The Impact of E-commerce on the Real Estate Industry: Baen and Guttery Revisited
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
The Impact of E-commerce on the Real
Estate Industry: Baen and Guttery Revisited
Executive Summary. One widely reported prediction is by Waleed A. Muhanna*
that the emergence of the web as an open medium for James R. Wolf**
commerce threatens the role of the real estate agent as a
market intermediary. In their 1997 article, for example,
Baen and Guttery predicted that the increased use of the
Internet and information technology would lead to a Introduction
downsizing of the entire industry. However, recent Bu- In The Coming Downsizing of Real Estate: The Im-
reau of Labor Statistics data show that the real estate
plications of Technology, Baen and Guttery (1997)
industry, like most of the economy in the United States,
examine the potential impact of the Internet and
experienced steady growth during the last few years. This
article revisits the issue of disintermediation in the con- other information technology on the residential
text of the real estate industry. It discusses—from a the- real estate industry. They predicted a continued
oretical and conceptual perspective—several reasons why rise in that the number of buyers and sellers using
the predicted downsizing did not occur. The analysis sug- the Internet to find real estate-related information.
gests that the Internet, though clearly a very powerful A recent study by the National Association of Real-
tool with strategic implications, may not be as disruptive tors (NAR) (1999) confirms these predictions: 37%
a technology as originally predicted. of all potential homebuyers searched for a home
online in 1999, up from just 2% in 1995. Baen and
Guttery also correctly anticipated that the Inter-
net will give users access to an unprecedented
array of information traditionally held by sales
agents. Today, websites such as Yahoo!Real
Estate, MSN’s HomeAdvisor.com, HomeSeekers.
com, Homestore.com, the NAR’s official website
Realtor.com and several others provide visitors
with a breadth of information, including data on
recent house sales and prices of comparable
houses, information on neighborhoods, schools,
taxes, costs of living, and maps and tools for
locating, buying, financing and insuring a home.
Using a transaction cost argument, however, Baen
and Guttery (1997) predicted that increased use of
the Internet and information technology would
have a dramatic and negative impact on the real
estate industry in terms of both income and em-
* Ohio State University, Columbus, OH 43210-1144 or ployment levels. They argued that buyers and
muhanna.1@osu.edu. sellers with access to information available via
** Ohio State University, Columbus, OH 43210-1144 or the Internet will have no need for traditional ‘‘in-
Wolf.206@osu.edu. fomediaries’’ and that several other players in real
Journal of Real Estate Portfolio Management 141Waleed A. Muhanna, James R. Wolf
estate support positions will also be disinterme- and 13% in 2001 as sales continued to rise. More-
diated by the Internet. The authors predicted job over, the once crowded field of the online real es-
losses in sectors directly related to real estate, in- tate sector has considerably thinned out as a result
cluding sales agents and developers, as well as sec- of consolidation and closings. At the top of the list
tors involved in the support of real estate trans- of up-starts that failed are e-brokerage compa-
action such as legal services and banking. They nies such as Owners.com, which merged with
argued that ‘‘the real estate property and mortgage Homebytes.com in October 2000 and whose pri-
markets, together with all supporting professions mary business model sought to bypass the tradi-
and service providers, are experiencing a paradigm tional broker by catering to the FSBO market.
shift that will have major implications in levels of The list of survivors is made up of online compa-
employment and compensation,’’ (p. 1). Later add- nies (e.g., homestore.com) that sought to fully em-
ing that ‘‘there will be a tremendous cost to the braced the real estate agent rather than cut out
real estate profession in terms of income, and the agent as a middleman.
therefore employment,’’ (p. 15).
This study revisits the issue of disintermediation
To date, for most of the real estate industry, Baen in the context of the real estate brokerage industry.
and Guttery’s (1997) predictions of reductions in Drawing on different bodies of knowledge and
employment and income have not materialized. In frameworks, the study explores—from a theoreti-
fact, in the four years since the article’s publica- cal and conceptual viewpoint—several reasons
tion, the real estate industry in the United States, why the predicted downsizing did not occur, and
like much of the U.S. economy, has experienced offers a different assessment of the likely impact
steady growth. Of the sectors examined by Baen of the Internet on the real estate brokerage indus-
and Guttery, this study uses data from the U.S. try. The analysis and synthesis are aimed at im-
Bureau of Labor Statistics (BLS) and finds that proving our understanding of the potential impact
only select sectors of the banking industry have of the Internet on the real estate industry. It also
experienced any job loss, and that most of the cat- explains—at least in part—the recent shakeout in
the online real estate sector, and this can help cre-
egories examined have experienced steady growth
ate a roadmap for real estate professionals going
during the last decade, even after adjusting for
forward.
