The Impact of E-Commerce on the Real Estate Industry: Baen and Guttery Revisited

By Muhanna, Waleed A.; Wolf, James R. | Journal of Real Estate Portfolio Management, May-August 2002 | Go to article overview

The Impact of E-Commerce on the Real Estate Industry: Baen and Guttery Revisited


Muhanna, Waleed A., Wolf, James R., Journal of Real Estate Portfolio Management


Executive Summary. One widely reported prediction is that the emergence of the web as an open medium for 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 downsizing of the entire industry. However, recent Bureau of Labor Statistics data show that the real estate industry, like most of the economy in the United States, experienced steady growth during the last few years. This article revisits the issue of disintermediation in the context of the real estate industry. It discusses-from a theoretical and conceptual perspective-several reasons why the predicted downsizing did not occur. The analysis suggests that the Internet, though clearly a very powerful tool with strategic implications, may not be as disruptive a technology as originally predicted.

Introduction

In The Coming Downsizing of Real Estate: The Implications of Technology, Baen and Guttery (1997) examine the potential impact of the Internet and other information technology on the residential real estate industry. They predicted a continued rise in that the number of buyers and sellers using the Internet to find real estate-related information. A recent study by the National Association of Realtors (NAR) (1999) confirms these predictions: 37% 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 Internet 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 employment levels. They argued that buyers and sellers with access to information available via the Internet will have no need for traditional "infomediaries" and that several other players in real estate support positions will also be disintermediated by the Internet. The authors predicted job losses in sectors directly related to real estate, including sales agents and developers, as well as sectors involved in the support of real estate transaction such as legal services and banking. They argued that "the real estate property and mortgage markets, together with all supporting professions and service providers, are experiencing a paradigm shift that will have major implications in levels of employment and compensation," (p. 1). Later adding that "there will be a tremendous cost to the real estate profession in terms of income, and therefore employment," (p. 15).

To date, for most of the real estate industry, Baen and Guttery's (1997) predictions of reductions in employment and income have not materialized. In fact, in the four years since the article's publication, the real estate industry in the United States, like much of the U.S. economy, has experienced steady growth. Of the sectors examined by Baen and Guttery, this study uses data from the U.S. Bureau of Labor Statistics (BLS) and finds that only select sectors of the banking industry have experienced any job loss, and that most of the categories examined have experienced steady growth during the last decade, even after adjusting for population growth. Further, the published results of REALTOR Magazine's (www.realtormag.com) annual compensation surveys of NAR members suggest a steady rise in the median income of real estate practitioners from $33,600 in 1995 to $38,300 in 1996, to $43,400 in 1998, $48,750 in 1999, and $50,000 in 2000. …

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