Real estate licensing laws are a criminal conspiracy against the consumer created by and for the benefit of a cartel.

This is me writing in June of 2007. Someone linked to it from Twitter yesterday, and I read it for the first time in years. The argument holds up — there has never been any attempt at rigorous refutation — but it’s even more interesting now that America has discovered what Sarah Palin and others are calling “crony capitalism” — the pandemic affliction I call Rotarian Socialism or simply rent-seeking.

When I wrote this, I was sure that the real estate licensing laws had nothing to fear. Things have changed. For a first thing, when state governments have to choose between marginal departments and continuing to provide a food dole to reliable voters, the state department of real estate could see huge budget cuts. But even better, sooner or later it will dawn on people that the only way to push “businesspeople” like the NAR off the taxpayer’s tit is to repeal all commercial regulation.

That’s a game-changer. If you’re good at actually delivering value to your clients, so much the better for you. The free market rewards virtue. And if you’ve been depending on the NAR and all those huge stacks of rent-seeking legislation for your income — good luck at your next job… –GSS

 
Real estate licensing laws are a criminal conspiracy against the consumer created by and for the benefit of a cartel

When I walk into a supermarket, the first thing I look at are the floors. If they aren’t buffed to a blinding glow, I walk right back out. Why? Because if the manager isn’t staying on top of the floor maintenance, he isn’t staying on top of anything else, either. Without doubt, I am “protected” by vast armies of federal, state and local food cops, but it turns out that they are not willing to get food poisoning in my place. If I fail to guard my own self-interest, the courts might make me (or my heirs) whole — after-the-fact. But nothing can protect me if I won’t protect myself.

Surely you effect many similar sorts of “consumer protection” in your own behalf, possibly believing in your heart that the laws can protect you, yet exercising caution to protect yourself even so. But consider this: If, when selecting electrical equipment, you had to choose between oversight by government functionaries or the Underwriters Laboratories — but not both — which one would you choose?

If you said government, you can stop reading now. You’re hopeless. For those still with us, what we’re doing is exploring the implications of doing away with real estate licensing laws. And if that idea makes you shiver, you can settle down: No matter what I say, the real estate laws are not going to be repealed any time soon.

But imagine for a moment that your neighbor’s mother introduced an old friend to the FSBO seller up the street. This is brokerage, introducing buyer to seller. The principals are unrepresented, but they can do everything they need to do — in Arizona, at least — at the offices of a title company. Nothing unlawful has occurred — until grandma takes a finder’s fee from either the seller or the buyer.

At that point she is in violation of real estate licensing laws. She can connect buyers with sellers all day, every day — provided she does not get paid for doing so. The purpose of the real estate licensing laws is not to protect buyers and sellers from chatty grandmas, who may or may not know anything about real estate. Instead, those laws exist to limit artificially who can be compensated for introducing buyers and sellers.

Before the advent of licensing laws, chatty grandmas and underemployed barbers, among other people, brokered real estate on the side. In the name of “protecting” consumers, the NAR got state legislatures to pass laws putting those innocent souls out of the real estate business. These are the actions of a cartel. Even now, the NAR is trying to pass federal legislation forbidding banks from brokering real estate.

This is important. We’ve already established that laws and regulations will not protect you in the marketplace if you are unwilling to protect yourself. Moreover, we’ve agreed that — as with the Underwriters Laboratories — where free-market oversight systems are in place, they are preferable in your own opinion to government laws and regulations. Finally, with respect to real estate licensing laws, we have demonstrated that the purpose of the laws is not to protect the consumer, but, rather, to protect licensees from the brokerage efforts of chatty grandmas and underemployed barbers — and banks — and anyone else who might introduce buyers and sellers for less money than licensed brokers want for them to have been charged.

From where I sit, there is no cogent rationale left to defenders of real estate licensing. We know from first-hand experience that self-protection buttressed by free-market oversight actually works at achieving true consumer protection. We also know that government laws and regulations do not work at achieving consumer protection. And we know that the real estate licensing laws are the result of a conspiracy against alternative vendors, with the far greater population of secondary victims being buyers and sellers of real estate. If you wish to defend these laws, I say you have nothing left to defend.

I am in league with the Greeks. I believe in questioning absolutely everything, and I am not afraid to risk being wrong on the path to discovering what is right. It is far beyond pellucid to me that real estate licensing laws are an abomination. If I could effect only one of my desired real estate reforms, I would divorce the commissions, but it remains that the real estate licensing laws — and occupational licensing laws in general — are by far the greater crime.

So, while you’re here, let’s consider some other ideas in the neighborhood. This is email I had from a Phoenix-area Realtor:

I read your article in the Arizona Republic about licensing laws. I totally agree.

I also wanted to ask you what your feelings are regarding part-time agents. I feel that there should be a disclosure requirement for agents with other employment. We all know that it can hurt our clients if we are not able to assist them in a timely manor.