population growth. Further, the published results
of REALTOR Magazine’s (www.realtormag.com)
The remainder of the article is arranged as follows.
annual compensation surveys of NAR members
In the next section Baen and Guttery’s (1997) pre-
suggest a steady rise in the median income of real
dictions concerning the banking industry are
estate practitioners from $33,600 in 1995 to
revisited. The following section examines more
$38,300 in 1996, to $43,400 in 1998, $48,750 in
closely the real estate brokerage sector, which has
1999, and $50,000 in 2000.
generally experienced growth contrary to Baen and
Guttery’s predictions, and discusses four primary
Another prediction that has not materialized, de-
reasons why disintermediation of traditional
spite the growing number of Internet real estate
agents is not likely to be prevalent. The final sec-
sites and the unprecedented amount of free in-
tion is the conclusion.
formation available to home buyers and sellers, is
the belief by many that advances in information
technology, specifically the rise of the Internet,
will encourage ‘‘for sale by owner’’ (FSBO) sales,
Employment in the Banking Industry
which—according to industry statistics—histori- Employment statistics for the banking industry
cally account for 16% to 20% of the market, with have been mixed at best. As depicted in Exhibit 1,
higher percentages in hot sellers’ markets. How- the mortgage banking sector experienced job gains
ever, recent NAR (2001a, 2002) studies in fact from 1996 to 1999, but lost jobs in 2000. (The ex-
found the opposite to be true: FSBOs in 1997 stood hibit also shows the employment numbers after
at 18% of the market but slipped to 16% in 1999 adjusting for population growth, using 1979 as the
142 Vol. 8, No. 2, 2002The Impact of E-commerce on the Real Estate Industry
Exhibit 1
Number of Mortgage Bankers (SIC 616) (‘000)
1800
1700
1600
1500
1400
1300
1200
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Total Adjusted
base year.) Another banking sector that has expe- laws governing lending institutions and other fac-
rienced job losses in recent years is commercial tors such as consolidation and increased competi-
banking and federal saving institutions. Baen and tion from non-banking institutions offering similar
Guttery (1997) reported that the sector employed services, than from the rise and diffusion of the
slightly more than 1.6 million workers in 1996. In Internet.
2000, after two years of job losses, the sector em-
ployed approximately thirty thousand fewer work- Holland and Westwood (2001) note that from 1950
ers (Exhibit 2). However, the decline began years to the 1980s, bank markets were heavily regulated
before the emergence of the Internet as a viable and this regulation protected banks from any form
medium for commerce. This sector has witnessed of external competition. They note that these pro-
a steady erosion of jobs over the previous decade. tective regulations caused the industry to lag be-
The job losses seem to stem more from changes in hind others in terms of several competitive factors
Exhibit 2
Total Employment at Commercial Banks and Federal Savings Institutions
(SIC’s 602/603.5) (‘000)
1800
1700
1600
1500
1400
1300
1200
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Total Adjusted
Journal of Real Estate Portfolio Management 143Waleed A. Muhanna, James R. Wolf
Exhibit 3
Total Real Estate (SIC 65) Employment (‘000)
1600
1500
1400
1300
1200
1100
1000
900
80
82
84
86
88
90
92
94
96
98
00
19
19
19
19
19
19
19
19
19
19
20
Total Adjusted
and that the overall profitability of banks has de- makes it easier for consumers to do comparison
clined for the past twenty years. They explain that shopping.
