Will The Internet Create A Real Estate Rust Belt?

Peter G. Miller
OurBroker®

There's an "Internet rust belt" says Charles Babcock, a writer with ZDNet's Inter@ctive Week. The "rust belt" of the Midwest, you'll remember, is where we used to have great steel works and huge manufacturing plants until such facilities and their jobs went south or overseas.

Babcock says the Internet is also creating a rust belt, "that space between the old economy and the new economy, where jobs grow old, then disappear. Today, it's occupied by travel agents, bank tellers and bookstore clerks, whose ranks are being reduced in increasing numbers by their automated Internet substitutes."

In the future, says Babcock, "the rust belt's residents may include the traditional car salesmen, software sales force, stockbrokers, real-estate brokers and lawyers who provide routine services such as wills, trusts and business pacts."

Real-estate brokers?

"According to some economists," says Babcock, "the Internet will one day replace anyone who enjoys a middleman position by virtue of the information he or she controls."

So is Babcock right, will the Internet doom real estate brokerage?

To accept the idea that consumer demand for realty services will decline, one must presume that something on the Web will advantageously replace the functions now offered by brokers and salespeople. What, exactly, is it that the Internet can do for real estate consumers without a broker?

The Internet has already increased the information base available to consumers. Extensive property listings can now be found on a variety of state, local, franchise, company, broker, licensee, and newspaper sites. A number of sites with discounted services have emerged, and at least one features salaried salespeople as opposed to independent contractors working on commission. No less important, the Internet also includes huge volumes of real estate information, most of it free.

Given a strong market in most areas, access to listing data, and expansive consumer information and advice, if Babcock is correct one would expect to see generally lower brokerage fees, declining numbers of active licensees, and larger numbers of self-sellers.

But you don't see such things.

"The percentage of FSBOs fell from 18% in 1997 to 16% in 1999," says David Lereah, NAR's chief economist, "which is contrary to historic trends. In previous hot real estate markets, more people attempted to sell their own home -- but this trend reversed in last year's record market."

Why hasn't the Internet spurred more FSBO transactions and fewer deals with brokers? There are probably several reasons, but let's start with something basic: brokers in the usual case are not middlemen. Listing brokers and buyer brokers are advocates and partisans. They're neither neutral nor impartial.

Even though the Web can be seen as an important place to do business -- half of all households are now online -- there's not a single example of a FSBO (for sale by owner) site that significantly impacts the national marketplace, a marketplace with some six million new and existing home sales each year.

Unlike booksellers, stockbrokers, and travel agents, realty brokers have not been swamped by the Internet. If anything, brokers have learned to use the Web to their advantage.

In the context of real estate, the Web is emerging as a major information resource -- a place to check listings, locate broker services, read the news, and examine mortgage options. While consumers like the library aspects of the Internet, a study from Coldwell Banker says that "only 10 percent" of those surveyed were very comfortable "doing business with companies that exist solely on the web with no 'real world' offices to visit and/or contact."

"Almost nine out of 10 respondents (89 percent)," says Coldwell Banker, "report that they would be unlikely to bid on a home online after having seen only pictures or video without visiting the home."

The Web has significant value and will change many industries and professions. But it won't change them all, it won't change them all completely, and it shouldn't. For example, the idea of low-cost online attorney services is surely enticing, but you can already go to legal clinics in most cities and obtain professional services at reduced fees. And even with an online site, you still need licensed attorneys to provide advice, attorneys who must be compensated.

Or, think about sites to sell cars online. Sure it makes sense -- but do you want to pick up your new car locally or at the factory? If you want local delivery and servicing, who will operate such facilities? How different is car selling with the Internet from car selling without it?

As well, producing online services is hardly free. There may be reduced location costs, but expenses for technology and marketing are likely to be far greater. And even reduced location costs are uncertain -- just consider the 2.7 million square feet of warehouse space built by Amazon.

But what about the future? Is there any reason to believe that 10 years from now brokerage will look much as it does today?

There's little doubt that in a decade we'll live in a wired society and that much will change as a result. That said, some things will remain much the same: Buyers and sellers will still have competing interests, transactions will be complex, and all properties will remain unique.

It's likely that we'll see fewer active licensees in the future -- but not because of the Internet. The numbers will decline because a small percentage of licensees now handle a disproportionate number of transactions, a trend which seems unlikely to be reversed. The result is fewer dollars left to divide among those who are unproductive. Economics -- not electrons -- will determine how many salespeople and brokers are active in the future.