It needs to be disclosed that employment with someone else could delay an agent’s ability to service the client properly.

Ethics and fiduciary is talked about all of the time but isn’t it unethical not disclosing an agents status?

I think this is a fine idea, except by now we’re talking about torts — civil court cases — not statute law or regulations.

If the real estate licensing laws were repealed, I think buyers and sellers would — as they should now — exercise much greater care in choosing whom to employ. Without the shield of the state-issued license to cover their asses, I would expect managers of real estate brokerages to exercise much greater care in choosing whom to hire. And I would expect the Errors and Omissions underwriters to step up their oversight in a big way.

There’s more: The NAR — or a more-honest competitor — would have a far greater incentive to vet the ethics of its membership, as would the MLS system or whatever might replace it. As with the Underwriters Laboratories, these “professional” organizations might become something more than dues-devouring paper tigers at setting and enforcing standards of care.

It might turn out that you could not employ a chatty grandma or underemployed barber even if you wanted to. The state license does nothing to prevent the lowest common denominators — intellectually and ethically — from becoming real estate “professionals.” But the free-market entities that arise to replace — and actually undertake — the oversight function could prove to be far more exacting than anything we can imagine in the current context.

In a comment to my column from Friday’s Arizona Republic, Athol Kay asks three questions:

If the laws’ purpose is to limit entry, why are brokerages packed wall to wall?

Because the barrier to entry is still very low. The real estate licensing laws put the barbers — particularly — out of business, and they forbade people with a casual or isolated interest in real estate brokerage from collecting compensation for their efforts. But, unlike other occupational licenses, almost anyone who wants a license can get one.

Wouldn’t that excess supply of agents drive prices down?

It tends to keep the median income for licensees very, very low.

Why didn’t NAR require/suggest licensing being a high hurdle instead of a low one?

For the reasons discussed in the article commented on: Because the broker-level license is a license to steal. A steady supply of gross incompetents with stars in their eyes is the main profit center in many brokerages. The real estate licensing laws were hugely unpopular when they were first passed, so their scope was very limited. But where salespeople may or may not have clients, a broker’s clients are salespeople — and there is plenty of money to be had out of them before all but the smallest few of them fail. The NAR and the MLS are in on this game, too.

Athol continues in a post at his own weblog:

If you’re complaining about haphazard training, wouldn’t the more obvious solution be higher standards for licensure?

No, for all of the above reasons: The license cannot substitute either for due diligence on the part of consumers or for free-market oversight entities. Moreover, further limiting the supply of providers of a function any reasonably intelligent barber can do is simply a more egregious form of the current conspiracy. If market forces demand greater training — as our own E&O underwriter does — that is the right way to effect it.

There’s more: The license, no matter what training it requires, is fundamentally anti-intelligence, anti-experience, anti-due diligence. The license not only deludes consumers into thinking that all agents are the same, it permits newly-minted licensees plausibly to make that very stupid claim. Where vendors compete for reputation, experience matters. Moreover, in a market where reputation and long-standing successful practice matter, new entrants would have to align themselves with established firms to get the traction necessary to go out on their own. This allows for the training that mostly doesn’t happen now, along with a weeding-out that doesn’t happen at all. You can hang your new real estate license practically anywhere, since you’re all profit to your broker. If licensing laws were repealed, managers of successful brokerages would be very careful not to hire — and to terminate with dispatch — people who might destroy their reputations.

More:

No licensing means there would be no more agents. The legal construct of “a real estate agent” would vanish. With that change the entire category of Agency Law would be null and void.

Not to be mean, but this is dumb. The law of agency is ancient, at least as old as the Greeks. If anything, the trend in statute law is to weaken the duties imposed by the common law of agency. To be frank, I would happily bid farewell to the entire category of laws designated as malum prohibitum — wrong because forbidden by statute law, with the civil courts handling the tortious claims now designated as malum in se — wrong in itself. In any case, where a party is injured in a real estate transaction, the case is handled in civil court, and this would not change if the real estate licensing laws were to be repealed.

One more:

Why would NAR seek to limit the number of Realtors anyway?

It doesn’t. The NAR’s interest is in limiting the number of non-Realtors.

Put a fork in this one. It’s done. The real estate licensing laws are not going to be repealed, more’s the pity, but I don’t think there is any rational defense to be made for them. They are a conspiracy arrayed directly against alternative vendors, and indirectly against all consumers, created by and for the benefit of a cartel. They do not protect consumers. They serve instead to induce consumers to be careless about their own interests, even as they encourage licensees to misrepresent their knowledge and experience. Moreover, they prevent the spontaneous creation of truly-viable free-market alternatives to licensing. They not only do not protect consumers, they effectively prohibit the means by which the interests of consumers could be protected.

If you can dispute any of this, make your case in cold, clear reason. And if you cannot dispute this argument, a gracious concession would be an unexpected delight.