the easing of regulations has blurred the bounda-
ries between banking and other industries, desta-
bilized the market and allowed new aggressive en- The Real Estate Industry
trants from other industries to enter. However, Four years after the publication of Baen and Gut-
while perhaps not responsible for recent job losses, tery (1997), the real estate industry, along with the
the Internet, and Information Technology (IT) in rest of the U.S. economy, generally experienced
general, are having an impact on the banking in- steady job growth (see Exhibits 3 and 4). In 1996,
dustry. Holland and Westwood write that IT is the the BLS reported just fewer than 660 thousand
most important single factor changing the banking workers were employed as real estate agents and
industry, and that successful banks are using the managers. In 2000, that number, while slightly
Internet and other information technologies to at- down from 1999 (more likely on account of the
tract customers and build their brands. However, slowing economy), had grown to 745,000 (Exhibit
they also note that technology makes it easier for 5). Adjusted for population growth, using 1979 as
non-banking institutions to enter and compete in the base year, this represents about a 9.2% real
the market. increase in total employment from 557,000 in 1996
to 608,000 in 2000. The BLS also reports slightly
Perhaps the reason that retail banking and real fewer than 114,000 workers employed as real es-
estate employment numbers have moved in differ- tate developers and subdividers in 1996. By 2000,
ent directions is related to the nature of each prod- that number had grown to 128,500 (Exhibit 6). Ad-
uct. Banking services appear to differ from real es- justed for population growth, this represents a
tate in that consumers generally view banking as 9.1% real increase. Similarly workers employed in
more of a commodity. Timewell and Young (1999) legal services grew from 927,000 to over one mil-
observe that because of low switching costs in the lion during the same period (Exhibit 7), amounting
banking industry, consumers are ‘‘cherry-picking’’ to 5% real growth.
among financial institutions. If customers do not
like the rates or services of one bank, they simply There maybe several factors behind the fact that
switch to one more to their liking, and the Internet the predicated ‘‘downsizing of real estate’’ has not
144 Vol. 8, No. 2, 2002The Impact of E-commerce on the Real Estate Industry
Exhibit 4
Total Non-Farm Employment (‘000)
140000
130000
120000
110000
100000
90000
80000
80
82
84
86
88
90
92
94
96
98
00
19
19
19
19
19
19
19
19
19
19
20
Total Adjusted
materialized to date. While it might be argued, the information that is now freely available on the In-
diffusion of the Internet notwithstanding, that a ternet. Noting, ‘‘Technology is transforming and
longer period of learning and adjustment is needed transferring valuable information previously mo-
before the full impact of this technology is felt; the nopolized by the real estate profession into a free
grim predictions are the result of a misreading of service,’’ (p. 4). Traditionally, only real estate pro-
the Internet’s effect on intermediaries. In particu- fessionals and other subscribers to Multiple List-
lar, it appears that characteristics inherent in the ing Services (MLSs) could obtain the detailed home
real estate product and market as well as the sales listing information necessary to conduct a thor-
agent’s position in the value chain make disinter- ough home search. Baen and Guttery correctly an-
mediation less likely to occur. ticipated that MLS data would soon be available
over the Internet, but they incorrectly seem to as-
sume that real estate sales professionals derive
The Gatekeeper and Transaction Cost
their position in the value chain from their monop-
Arguments
oly on this listing data. To Baen and Guttery, ac-
Among others, Baen and Guttery (1997) argue that cess to listing data represented an entry barrier for
the Internet’s effect on markets will be wholesale the real estate market. Accordingly, they argue
disintermediation. They foresee an electronic mar- that once this barrier is lowered, market power
ketplace where intermediaries will be eliminated would be taken from the agents and distributed
and end-customers will interact directly with pro- among the buyers and seller. They quote Rosen
ducers. The authors note that the commissions (1996), ‘‘Underlying the squabbling (among agents)
charged by U.S. real estate agents are about double is the very real specter that the information-laden
those charged in South Africa, New Zealand and Internet will replace much of the public’s need for
the U.K. They paint the picture of an industry agents’ traditional house-hunting services. The
shaken by changes brought by technology, on the fear mongers’ theory is simple: If buyers and sell-
brink of ‘‘imploding’’ over internal squabbling and ers can sit at their personal computers and Macs
external pressure. and gather enough information about each other’s
offerings—and even make offers—why should they
Baen and Guttery (1997) assert that historically pay an agent?’’ (p. 4). This view was also held, at
real estate agents have derived their power from least in part, by the NAR. Atkinson (2001) notes
the proprietary information that they controlled, that the NAR fought to prevent MLS data from
Journal of Real Estate Portfolio Management 145Waleed A. Muhanna, James R. Wolf
Exhibit 5
The Number of Real Estate Sales Agents and Managers (SIC 653) (‘000)
800
700
600
500
400
300
80
82
84
86
88
90
92
94
96
98
00
19
19
19
19
19
19
19
19
19
19
20
Total Adjusted
being released over the Internet. When Microsoft are the cost of completing the desired activity. Gov-
attempted to make home listing data available via ernance costs are the coordination and control
its website, Atkinson notes that the group fought costs involved in completing an activity. Firms
Microsoft in court and even lobbied against the choose the distribution channel (direct versus in-
company in its antitrust battle with the U.S. direct through an intermediary) that minimizes
government. the sum of both costs. Information technologies,
such as the Internet, help reduce both costs, and
Baen and Guttery (1997) envision a bleak future this, it is argued, gives producers the means and
for the real estate industry where buyers and sell- incentive to sell direct, bypassing traditional mar-
ers involved in ‘‘cyber-tech’’ real estate transac- ket intermediaries altogether.
