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Commentary

Realtors ‘Clean House’ by Stifling the Competition


     
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More than a decade ago the Massachusetts Association of Realtors succeeded in getting the state to increase real estate license renewal requirements. They rallied behind the importance of adding a continuing education requirement for agents in the industry, claiming that these courses would increase the quality of service to Massachusetts homebuyers.

Unfortunately, a new Beacon Hill Institute policy study that we co-authored found that their quality of service never increased but that instead the industry enriched itself through the regulations.

The Massachusetts Association of Realtors (MAR) lobbied the Legislature for years to implement a continuing education requirement. When it finally passed, Association President Laura Shifrin claimed, “This law will raise the level of professionalism within the real estate industry and help ensure quality representation for consumers relative to home buying and selling.”

Historically, after passing their initial licensing exam, real estate agents only paid a nominal fee to renew their license every two years. Beginning in 1999, real estate agents were required to complete 12 hours of continuing education training prior to each license renewal.

Those who did not complete the education, but paid the fee, were placed on “inactive status.” Inactive agents could not represent clients, but they could earn referral fees by referring business to an agent with an active license.

Continuing education courses often don’t have much to do with industry practice. They also often lack any exit exams demonstrating that anything valuable was learnt through the instruction. However, added regulations do succeed in eliminating competition. In this case, MAR’s new requirement effectively pushed large blocks of agents out of the business.

Prior to the continuing education requirement, many agents maintained their licenses after ceasing to practice the profession full time. Some worked on a part-time basis while others might only represent themselves or a friend every few years.

For agents who only made such occasional sales, it wouldn’t be worth going through the 12 hours of classes every two years. We suspected there were many such agents and as a result the requirement would shift business from very low volume agents to full-time agents.

The results of our study confirm these suspicions. The continuing education requirements reduced the number of active real estate agents by 58 percent, while increasing the incomes of remaining agents by 17 percent. MAR responded to our study by claiming that they didn’t think that 6 hours per year was much of a barrier. The numbers tell a different story. It might not be much of a barrier for their average member who is a full-time agent, but it is enough of a one to crowd out part-timers. And it gets worse.

Our study also analyzed data on the number of consumer complaints made since the implementation of the new standards, and specifically the number of complaints where the board took action against an agent’s misdeeds.

The study found no evidence that either the volume of complaints, or those requiring a response from the board, decreased after mandating the continuing education courses.

The evidence suggests that MAR’s relentless lobbying for the continuing education requirement was not a publicly spirited attempt to increase their service quality. Instead, it was a classic case of regulatory capture.

In other words, full-time agents changed the law to limit their competition from part-timers and enhanced their own incomes in the process. Sadly, the much-touted benefit to consumers has yet to be seen.

Massachusetts residents are now forced to overpay for brokerage services of no better quality than they were before MAR passed the continuing education requirement. Clearly, the Realtors are benefiting while the public pays the price. Until the requirement is repealed, the citizens remain the biggest losers.


Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been Assistant Professor of Economics at San Jose State University, Associate Professor of Economics at Suffolk University, a Fellow with the Mercatus Center's Global Prosperity Initiative, and a Visiting Research Fellow with the American Institute for Economic Research. He is also the editor of the Independent Institute books, Housing America: Building out of Crisis and Making Poor Nations Rich.

Evgeny Vorotnikov, Ph.D. is a Post-Doc Fellow at the University of Minnesota and a Tuerck Foundation Fellow.






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