The Disintermediation That Wasn't
It's hard to believe that it's been over a decade since the notion of Internet disintermediation first received widespread attention in Bill Gates' book, The Road Ahead. If you look at travel agents who collected a lot of money for printing airline tickets, the prophecy has come true.
Residential real estate was another field predicted to be toast. John Baen and Randall S. Guttery predicted in 1997 that jobs would be lost to automation, commissions would drop, and more sellers could sell direct. The logic of the argument is strong, even in hindsight, but it doesn't hold up. Instead of being pushed aside by the Internet, real estate agents, individually and in powerful trade associations, have been aggressive in their adoption of emerging technologies. Rather than being disintermediated, the National Association of Realtors has become the subject of Federal Trade Commission and Department of Justice inquiries into price maintenance: U.S. house sellers generally pay a 6% commission, while in the U.K., the figure is only 2%.
What happened that the prediction could be so far off?
The picture is not unambiguously successful. Real estate agents in the U.S. enjoyed a year of extremely high market activity in 2004, but average commission income went down, in part because average selling prices were accompanied by a drop in the average commission to 5.1%, and in part because the barrier to entry for the field is low enough that lots of new aspiring agents got their licenses. Still, this largely means that the field is a victim of its own success.
1) Real estate is a relationship business
Whether he or she is hunting for scarce properties in a hot market or scarce buyers in a cool one, good real estate agents embed themselves in deep social networks. The trust required for a buyer to make what is typically the biggest purchase of his life does not translate to a browser-based form. As recent house sellers, we found our buyer through a real estate agent who had been working with him as a buyer's broker for nearly a year. Could a website, however thorough, have broken that trust if we had tried to sell the property ourselves?
2) Houses aren't plane tickets
To the extent that house purchases are deeply personal and given that every buyer is different, the matching of buyer to property requires both architectural and psychological understanding, patience, and some luck. Real estate agents spend a lot of time behind the scenes learning the market, tracking trends, and generally becoming informed as to what combinations of features will match up best with a given buyer.
3) Control over information confers power
A real estate transaction involves multiple layers of information: comparable sales, future uses for nearby vacant land, whether the neighborhood kids are nice and the schools good, what kind of builder put up the structure, etc. Little of this exists in standardized databases, and it's both hard and expensive to generate in a channel outside traditional real estate firms. Where data does exist in structured form, access both to add and to view important kinds of information is tightly controlled.
4) Organization is power
The National Association of Realtors is large, well-funded, and effective in influencing legislation. Many attempts to create alternative business models, involving less than full service but more than For Sale By Owner behavior, have been literally or effectively outlawed in certain states. No comparable organization exists for travel agents, for example.
5) Real estate has embraced emerging technologies
I can recall seeing the iPix 3-D photographic demo at a trade show in the late 1990s; now flythroughs, often sophisticated, are a staple of real estate websites. In the November 28 Boston Globe, a local agent discussed how a new tool integrates access to listings, personal contact management, and other tools in a PDA. Some brokers have taken to using blogs as another tool to build relationships, confer authority, and generally keep their names in play. Even so, the most powerful tool for most agents remains the mobile phone, a device and set of capabilities that the Web has a hard time replacing.
6) Home-buying is a complex transaction
As my Penn State colleague Steve Sawyer and his co-authors have found, it's naive to speak of disintermediation, singular, in the process of purchasing a house or condominium. The Web has clearly changed the process, but there are too many moving parts in the transaction for it to be conducted completely online. Some business-to-business aspects are moving toward standards like XML to smooth workflows between, say, mortgage lenders and title insurers, but conceiving of the process as analogous to even car-buying ignores the coordination and other roles played by a trusted party in a complicated, emotional, and large purchase. As Sawyer et al state,
"The analytic simplicity of categorizing complex transactions as either intermediated or not belies the web of connections and actions that make selling and buying real estate a multi-state and multi-step process."
It's good counsel to observe as we analyze other predictions in the future.
References:
John Baen and Randall Guttery, "The Coming Downsizing of Real Estate," Journal of Real Estate Portfolio Management
Kimberly Blanton, "Realtors get their hands on technology," Boston Globe, November 28, 2005
Waleed Muhanna, "The impact of e-commerce on the real estate industry: Baen and Guttery revisted," Journal of Real Estate Portfolio Management 8
Steve Sawyer, Rolf Wigand, and Kevin Crowston, "Redefining Access: Uses and Roles of Information and Communication Technology in the U.S. Residential Real Estate Industry from 1995-2005" Journal of Information Technology
--Dr. John Jordan
Founder, Still River Research and executive director of the eBusiness Research Center at Penn State University
Early Indications has been published by John Jordan twice monthly since 1997, focusing on the broader implications of emerging technologies. It is distributed free of charge by the eBusiness Research Center at Penn State University. Back issues are available online at earlyindications.blogspot.com. Quotation is permitted with full attribution. The author holds no direct financial stake in any of the companies mentioned. Comments and questions, which will not be included in future letters without express permission, should be directed tojmj13@psu.edu; to subscribe simply send a request to hmw2@psu.edu.
Posted by John Jordan at January 11, 2006 04:09 PM
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