Most boxers say it’s the punch you don’t see coming that knocks you out. A question worth asking as several high-profile lawsuits continue to make their way through federal court is whether the U.S. Department of Justice (DOJ) is the proverbial knockout punch for the National Association of REALTORS® (NAR) and the industry at large.
It’s been slightly more than a year since the DOJ shocked the industry by announcing that it would withdraw from a settlement with NAR so that it could continue investigating NAR’s Participation Rule and the Clear Cooperation Policy.
While it’s still unclear where the DOJ’s investigation stands—they didn’t immediately respond to RISMedia inquiries for this article—experts tell RISMedia that the DOJ’s probe could pose another significant threat to the industry when it finally comes to a head.
“I can’t think of anything good that comes from the DOJ backing out of the agreed-upon settlement,” says Ken H. Johnson, an economist at Florida Atlantic University’s (FAU) College of Business. “To see one side back out of a settlement is particularly disturbing given the 40-year history of reaching settlements and the industry adjusting and morphing itself.”
‘Working relationship’ strained
The feud between the DOJ and NAR isn’t a new phenomenon. The two entities have had a contentious relationship for decades over different aspects of NAR’s policies and how real estate has operated.
According to Johnson, a practicing real estate agent for 12 years from the mid-1980s to 1995, throughout the years, both sides found a way to work things out—typically in a settlement.
For example, the DOJ filed a lawsuit against the organization in 2005, alleging that NAR rules limit competition from real estate brokers who use the internet to serve their customers. The case targeted policies that allegedly blocked internet-based companies from accessing MLS data.
The DOJ and NAR reached an agreement in 2008 that lasted 10 years. The settlement terms required NAR to repeal its anti-competitive policies and MLSs to repeal rules based on these policies.
“DOJ has had a history of working things out with NAR and settling them, and if other issues arise, they’d return to NAR again,” Johnson says. “That pattern creates relative certainty, and that’s a good thing for the industry regarding the number of agents we have, how we sell things and manage property.”
That pattern was broken in July 2021, however, when the Justice Department requested to withdraw from a settlement the two hashed out in November 2020.
NAR lambasted the agency for the move, asserting that the association had already begun implementing the agreed-upon changes, which would repeal and modify specific anti-competitive rules. After a series of public volleys between the two, NAR filed a lawsuit to quash the DOJ’s request to back out of the terms of its settlement with NAR.
Thus far, there has been no movement on the petition, and the investigation is presumably ongoing.
Despite the setback, a NAR spokesperson tells RISMedia that the organization is still committed to advancing and defending independent and local broker marketplaces that provide greater economic opportunity and equity for small businesses and consumers of all backgrounds and financial means.
“The Department of Justice response seeks to defend its unprecedented attempt to withdraw from a fully binding agreement after NAR had already begun to implement its terms,” says NAR VP of Communications Mantill Williams. “If the DOJ’s view prevails, it would undermine the strong public policy in favor of upholding settlement agreements and public confidence that the government will keep its word in future cases. The DOJ must be governed by principle, and NAR simply expects the department to live up to its commitments.”
The potential fallout
The Justice Department’s decision to back out of its settlement came at a troublesome time for the industry, as NAR and a handful of large brokerages have faced several antitrust lawsuits challenging agent compensation and NAR’s MLS policies.
Some observers tell RISMedia that the lull in the DOJ’s probe could be due to the agency waiting on the outcomes of one or more private lawsuits.
“If some private firm or entity is bringing a lawsuit to achieve a goal that the DOJ thinks is in the public interest and inconsistent with the antitrust laws, they want to help them win because that will set a precedent, even if that only applies in a particular region,” says Mark Nadel, an attorney and policy advisor for the government.
Nadel has researched and published reports on real estate commissions separate from his employer and has critiqued the industry’s commission structure on different occasions.
In one of his recent reports, Nadel authored an article commissioned by Real Estate Exchange (REX) as the startup sued NAR and Zillow over NAR’s co-mingling policy, which lets local associations choose whether non-MLS content can appear with theirs or whether it has to be posted separately.
The lawsuit alleges that Zillow implemented a website change last year, segregated and concealed listings that weren’t from the MLS, per the NAR policy.
The lawsuit appeared to falter in June 2021 when a U.S. district court judge ruled against the startup, claiming that REX hadn’t supported its claims. However, the case seemed to get a second wind in September 2021, after the same judge denied NAR and Zillow’s motion to dismiss the case.
The judgment came a month after the DOJ intervened with a statement of interest to prevent the drawing of “unwarranted interferences” from a 2008 consent decree between NAR and DOJ that expired in November 2018.
The Justice Department made a similar move in the Burnett/Sitzer lawsuit in 2019.
Nadel tells RISMedia that lawsuits like Burnett/Sitzer and Moehrl v. NAR could accomplish a goal that parallels the DOJ’s if they determine NAR’s policies as anti-competitive.
“The federal suit is a class action lawsuit,” Nadel says. “If they win, that’s nationwide, and that’s almost as good as Justice winning itself.
“If they win the lawsuit, and the court says ‘we find this in violation of the antitrust laws; therefore, we direct that you prohibit listing brokers are limited for setting the rates for buyer brokers,’ then that’s done,” Nadel adds.
According to Johnson, if they prevail, the lawsuits could lead to a decline in agent numbers industrywide. With 2 million to 2.5 million licensed agents in the industry, he says that a significant shift in the agent compensation structure could lead to a culling of real estate professionals.
“You will see far fewer licensees in the future, and that means the large brokerage houses will have to find different models because they will have to charge either higher monthly fees or take higher splits,” Johnson says.
He suggests that NAR membership, which currently sits at 1.56 million REALTORS®, could be halved over time.
While the jury is still out on the endgame for the DOJ’s probe, pundits and onlookers suggest that the current lull in the DOJ’s investigation may not be as foreboding as others forecast.
“Disinterested observers confirm the DOJ’s recent actions were unprecedented, giving us reason to question whether the department actually is working through the questions at hand in good faith,” says Craig Cheatham, president and CEO of The Realty Alliance. “We hope trust will be restored in the players and the system in the months ahead so these matters can be settled fairly.
“In the past, we have seen actions of federal agencies early in the process indicate significant intervention was coming, only to see the process stall as regulators begin to better understand our industry, and then no federal action is taken,” Cheatham continues. “It is possible this explains the current lull, but the current team has shown itself to be unpredictable if nothing else.”
Bill Fowler, who currently works as a consultant after senior roles in tech and leadership at Compass and Zillow, thinks that the DOJ’s investigation is part of a “correction” that the industry has been heading toward for several years now.
“We began this quiet evolution with the advent of large-scale portals that did a lot of the work the buy-side agents typically held as private,” says Fowler. “Most of their value proposition has been eroded to the point, now, where I think everyone is openly questioning the buy-side commission.”
The emergence of new home-search tech and the pursuit of reducing friction in the home-buying process has also played a part in that problem, according to Fowler, who says the Justice Department is trying to “align the industry with the expectations of the modern consumer.”
“That’s going to be catastrophic for some people, but it’s great news for those of us who believe in the power of the agent,” he says.