tions perform most of the tasks involved in buying
and selling a home over the Internet and for the A closer examination of transaction cost theory,
most part without real estate professionals. They however, suggests a different conclusion (Sarkar,
predict that several players currently involved in Butler and Steinfield, 1998). By focusing exclu-
real estate transactions will be replaced by infor- sively on the relationship between producers and
mation technology and that the sixteen partici- consumers, proponents of the disintermediation
pants currently required for a transaction will be hypothesis overlook the effects of IT on other re-
pared down to four or five. lationships, such as the one between the consumer
and the intermediary. Sarkar et al. note that due
Proponents of the disintermediation hypothesis to economies of scope and scale, channel functions
draw on transaction cost theory (Williamson 1975, can often be provided at lower costs by specialized
1985). The theory focuses on a firm’s choice be- intermediaries. The very same technology that
tween internalizing an activity and relying on ex- lowers the cost of internalizing a function for a pro-
ternal market agents. The theory holds that firms ducer also lowers the cost of that function being
considering the hierarchy (i.e., internalizing the performed by an intermediary. So, just because
function) versus market (i.e., relying on a market property sellers can potentially reach buyers di-
agent) option will behave in a cost-economizing rectly though the Internet does not necessarily
way. The costs come primarily from two sources: mean that either party will do away with the ser-
production and governance costs. Production costs vices of an intermediary. The intermediaries (the
146 Vol. 8, No. 2, 2002The Impact of E-commerce on the Real Estate Industry
Exhibit 6
Real Estate Subdividers and Developers (SIC 655) (‘000)
160
150
140
130
120
110
100
90
80
82
84
86
88
90
92
94
96
98
00
19
19
19
19
19
19
19
19
19
19
20
Total Adjusted
Exhibit 7
Legal Service Providers (SIC 81) (‘000)
1100
1000
900
800
700
600
500
400
80
82
84
86
88
90
92
94
96
98
00
19
19
19
19
19
19
19
19
19
19
20
Total Adjusted
real estate agents, perhaps acting collectively) rates agents are able to command, there is no ev-
themselves can exploit the new medium to become idence that this is happening so far. Also, from the
more productive and enhance the overall efficiency consumer’s perspective, a significant reduction in
of the transaction. Thus, instead of threatening in- transaction cost is equally likely to boost demand
termediaries, the Internet—it can be argued—is for real estate services, because it renders more
not only sustaining but can even provide new op- residential moves and first-time home purchases
portunities for intermediaries. financially affordable.1 Such an increase in the vol-
ume of real state transactions might be enough to
Finally, although the increased channel efficiency compensate for a possible decline in average com-
can put downward pressure on the commission mission rate.
