Transparency, Real Estate, and Consequences

“There’s no such thing as a free lunch.”

– Milton Friedman

There are certain topics within the real estate industry that keeps coming back from time to time, like Freddy Krueger or Jason Voorhees.  The future of REBarCamp, raising the standards of professionalism, broker brands vs. agent brands, and so on. Some topics, you wish would just freakin’ die already (like one might feel about say Freddy Krueger) while other topics, you wish would live on forever like Mick Jagger and Cher.  Although I doubt I’d shed more than a single ironic tear were Jagger and Cher to hang up their spurs and retire finally, so to speak.

One of the more interesting recurring topics is the issue of “transparency”.  I put quotes around that word because it isn’t really clear what is meant by transparency by the different folks who talk about it, but the general notion appears to be that realtors, brokers, MLS’s, etc. ought to make more data and information available to the public in order to (a) drive innovation, (b) benefit consumers, (c) help brokers, (d) all of the above, (e) and so on and so forth.

An excellent recent post on UrbanDigs, the blog of Noah Rosenblatt, raises the issue of transparency once again.  The nice thing here is that because Noah is a real estate agent in the People’s Republic of Manhattan, where a MLS most definitely does not exist, he has a perspective on transparency that is a wee bit different from that of others who work in MLS-enabled markets.

As I read the blog post and the comments that followed, I began wondering if those who are in full-throated support for “transparency” have truly considered the cost of transparency.  This is not to say that transparency is a bad thing; indeed, I tend to argue for greater openness and greater transparency.  But I do so with some awareness, I think, of the costs involved.  Some folks, however, appear to think that transparency, like “social media”, is some sort of a magic bullet that carries no costs at all.

Well, there ain’t no such thing as a free lunch.  In that spirit, let’s take a moment (or six) to think about transparency, real estate, and the consequences of such.

Transparency, Gotham-Style

Noah is in full advocacy mode in his post, asking questions (rhetorical, as it turns out) like these:

Are brokers and brokerage firm executives so narrow minded to think that innovation and transparency will kill their business models? Or the commission structure of this industry? Or both?

As it happens, those are some great questions to ask about transparency.  Even the initial rhetorical question a la Rosenblatt turns into a more serious contemplation:

If the fight against transparency is to protect a higher commission standard in the industry, I think that is a losing battle too. In the end, innovations tends to make markets more efficient and I see no reason why this market would be any different. Although discount models have tried and failed to infiltrate this market (Foxtons comes to mind), I doubt the innovations will stop there. More ideas will eventually come through and one will ultimately hit. Who knows what that model is and who knows when it hits the market, but I am yet to see a really intriguing model designed for sellers to make the marketing process more efficient and cost effective when compared to the full service brokerage model currently in place. Up until now, most of the innovation has been launched with the buyer and broker in mind. (Emphasis added.)

Now, Noah sort of brushes these issues aside:

Any brokers fighting transparency are fighting innovation and progress; and to me that is a losing battle. Why fight it? I mean, is providing real time data, improved data I should say that more accurately reflects what is really going on out there, a clear & present danger to individual broker business models? In my opinion, no way! In fact, I think it will help the broker service their client. Individual brokers run their own business and craft their own model; they are as successful as their model and networking/referral reach permits and usually is measured based on the quality of service provided to their clients. Higher quality of service, more repeat/referral business. There is a usually a close attachment between the relationship of any one buyer/seller and any one broker and the human element will always serve a purpose. (Emphasis in original.)

What I’d like to hear more about is why Noah (and others who support “transparency”) believe that it will help the broker (agent?) service its clients.  Let me explain why I’m curious.

Efficiency Isn’t Care Bear Land

Efficiency sounds like one of those things that no one could possibly be against, like puppies and motherhood.  Well, since Noah does live and work in Manhattan, I guess it’s just puppies as the women of Manhattan aren’t that fond of motherhood.  In reality, however, efficiency is a term fraught with conflict: there will be blood, ladies and gentlemen.

I remember reading Titan, a biography of John D. Rockefeller, the tycoon of Standard Oil.  What we know generally about Rockefeller is the demonization of him as a “robber baron” whose brutal competition crushed other companies, who formed oil trusts, and so on.  What is less known is how he got there.  This biography of Rockefeller at least hints at it:

Rockefeller abhorred waste and devoted considerable energy to increasing the efficiency of his refining business. He believed that the secret of success was attention to detail — to wringing little efficiencies out of every aspect of his business. He hired his own plumber and bought his own plumbing supplies. He built his own cooperage shop and made his own barrels for the oil. He bought tracts of white-oak timber for making the barrels. Instead of transporting the freshly cut green timber directly to the cooperage shop, he had kilns built on the timber tracts to dry the wood on site, to reduce the shipping weight of the lumber. He bought his own wagons and horses to transport the wood to the cooperage shop in Cleveland. (We would call this” vertical integration” today.)

