November 28, 2018
DIY Real Estate: Inside Technology’s Next Disruption
By Chester S. Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance, Carnegie Mellon University’s Tepper School of Business
Venture capitalism’s latest darling — proptech, or technology that targets real estate — is barreling toward an industry that’s ripe for disruption. Convenience, a rise in technical fluency, and a preference among prosperous millennials for replacing the middleman with an app are all factors driving people toward sites such as Zillow and Opendoor.
But before we start deconstructing the future of real estate as we know it, it’s important to recognize some key factors that could influence the amount of disruption proptech can create, even if it re-shapes the way we think about buying and selling property.
The first thing to remember is this: disruption is not inherently bad. While changing the status quo can be uncomfortable, even painful, it’s also a sign of progress. People don’t do the same jobs now that they did 20, 30, or 40 years ago. We work flexible hours, often from home. We answer our own phones, make our own appointments, type our own correspondence, book our own travel, operate elevators ourselves. But change is the core of our society’s success.
Even so, we have not always handled disruption as well as we could. Retraining people to do new jobs, or to do their old jobs differently, can be challenging. Typically, those who adapt most readily to change were probably more flexible than their peers originally, and in some cases started adapting before any retraining was even available.
The same may also be true with real estate. Once an area that was viewed as disruption-proof — because people are always going to require places to live and need to change their housing consumption on occasion — technology has quickly revealed that this is an industry capable of change. No longer do buyers need a real estate agent just to access listings; we can do that from our own computer or phone. This technology also simplifies the process for buyers by identifying options quickly within a preferred location and budget range, as well as providing a look into the interior of the home. But that doesn’t mean the real estate agent is obsolete. Matching is very important in housing markets, and good agents play an essential role in finding the right house for the right buyer. That’s why most sales are concentrated within a small set of talented agents.
While some proptech sites are pushing for transactions that are sight-unseen, which would impact even high-performing real estate agents, other frictions in the market are at play that could mitigate the disruption. For example, high transfer taxes can distort and limit real estate transactions. Adverse selection — in which a seller may know more than the buyer about the condition of the property, possibly mitigated by inspection — can come into play. Suddenly, the role of the real estate agent in creating good matches becomes more important because of the cost barriers and risks in the background.
The bottom line is this: disruption impacts many professions, from taxi drivers who compete with Uber to bank tellers who compete with mobile apps and ATMs. So why should real estate agents be exempt from that? As Billy Beane told his lead scout in Moneyball, “Adapt or die.” It may sound harsh, but the alternative is to make work for people that isn’t genuinely needed — and that’s not a hallmark of a society that pursues progress or respects the dignity of workers.