Journal of Real Estate Portfolio Management 147Waleed A. Muhanna, James R. Wolf
The Nature of Competition in the Real phase of competition. As such, firms attempting to
Estate Industry compete on price, like several real estate Internet
The nature of competition in the industry may also startups, are essentially going against the prevail-
explain the inability of many Internet real estate ing basis of competition and are therefore not
firms to make inroads into the home buying/sell- likely to find success. As Baird and Christensen
ing market despite offering consumers hefty dis- (1997, 1998) observe in the context of a pre-
counts. It also helps explain why the introduction Internet startup called Studio Reality, ‘‘because of
of web technology is neither likely to make the real the financial riskiness of the home buying trans-
estate brokerage market fully contestable (Bau- action, and because there is no clear, standard
mol, Panzar and Willig, 1988) nor dramatically dis- measures of quality and performance for homes,
rupt the dynamics of competition in the industry, the home-buying market is still ensconced in the
as many seem to suggest. reliability stage of the evolution of competition; it
is unlikely to switch rapidly to a more convenient
Christensen (1997b:117) describes consistent pat- form, as long as the reliability issues remain
terns in the evolution of competition in all indus- largely under-satisfied.’’ Individual property buy-
tries. He argues that, ‘‘individual products may ers and sellers are therefore likely to persist in
pass through life cycles of birth, growth, maturity choosing vendors of real estate services more on
and demise. But product categories and brands the basis of reliability (i.e., competence and trust)
tend to follow cycles of evolution rather than life rather than convenience or price. The need for a
cycles.’’ According to Christensen, the evolutionary
reliable professional to help with a process that is
stages are functionality, reliability, convenience
viewed as knowledge-intensive and complex by
and price. In each stage, companies compete and
most consumers, dominates any desire those con-
customers make their selections based on a single
product attribute or a family of attributes, and this sumers may have for more convenience or a better
attribute or attributes constitutes the ‘‘the basis of price. Real estate sales agents are therefore not
competition in an industry.’’ In the beginning, com- likely to be disintermediated by a new medium,
panies compete and are compared on functionality. such as the Internet, that simply offers greater
Over time, companies make improvements to their convenience and reach. Those attributes are
products until functionality exceeds the market’s clearly important in the mind of consumers, and
need and firms can no long gain any meaningful the Internet can indeed enhance the overall effi-
advantage from improving functionality. At that ciency and convenience of the process. However, in
point, the basis of competition shifts to reliability. a reliability market, competence and trust trump
Reliability is improved until products are consid- price, and the real estate agent or firm that com-
ered ‘‘reliable enough,’’ after which, firms begin petes on the price dimension alone is not likely to
competing on and focusing their innovation toward find success (either online or offline).
convenience. Ultimately, required convenience is
exceeded and the basis of competition shifts to
price. Characteristics of the Residential Real
Estate Product Itself
The condition that drives the transition from one
Is the residential real estate product itself (a
basis of competition to the next in an industry is
home) amenable to online buying and selling?
‘‘oversupply,’’ according to Christensen (1997b). If
the prior basis of competition is not yet over- Clearly, there are certain product characteristics
satisfied, a competitor who prematurely leaps to that impact the suitability of a product for online
the next basis of competition is not likely to find commerce, but what are these characteristics or
success. Thus, it is important to consider the pre- factors?
vailing basis of competition when assessing the vi-
ability of a new business model in a given industry. Information economists (Nelson, 1970; and Darby
and Karni, 1973) distinguish between three differ-
Looking at the real estate industry, it can be ar- ent product characteristics or qualities according
gued that the industry is still in the reliability to how consumers learn them: ‘‘Search qualities
148 Vol. 8, No. 2, 2002The Impact of E-commerce on the Real Estate Industry
which are known before purchase, experience qual- products, they are largely inapplicable when it
ities which are known costlessly only after pur- comes to what is in effect a ‘‘one of a kind’’ (often
chase, and credence qualities which are expensive used) product like a home. When purchasing a
to judge even after purchase,’’ (Darby and Karni, home, a buyer may be able to gather information
1973:69) While most complex products have all on the size of the lot and the number of bathrooms,
three types of ‘‘qualities,’’ products may be classi- but much of the relevant ‘‘touch and feel’’ infor-
fied into three broad categories according to which mation must be gathered in person, and checking
class of qualities dominates. Search goods, like the credibility of the seller’s claims often requires
most commodities and financial instruments, are the advice and opinion of experts.
