I was just reading about the CFA ragging on the Real Estate Industry. One of their claims was that NAR and Real Estate boards (led mostly by Agents and Brokers) have been trying to keep barriers to entry low. The low barriers to entry causes there to be too many licensed agents, which leads to an inefficient marketplace, where commission rates are kept high. Essentially they are saying that NAR and the Real Estate industry has complete control over commission rates.
Apparently the CFA claimed that there were 2.5 million licensees, and only about 7 million sales annually. Therefore, by most brokers completing only a handfull of sales each year it helped "support a system that keeps comission rates high." And they claim that this is from an economists point of view.
I studied economics, and this couldn't sound more wrong to me. Competition creates efficiency, and the most efficient market, is one that has perfect competition. In general, conditions for perfect competition require:
- A large number of buyers and sellers (check)
- goods or services offered are functionally identical (pseudo-check....nothing's perfect)
- and freedom of entry and exit
The fact of the matter is, the more players that there are in a market, the more competative and efficient it becomes. One factor that could possibly effect comissions in an area, would be a market with a few large players that had a large majority of market share.
I think the better question comes if we take it to the extreme, and assume that the CFA is right, and the real estate industry and NAR do have a magical grasp of (negotiable by law) commission rates. What exactly would be their plan to deal with some of the new discount brokerages popping up, that are giving a percentage of the commission back to the buyers?
The easiest way to deal with that would be to snuff them out. These new discount business models are based on the going commission rates. Use the strength of numbers and the grasp of the market share and make the going comission rate lower. Lower the standard, and their model won't survive.
However we don't see that happening because the real estate industry and NAR cannot change commissions with the flick of a switch. The market sets the rates.
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