuits – Moehrl v. NAR and Sitzer v. NAR. Both lawsuits seek an end to the listing of buyer broker commissions by listing brokers. Both buyers and sellers would negotiate and pay their own commissions. Separating commissions would immediately reduce the commission expenses of sellers and, for the first time, would give buyers a real opportunity to negotiate buyer broker commissions. This uncoupling would also greatly free discounters and tech companies to offer an array of service options at lower prices. Anti-rebate statutes would then be irrelevant.
[1] Lu Han, Seung-Hyun Hong, “Testing Cost Inefficiency under Free Entry in the Real Estate Brokerage Industry,” Journal of Business & Statistics (2010).