products that are bought largely on the basis of
‘‘look and see’’ characteristics (e.g., price and color) Peterson, Balasubramanian and Bronnenberg
that can be assessed fully based on externally pro- (1997) examine the suitability of a product for on-
vided information. Experience goods, on the other line commerce by focusing on three other dimen-
hand, need to be personally inspected or tried be- sions: cost and frequency of purchase, value prop-
fore purchase (e.g., buyers want to squeeze the osition, and degree of differentiation. In terms of
melons, try on the garment and go for a test drive) value proposition, Peterson et al. classify goods as
because there is often some variance from one item either tangible physical goods or intangible infor-
to another ‘‘like’’ item. Physical products of this mation goods. As noted earlier, because informa-
sort are often bought on the basis of ‘‘touch and tion products (e.g., news, music, software) can be
feel’’ attributes, characteristics that a pure elec- delivered in digital form at essentially zero cost,
tronic medium such as the Internet is not gener- they are clearly more suited for online commerce.
ally designed to convey. The Internet therefore is Differentiation refers to the degree sellers can set
more likely to threaten traditional (physical) retail their goods apart. When producers are incapable
channels for search goods (because direct experi- of significant differentiation, their products are
ence is not required) than for experience goods (Lal viewed as commodities and Internet-related mar-
and Sarvary, 1999). keting can result in extreme price competition.
Since each home is unique in several ways, sellers
Many products also have a number of important have a wide array of options for differentiating
qualities, called credence characteristics, that are their homes when they put it on the market. Even
difficult to determine based on casual inspection or homes built on similar plans in the exact same
use. Credence goods are goods for which the neighborhood can be differentiated by several fac-
buyer’s decision-making is dominated by concerns tors including landscaping, selection of wallpaper
about credence characteristics. These typically in- or paint, lighting and bathroom fixtures or window
volve ‘‘hidden’’ attributes of a product relating to treatments, just to name a few. Search online for
the production process and the quality of construc- high differentiation goods is likely, particularly for
tion. Because these characteristics are ‘‘hidden,’’ higher priced items like homes. However, because
there is a need for the buyer to uncover them or at homes are complex, expensive, infrequently pur-
least combine the claims of the seller with infor- chased, tangible products, with significant experi-
mation about the credibility of those claims. ence and credence attributes, actual online pur-
chase of such items is unlikely.
A home is clearly a complex product that has both
search, experience as well as credence qualities,
The Real Job of a Real Estate Agent
and as such, it is not amenable to pure online com-
merce. Factors that could mitigate problems asso- Wigand, Crowston and Sawyer (2001) observes
ciated with experience and credence goods include that there are seven distinct steps in the real es-
developing a positive brand image, producing tate process: listing a house, marking the listing,
items of consistent and reliable quality, and offer- finding a buyer, helping a buyer select a house, ne-
ing favorable return policies and warranties. How- gotiating a contract, removing contract contingen-
ever, while these strategies might be effective in cies and closing the sale of the house. Whether rep-
the context of brand-new, mass-produced consumer resenting the buyer or the seller, the real estate
Journal of Real Estate Portfolio Management 149Waleed A. Muhanna, James R. Wolf
agent plays a key role in each of these steps. The research that shows realtors’ incomes increase
Internet may provide buyers and sellers increased with experience. As realtors develop richer social
real estate transaction information, but having networks, they are more able to exploit their net-
gathered all that information most people need works for gain. Wigand et al. observe that real es-
someone to help them sort through and interpret tate sales agents provide value in two ways. First
it. This is probably why the Internet has had little by providing resources from their social network
effect so far on the public’s perception of the and secondly by guiding buyers and sellers
agent’s role. An NAR study cited by Freedman through the steps required to complete a real es-
(2000) shows that buyers using the Internet to tate transaction. It is this transaction expertise
search for homes actually utilize real estate agents and local market knowledge along with their ac-
more often than non-Internet home shoppers— quired social network, not their access to proprie-
87% vs. 76%. According to that study, sellers want tary information, that we believe safeguard real
a real estate agent to find a buyer, sell within a estate agents from disintermediation.
