A Stunning Lawsuit Could Change How Realtors Get Paid

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, we've been doing a lot on competition stuff lately.

Tracy Alloway (0:19)

Yeah, we really have. Let's see, so we spoke with Lena Kahn from the FTC recently. Before that, we spoke to the DOJ's Jonathan Cantor. So it feels like we've been making the competition rounds.

Joe Weisenthal (0:31)

Right, we've talked a little bit about chicken too in a few episodes.

But competition, more broadly, is a good lens to really learn about market structure across a range of industries, because every industry is different and every industry has different centers of power and people who have information, people who extract rents from that information. And so just in terms of, I don't know, sheer curiosity about how different businesses work, the sort of competition lens I find to be very useful for getting to know it.

Tracy Alloway (1:03)

Oh, absolutely. And it's one reason why we keep asking people from the FTC and the DOJ how they actually do their research and learn about industries. But I would say, aside from that benefit, which is a major one, it does feel like there is this kind of ground swell of antitrust pressure, or there's more of a examination of anti-competitive practices nowadays. And it does feel like maybe the winds are shifting a little bit towards the consumer, perhaps given the macroeconomic background, we've seen a lot of complaints about inflation, higher prices, obviously, feels like companies are, in some respects, getting more savvy about what they're charging people. But then you also have companies or industries that have kind of been doing the same thing for a long time, but now people are looking at it more critically.

Joe Weisenthal (1:55)

Yeah, absolutely, that's very well put. It does feel like across the economy, you see this a lot, where something has been the norm for 30, 40, 200 years.

And then for whatever reason, maybe there's more data, maybe social media, maybe something. Suddenly people wake up and say, wait, is this fair? Is this right? Is this optimal? Is this a good system? I think we see it a lot in medicine, for sure, where people are like, wait, this is how it works.

But, and again, I mentioned, we've been doing a lot on competition. We've also been doing a lot on housing.

Tracy Alloway (2:30)

Yes.

Joe Weisenthal (2:31)

And so this is gonna be an episode that is sort of a merger.

Tracy Alloway (2:34)

Let's put the two together.

Joe Weisenthal (2:35)

Let's put the two together and talk about competition and housing.

Tracy Alloway (2:38)

Yes, so I'm sure listeners have probably seen some headlines floating around about a recent federal civil case called the Sitzer Burnett case. It was basically a civil lawsuit, and it found that the National Association of Realtors plus two large brokerages, I think they were called Keller Williams and Home Services of America, conspired to keep commission costs artificially high.

And the jury awarded Missouri home sellers something like $1.8 billion, but I've read that a judge could, in theory, increase that to damages of as much as $5.3 billion. And this has kicked off a huge discussion about the future of the real estate industry, which has historically made its money from these commissions, at least on the brokerage side.

Joe Weisenthal (3:28)

You summarized that very well. That was really good. And this gets to something, there are many aspects of real estate brokerage that I just don't really understand. I don't really get what multiple listing services are.

Tracy Alloway (3:40)

Yeah, I'd never heard of that before.

Joe Weisenthal (3:42)

I knew, I mean, I was familiar with these databases. I don't really get who owns them. I know that access is very restricted. I don't totally understand.

So I know you have a buyer's broker, but then also you can go on Zillow and find your own house or something like that. At one point when I was trying to buy a house earlier this year, found something on one of the sites, maybe it was Zillow, but then there was this broker who emerged. I don't really get how all these pieces fit together, but I do understand that if you have access on some level to this infrastructure, then it's very valuable.

Tracy Alloway (4:15)

Well, here's the thing. It's one of those costs that is substantial.

I think the average is something like five to 6% commission on a home sale price.

But because it's so baked in to what both sellers and buyers are paying, it's never really broken out. I think people don't think about it that much. It's just incorporated into the overall cost of either buying or selling a house. But now people are starting to examine it more closely and say, well, wait a second, how is this all working? What are the incentives here? And why has the average commission been so remarkably stable across literally a century, I think?