November 13, 2023

By Makenzy Mohrman, Capstone Financial Services Analyst

Against the backdrop of the global pandemic, the US housing market saw one of the steepest increases in both home price and rental rate growth in history. Home prices climbed over 40% between May 2020 and May 2023. Average effective rental rates grew over 27% during the same period. At the same time, average hourly earnings for US employees only grew 12%. The market’s continued lack of housing supply has exacerbated the dramatic increases in housing costs and the financial stress on US families.

Given the limited tools US housing regulators have to address the housing supply crisis head-on, they have taken a different, novel approach: targeting niche business models across the lesser-seen edges of the housing market that have quietly inflated consumer housing costs— a tact that can still deliver political “wins.” We believe three recent cases exemplify this underappreciated strategy in action:

1. Real Estate Brokerage Commissions Under Fire

In July 2021, the Department of Justice (DOJ) withdrew its consent to a settlement reached in 2020 with the National Association of Realtors (NAR) that would prohibit the NAR from facilitating certain industry practices that allegedly artificially inflated real estate broker commissions. However, the settlement did not touch certain rules the NAR enforces that are central to how real estate brokers earn commissions today. In particular, it did not cover the “buyer broker commission rule,”—which requires all member brokers to make a blanket, unilateral offer of compensation to buyer brokers to list properties on NAR-controlled multiple listing services (MLS).

In July 2021, the DOJ withdrew its consent to the settlement and filed to voluntarily dismiss its original complaint without prejudice. It then issued a new civil investigative demand (CID) to the National Association of Realtors requesting information and documents related to the buyer-broker commission rule. We believe the DOJ wants to do away with the rule—and could go further to fundamentally change the way real estate commissions are paid out today to lower commission costs for consumers.

The industry faces an investigation by the DOJ and several class action lawsuits brought by home sellers seeking to eliminate the buyer-broker commission rule to ultimately lower commission rates. 

2. DOJ Likely to Target Property Management Rent-Setting Technology

The Biden administration has recently set its sights on companies affecting affordability in the rental housing market. On January 25^th, the Biden administration announced plans for a new whole-of-government approach to strengthen renter protections. As part of the plan, the DOJ will gather feedback on “modern methods of information-sharing in consumer-facing markets” to inform updated guidance around anti-competitive information-sharing. On February 3^rd, the DOJ Antitrust Division withdrew its support for a handful of long-standing policy statements that had until now provided legal safe harbors for certain information-sharing practices across industries. In remarks accompanying the withdrawal of support, DOJ Principal Deputy Assistant Attorney General (PDAAG) Doha Mekki said, “One factor in the safety zones is the use of a third-party intermediary to facilitate information exchanges. However, exchanges facilitated by intermediaries can have the same anticompetitive effect as direct exchanges among competitors. In some instances, data intermediaries can enhance – rather than reduce – anticompetitive effects.”

We believe the DOJ is after platforms—like RealPage, Inc.—that provide software to advise property management companies on the rental rates they should charge tenants.

We believe the DOJ is after platforms—like RealPage, Inc.—that provide software to advise property management companies on the rental rates they should charge tenants. RealPage faces multiple class actions brought by renters who believe the company conspired with property managers to charge inflated rental rates—violating federal antitrust law. There are rumblings that the DOJ is conducting its own investigation. We believe the result of these suits—or a potential suit brought by the DOJ—could hamper property manager’s ability to use tech platforms to set rents and ultimately hit their bottom lines.

3. GSEs Intend to Crackdown on Title Insurance Costs for Borrowers

At the direction of the FHFA, the GSEs—Fannie Mae and Freddie Mac—have become hyper-focused on reducing closing costs for borrowers to make homeownership more attainable in an increasingly expensive market. They are looking to do this by supporting alternatives to traditional title insurance—which can run a borrower anywhere from 0.5% to 1% of a home sale price upon closing. On a $300,000 home, that would mean estimated title costs would be roughly $2,250. Title insurers have historically attracted scrutiny from regulators and consumer advocates for title products’ relatively low loss ratios and high commission rates relative to other insurance products. Title insurance industry advocates have until recently been able to communicate to regulators and lawmakers the importance of a true title product relative to alternatives—like attorney opinion letters (AOLs). However, sentiment around the products appears to be shifting under the Biden administration as home affordability issues persist.

In April 2022, Fannie Mae updated its selling guide to allow, in limited circumstances, the purchase of loans using AOLs in lieu of title insurance. Freddie Mac had already made this change to its selling guide back in May 2020. While the takeup rate on using AOLs remains low today, the GSEs have been exploring other ways to incentivize the use of title alternatives that could give title insurance companies reason for concern. In June 2022, FHFA announced its approval of the GSEs’ Equitable Housing Finance Plans—plans the GSEs adopted at the behest of FHFA designed to map out ways to advance equity in the housing finance system. Both Fannie Mae and Freddie Mac included in their plans various actions they plan to take over the next three years to reduce the cost of title insurance, including standing up pilot programs to promote the use of AOLs and exploring other title alternatives to lower closing costs.

We don’t expect the issue of housing affordability to abate anytime soon, given the prominence of the conversation across Main Street, Wall Street, and K Street.  

At Capstone, we don’t expect the issue of housing affordability to abate anytime soon, given the prominence of the conversation across Main Street, Wall Street, and K Street.  As such, we expect the burgeoning regulatory momentum to make underappreciated waves, risks, and opportunities across the industry, with material implications for companies and investors alike.

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