How the Department of Justice's Misunderstanding of Technology Harmed American Home Buyers

In the ever-evolving landscape of real estate, the role of technology cannot be overstated. From listing platforms to virtual tours, the internet has revolutionized how homes are bought and sold. However, a fundamental misunderstanding of the power of technology by the Department of Justice (DOJ) has inadvertently harmed American home buyers.

In its attempt to foster competition within the real estate industry (2005), the DOJ took action against a national association of real estate brokers, arguing that their policies restrained competition from brokers utilizing the internet to serve home sellers and buyers more efficiently and cost-effectively. On the surface, this initiative seemed noble, aiming to break down barriers and empower consumers with more choices. However, what the DOJ failed to foresee was the emergence of platforms like Zillow and the profound impact they would have on the industry, when given access to the data shared by brokers on their local multiple listing service (MLS).

Zillow, founded in 2006, quickly became a dominant force in the real estate market. Offering a comprehensive database of listings, along with tools for buyers, sellers, and agents, Zillow capitalized on the growing trend of online property searches. By providing easily accessible information and resources, Zillow empowered consumers to take a more active role in the home buying process, disrupting traditional brokerage models.

Unfortunately, the DOJ's oversight became evident as Zillow and similar platforms rose to prominence. Rather than fostering healthy competition, the DOJ's intervention inadvertently paved the way for the consolidation of power among tech giants in the real estate sector. With fewer restrictions on internet-based brokers, platforms like Zillow gained significant influence, shaping the market in ways that were unforeseen.

One of the unintended consequences of the DOJ's actions was a 6% INCREASE in average commission rates over the next two decades from 5.02% to 5.32%.  Prior to the DOJ intervention, the average real estate commission DECREASED almost 18% from 6.1% (1991) to 5.02 (2005). While the intention was to drive down costs for consumers by promoting competition, the reality was quite the opposite. With the rise of online platforms, traditional brokers found themselves facing stiffer competition, possibly leading some brokers to increase their commission rates to maintain profitability. As a result, home buyers were left bearing the brunt of these higher costs.  

The Sherman Act

The Sherman Act broadly forbids two main things: 1) agreements that harm competition, and 2) actions by a single entity that monopolize or try to monopolize a particular market. The Act gives the Department of Justice the power to stop such behavior through lawsuits, and it also allows individuals or companies harmed by these actions to sue for damages, which can be tripled. Over time, federal courts have established a set of rules under the Sherman Act: some types of anticompetitive behavior are automatically considered illegal, while others are judged on a case-by-case basis to determine if they unreasonably limit trade.

  • Should one company be able to control almost 50% of the internet search traffic for a particular industry?    
  • If a company is going to receive a 40% referral fee for a real estate transaction by introducing a consumer to a local real estate agent (while also displaying "reviews" for the top agents in their area), should this be disclosed and regulated? 

Moreover, the reliance on internet-based platforms introduced new challenges for home buyers, including issues related to data accuracy and privacy. While Zillow and similar platforms offered unprecedented access to property information, concerns arose regarding the accuracy of listings and the protection of personal data. Without proper oversight or regulations in place, consumers were left vulnerable to potential risks associated with online transactions.

In hindsight, it's clear that the DOJ's efforts to promote competition within the real estate industry were well-intentioned but ultimately misguided. By underestimating the power of technology and failing to anticipate the rise of platforms like Zillow, the DOJ inadvertently harmed American home buyers. Instead of fostering true competition, their actions led to the consolidation of power among tech giants, driving up costs and introducing new challenges for consumers.

Moving forward, it's essential for regulators to adopt a more nuanced understanding of technology's role in the real estate market. By staying ahead of emerging trends and anticipating potential consequences, regulators can enact policies that truly benefit consumers and promote healthy competition within the industry. Only then can we ensure that the American dream of homeownership remains within reach for all.

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