Tuesday, January 03, 2006

November 2005 Early Indications II: The Disintermediation That Wasn't

(distributed 11/30)
It's hard to believe that it's almost 2006, and 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 last Monday's Boston Globe (November 28), 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 on line. 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.

John Baen and Randall Guttery, "The Coming Downsizing of Real Estate,"
Journal of Real Estate Portfolio Management 3 (1)

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 (2)

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 (20) 4