time frame, set a price, negotiate with the buyer
and complete the paperwork. Freedman reports
that the same study found that buyers expected Conclusion
agents to find the right house, negotiate price, com-
plete paperwork, calculate purchasing power and This study has revisited Baen and Guttery’s (1997)
to arrange financing. examination of technology’s effect on the real es-
tate industry and found that, in general, their
The Internet can provide only some of the services most ominous predictions of income and employ-
mentioned above. For example, several online real ment loss have not materialized. In the years since
estate sites and financial services and allow buyers their 1997 article, the real estate industry, like
to calculate their purchasing power and even ob- most of the U.S. economy, has experienced steady
tain pre-approval for a home loan. The Internet growth. Specifically, more workers are now em-
also makes listing a home to a worldwide market ployed as real estate agents, developers and legal
fairly simple. However, it may be difficult for a service providers, and that according to BLS sta-
seller to choose the best website to list their home tistics these sectors have grown in the years from
without the help of an experienced agent. In addi- 1996 to 2000. One industry mentioned by Baen
tion, it is difficult to imagine that the tasks of ne- and Guttery, banking, has experienced some job
gotiating with the buyer and seller or of trouble- losses, but these losses can be attributed to a dec-
shooting the wide variety of problems that may ade long trend of downsizing resulting from
arise could be successfully automated. changes in regulation and competition from new
non-bank entrants into the industry.
When making a home purchase, typically the sin-
gle most expensive investment and complex trans- Drawing on different bodies of knowledge and
action for most people, buyers feel the need for a frameworks, four possible explanations were ex-
relationship with a professional real estate agent. plored of why the predicted downsizing did not oc-
When putting their home on the market, sellers cur. From a transaction cost perspective, the Inter-
need assistance in setting a price, marketing the net’s effect on intermediaries in the real estate
property, finding a buyer and closing the sale. Real market may have been misjudged by proponents of
estate professionals fill the dual role of a the disintermediation hypothesis. The findings in-
marketing/sales agent and counselor, making it dicate that certain characteristics inherent in the
unlikely that they will be disintermediated by on- real estate market and the sales agent’s position
line services. As Wigand, Crowston and Sawyer in the value chain make disintermediation less
(2001) notes, real estate sales agents use social likely. Specifically, real estate products are ex-
capital—the set of social resources embedded in re- pensive, infrequently purchased, tangible, easily
lationships—to establish their stake in the value differentiated, experience goods with significant
chain, and that agents actively manage their social experience and credence attributes, and these
capital. This idea seems to be supported by NAR characteristics make sales via the Internet less
150 Vol. 8, No. 2, 2002The Impact of E-commerce on the Real Estate Industry
likely. The findings also indicate that the basis of competitive necessity and a potential strategic dif-
competition in the real estate industry is reliability ferentiator within the industry as opposed to an
and not price, and that real estate websites com- industry-wide threat, a technology that can be cre-
peting on price alone are not likely to succeed. Fi- atively leveraged to enhance the efficiency and
nally, evidence indicates that real estate agents de- quality of services provided by real estate practi-
rive their position in the value chain, not from a tioners in the new economy.
monopoly on information, but from their social net-
works and transaction knowledge and that this
factor makes Internet-enabled disintermediation Endnotes
less of a threat. Though more and more informa- 1. It is interesting to note that most residential moves are
tion relating to real estate is becoming freely avail- short-haul and for non-work-related reasons, according to a
recent Census Bureau report on population mobility
able online, the Internet has not taken the com- (www.census.gov / population / www / socdemo / migrate.html).
plexity out of the transaction, nor will it. Given For example, 43 million U.S. residents, or 16% of the popu-
how infrequently people buy and sell homes and lation, moved between March 1999 and March 2000. Fifty-
the complexity and size of the investment, people six percent of all moves were within the same county. Only
about 20% moved to another county in the same state, and
still want to have a licensed professional involved just 19% moved to a new state.
in the process.
This is not to suggest that the Internet is not im- References
portant—far from it. The web has already emerged Atkinson, R. D., The Revenge of the Disintermediated (Policy
as an important focal point for real estate infor- Paper), Washington, DC: Progressive Policy Institute, 2001.
mation and customer interaction, and there is no Baen, J. S. and R. S. Guttery, The Coming Downsizing of Real
question that this will have a dramatic impact on Estate: The Implications of Technology, Journal of Real Estate
Portfolio Management, 1997, 3:1, 1–18.
the process of marketing real estate properties and
Baird, B. and C. Christensen, Studio Realty, Case Study HBS
that it will result in the evolution of a new value- 9-697-036, Boston, MA: Harvard Business School, 1997.
added consultative role for real estate agents. ——., Studio Realty: Teaching Note, Case Study Teaching Note
However, far from being threatened by technology, HBS 5-698-055, Boston, MA: Harvard Business School, 1998.
