Ok - I know that rule #1 of blogging is to keep it short - 250 words max.  But rules are made to be broken.  Here's some thoughts on a whitepaper we're working on here at EquityScout.com.  Skip this one if you're looking for a short read...

For years Real Estate professionals are heard cries that the sky is falling – that the impending bursting of the real estate bubble along with advances in technology would soon make the profession obsolete.  But it’s been easy enough to disregard these predictions as alarmist exaggeration while the market zoomed along in the longest bull market in recent history. 

Now as we enter the fourth quarter of 2004 the picture is looking a bit less rosy.  According to recent market statistics prices are starting to stagnate in some areas, falling in other.  Houses are staying on the market longer as inventory levels hit record highs.  There are a variety of factors that lead me to believe that some changes might be on the horizon…

The real estate industry is poised to enter a period of instability.

The real estate industry, particular the customer-facing segment, exhibits a number of features that indicate that it is entering a period of transition:

• Large number of participants (estimated 1,275,000 registered Realtors® nationwide with around 10,000 joining the ranks every year.)
• Increasingly savvy customer base as consumers increase their understanding of the real estate markets and expect more from service providers.
• New market entrants on the technology front.

The three factors above are shifting influence towards the consumer and away from Realtors® and other real estate professionals.  This is a technology driven shift, and in the short term this will present a major challenge to the status quo 6% commission that agents earn on sales. 

 How does technology impact industries?

Technological innovation is nothing new, but the rapid rate at which new technological products and ideas appeared in the 1990’s prompted new efforts to understand the phenomenon.  Perhaps the most quoted reference is Clayton M. Christensen’s The Innovator’s Dilemma, which coined the term “disruptive technology.”

A “disruptive technology” is one that causes a major structural reordering of an industry.  Most major technological innovations are not truly “disruptive”.  Online retail is an illustrative example.  Destinations like Amazon.com have rocketed in popularity, but it’s now clear that traditional retailers are not headed for extinction.   In fact, online marketing has been embraced by the traditional segment as an enhancing strategy (example: barnesandnoble.com)

One the other hand, one doesn’t have to look far to find some technological innovations that truly have been disruptive.  Examples:

• The introduction and continual improvement of desktop computers revolutionized a variety of industries, from mainframe workstations to software design.
• The introduction and continual improvement of digital cameras impacted the entire photography industry.  Technology companies like Sony and Panasonic are capturing a major share of a market that was previously dominated by Cannon and Nikon.  Kodak has begun to discontinue some previously popular film-based product lines. 

In the two examples above, the structure of entire industries was permanently altered, long term strategies transformed, and the relative strength of market participants reordered. 

A number of industries are currently in a period of uncertainty as they go through technological shifts that may or may not be disruptive.  Examples:

• Online news outlets are threatening the structure of the newspaper industry.  The Economist magazine recently ran a feature “Who killed the newspaper?”  It remains to be seen what kind of impact this will have on the future of journalism. 
• Voice over Internet Protocol (VOIP) is challenging the telecommunications industry, and may permanently alter long-distance voice communication. 

…and most interestingly,

• The real estate industry is being challenged by a number of technologically-based innovations from companies as diverse as Craigslist, Zillow.com, Google, and a variety of for-sale-by-owner online solutions. 

 So what does this mean for the Real Estate industry?

Entrenched industries, by their very nature, tend to be slow to recognize and react to disruptive innovations when they arise.  Some factors to consider in the case of the real estate industry:

• The industry is made up of thousands of highly autonomous participants, with the National Association of Realtors (NAR) acting as a centralized but weak governing authority. 
• The information hierarchy is described as the progress from data (raw data), to information (processed data that answers a question), to knowledge (ability to apply information). 

• Within the traditional real estate industry, efforts to modernize, where they can be found, tend to focus on the data end of the information hierarchy (collecting leads, updating websites, digitizing contracts, etc.) 

These are the easiest challenges to undertake, however they will be the first to be assailed by new competitors, and they’re the services that Realtors® offer that consumers value least. 

NAR acknowledges that there is a gap to be bridged and challenges on the horizon, as evidenced by their commissioning of the 2006 Realtor® Technology Survey.  However, the same survey indicates a high level of complacency among Realtors® overall (although 86% of agents want MLS to expand technology tools, less than 40% were familiar with Zillow.com, a major emerging industry threat. 

If a major shift is eminent there is little that the industry as a whole can do to advert it.  However, individual participants can take steps to attempt to remain relevant.  (An example:  the emergence of digital photography pushed Polaroid into bankruptcy, but Kodak has thrived by using their position to move aggressively and early into designing and marketing digital cameras.  Witness also the major oil companies who are taking a position in renewable energy and biofuels refining.)

Market participants - companies, groups, partnerships, regional associations - need to recognize the threat that technology brings to their business model, move early and aggressively to preempt the threat by adopting technologies as necessary, and focus on shifting their value proposition away from the data end of the information hierarchy and towards the information/knowledge end.