Academic journal article The Journal of Real Estate Research

Market Structure in the Residential Real Estate Brokerage Market

Academic journal article The Journal of Real Estate Research

Market Structure in the Residential Real Estate Brokerage Market

Article excerpt

Abstract. This study provides empirical evidence regarding brokerage firm concentration in a local market multiple listing service setting over the years 1992-1995. To evaluate the level of brokerage firm concentration in this market, Gini Coefficients, HerfindahlHirschman Indices and Concentration Ratios for each year of the study period are calculated. Our results indicate that for firms responsible for listing properties, firm concentration has not varied substantially over the four-year study period. However, for those firms that were responsible for actually selling properties, firm concentration has decreased over the study period. This finding tends to indicate that the MLS now provides greater exposure to a wide variety of sales firms, therefore leading to a higher level of competition with a lower level of concentration for selling firms in this local market.

Introduction

The market for the services of residential real estate brokerage firms has seen considerable change in recent years. One dramatic change is a result of new computer technology that has increased the formation of regional multiple listing services (MLS) versus the traditional MLS for one city. Some concern exists that the residential brokerage business is moving toward domination by large national and regional firms. Michael Selz (1990) in a Wall Street Journal article reports that more than a half dozen of the largest national brokerage firms and the twenty-five largest regional firms handle more than 40% of houses sold. In the same article, Selz indicates that Richard Loughlin, chief executive officer of Century 21 Real Estate Corporation, predicted that the largest companies' share of the business would grow to 60% by 1995. These estimates are for homes that are sold through local multiple listing services and exclude new houses that are typically sold by developers.

The residential real estate brokerage industry is considered to have few barriers to entry with numerous companies offering what is perceived to be essentially the same service. In an industry with such low barriers to entry we would expect to find insignificant concentration levels. However, it is possible that at the firm level, brokerage firms are able to establish dominant positions in a market and thus command a large percentage of market share. Selz's (1990) comments support the view that considerable residential brokerage firm concentration exists and that it may be increasing.

In this study we examine brokerage firm concentration in a multiple listing service setting. We estimate the market structure of brokerage firms in an MLS over the 1992-95 period. Market structure in terms of brokerage firm sales from both the listing firm's and the selling firm's perspective is estimated. Even though the national figures provided by Selz (1990) suggest increased concentration in the brokerage industry, this picture may be misleading due to the fact that on the supply side the market has traditionally been localized. Therefore, although in our study we focus on brokerage firm concentration in one Texas city, it is believed that this study is of importance nationally, as it indicates the likely situation throughout the country.

This study is organized as follows. The next section presents a brief review of several studies that are concerned with market structure of the real estate industry. The third section presents our sample and summary statistics. The fourth section discusses the methodology. Section five reports our empirical findings and the last section contains our conclusions.

Related Studies

Several studies related to market structure in the real estate industry provided insights for the analysis presented in this work. Following the development of the MLS, market structure of the real estate industry received increased attention. For example, Miller and Shedd (1979) reviewed court decisions regarding whether market information gained from the MLS can be reserved only for the members of the local realty board who joined the MLS. …

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