a growing body of research shows that realtors Baumol, W. J., J. C. Panzar and R. D. Willig, Contestable Mar-
have embraced both information technology and kets and the Theory of Industry Structure, New York, NY: Har-
the Internet. A recent study (Muhanna, 2000) court Brace Jovanovich, 1988.
shows a dramatic rise in the number of firms using Business Wire, Onlines Go Bust, While a Traditional Brokerage
Booms; Prudential California Realty Announces Record Break-
the web channel during the second and third quar- ing Year, in Wake of Online Brokerage Failures, Lexis-Nexis,
ter of 1999: approximately 75% of the real estate March 05, 2001.
firms surveyed had established some sort of pres- Christensen, C., The Innovator’s Dilemma: When New Tech-
ence on the web, with another 13% indicating nologies Cause Great Firms to Fail, Boston, MA: Harvard Busi-
ness School Press, 1997a.
plans to do so by 2001. Another NAR survey
——., Patterns in the Evolution of Product Competition, Eur-
(2001b) shows that 90% of its members have a opean Management Journal, 1997b, 15:2, 117–27.
computer, four in ten have a personal website and Darby, M. and E. Karni, Free Competition and the Optimal
that 4% generate over 20% of their business online. Amount of Fraud, Journal of Law and Economics, 1973, 16,
The same study shows that 54% report new busi- 67–88.
ness generated from the Internet. The Internet Freedman, R., Thumbs-Up From Buyers and Sellers, Realtor-
mag.com, http: / / www.realtormag.com / rmomag.NSF / pages /
allows the agent to be more productive because ThumbsupfrRobArchive2000Jun, 2000.
potential buyers are more informed. The NAR fur- Holland, C. P. and J. B. Westwood, Product-Market and Tech-
ther notes that members that use technology earn nology: Strategies in Banking. Communications of the ACM,
more than those that do not. 2001, 44:6, 53–61.
Lal, R. and M. Sarvary, When and How is the Internet Likely
The Internet therefore does change the real estate to Decrease Price Competition? Management Science, 1999, 18:
4, 485–503.
brokerage business fundamentally, but not in the
Muhanna, W., Competing with E-Commerce in the Real Estate
disruptive way that many originally thought. The Brokerage Industry: An Empirical Assessment, Journal for
new medium appears to have emerged more as a Real Estate Practice and Education, 2000, 3:1, 1–16.
Journal of Real Estate Portfolio Management 151Waleed A. Muhanna, James R. Wolf
National Association of REALTORS䉸, REALTORS䉸 and the Rosen, M., Virtual Reality—Real Estate Agents Face Extinc-
Internet: The Impact of On-line Technologies on the Real Es- tion in an Information-Rich Century 21, Dallas Observer, Jan-
tate Industry, 1999. uary 18, 1996, p. 6.
——., The 2000 National Association of REALTORS䉸 Profile Sarkar, M., B. Butler and C. Steinfield, C. Cybermediaries in
of Home Buyers and Sellers, 2001a. Electronic Marketspace: Toward Theory Building, Journal of
Business Research, 1998, 41, 215–21.
——., NAR Survey Shows Members are More Experienced, Us-
ing High-Tech, News Release 84, Washington, DC, 2001b. Timewell, S. and K. Young, How the Internet Redefines Bank-
ing, The Banker, 1999, June, 27–30.
——., The 2002 National Association of REALTORS䉸 Profile
Wigand, R. T., K. Crowston and S. Sawyer, Towards Friction
of Home Buyers and Sellers, 2002.
Free Work: A multi-Method Pilot Study of the Use of Informa-
Nelson, P., Information and Consumer Behavior. Journal of Po- tion Technology in the Real-Estate Industry, Final Report NSF
litical Economy, 1970, 78:2, 311–29. Grant # IIS-9732799, 2001.
Peterson, R. A., S. Balasubramanian and B. J. Bronnenberg, Williamson, O. E., Markets and Hierarchies: Analyses and An-
Exploring the Implications of the Internet for Consumer Mar- titrust Implications, New York, NY: The Free Press, 1975.
keting, Journal of the Academy of Marketing Science, 1997, 25: Williamson, O. E., The Economic Institutions of Capitalism,
4, 329–46. New York: The Free Press, 1985.
152 Vol. 8, No. 2, 2002You can also read