“Wringing little efficiencies”.  From those little efficiencies, Rockefeller built a global dynasty.  A penny per barrel advantage led to his being able to undercut competitors, eventually build enough volume to buy railroads, get kickbacks, sweetheart deals, and all sorts of things that today would be considered anti-competitive.  But at the root of the dominance was efficiency; in fact, a whole host of little efficiencies.

So when Noah talks about innovation making markets more efficient, what he’s really talking about are companies going out of business and people losing their jobs — because a competitor can do things more efficiently.  More units of production from same units of input — that’s the definition of efficiency.

Now, one can argue — as I have and do and will — that some companies ought to go out of business, and some people ought to lose their jobs.  They’ll find other jobs in other companies or other industries where they can be put to the highest use; the nature of capitalism is creative destruction, after all.  But let’s not pretend that efficiency is some fantasy playground where everyone benefits.  There are winners and there are losers as efficiency changes.

Uncertainty Breeds Fear

The second point, I think, is that as Noah himself admits, no one really knows what business models transparency in real estate would spawn: “Who knows what that model is and who knows when it hits the market, but I am yet to see a really intriguing model designed for sellers to make the marketing process more efficient and cost effective when compared to the full service brokerage model currently in place.”

That’s a fine sentiment, and a laudable one.  But I think it’s important to recognize that uncertainty tends to breed fear.

When one has no idea what comes after a particular change, only eternal optimists or rank fools yearn for change.  Most folks have at least an inkling of what comes after a change, or an idea, or an ideology, or a belief.  Even the idea that “things can’t possibly get any worse” is often wrong: things most definitely can get worse, unless you’re dead.

That’s what makes the argument for transparency interesting.  Noah and his supporters do have some idea of what the result of transparency would be.  Otherwise, it’s impossible to argue, as he does, that providing improved data is not a “clear & present danger” to individual broker business models.  Having admitted that he doesn’t know what business models will emerge and when they will hit the market, it strikes me as illogical to then claim that transparency isn’t a danger at all.

The proper argument, I think, is to at least sketch out what “transparent real estate” might look like, what sorts of business models that will bring into play, and what the consequences of those models could be.

Now, I understand that Noah’s goal wasn’t to make arguments, but to stir up passions and support for transparency in the New York City real estate market.  I think he’s succeeded admirably, and congratulate him for bringing the issue to the forefront.

The task that remains is to understand what transparency means, what business impact it will have, who will win and who will lose, and what the consequences of transparency would be.

Let me suggest a few possible consequences.

Possible Consequences of Transparency

While all of the consequences of “transparency” are impossible to predict (for that matter, even one consequence is impossible to predict with certainty), there are two that strike me as logical: price pressure and fragmentation.

Lower Cost

The primary beneficiary of “transparency” in real estate appears to be the consumer.  The idea is that consumers no longer have to call a realtor just to get information on a property, to get market data, to get trending information, and so on.  They can simply go to a website or some other data source and get all that information for themselves, do their own analysis, do their own research, and finally contact the realtor when they’re ready to move to the next phase.

I personally cannot understand why these customers would not demand lower pricing for services from the realtor with whom they ultimately end up working.  Especially savvy New Yorkers.  You, Mr. Realtor, no longer have to do as much work — transparency means that I have done much of the hard work of selecting the neighborhood, finding the properties that fit my criteria, and researching the pricing information and so on.  Depending on just how transparent we’re talking about, maybe I’ve done everything short of entering the property in question for a personal inspection.

Since you have done less work, shouldn’t you get paid less?  Isn’t that the basic insight of efficiency?

Of course, I’ll pay for your advice, your negotiation skills, your assistance in the transaction, and so on — but it is undeniable that transparency (and the resulting efficiency) means that you don’t have to do the searching/finding for me.  Shouldn’t the price be lower?

The answer is, of course it should be.  Firms like Redfin lower the price by the means of rebates, precisely because the consumer takes on much of the work that agents previously had to do for them.  The per-unit (and by unit, I mean brokerage service unit) cost should drop, which logically means that the per-unit price will also drop.

Consider, for example, the impact of websites like Edmunds.com or CNET on the per-unit price of automobiles and consumer electronics.  Whether that’s a good thing or a bad thing will depend on who you are.

Fragmentation

Transparency essentially means that established brokerage firms with their proprietary databases, their pocket listings and such, no longer have a monopoly on that information.  It will be made available not only to the public, but to other realtors in the NYC market.

Fragmentation is the natural result.  We have seen this happen in virtually every other industry where once-private or once-difficult-to-get information was made widely available, i.e., transparent.

Law firms, for example, once maintained enormous libraries of case law and legal scholarship.  Today, Lexis/Nexis and Westlaw give even the smallest of law firms the ability to do legal research that the big law firms can.  The latter may have more people to throw at the problem, and have bigger corporate clients, but transparency in law did create fragmentation.  The same for finance and travel industry and every other once-closed, now-open industries.

Even our cousins in the commercial real estate space are finding it easier and easier to split off from the giant brokerages into small boutiques thanks to tools like CoStar and Loopnet: tools that drive transparency and make information available.

Large brokerages still exist in residential real estate — but they are impacted by transparency (which exists in MLS markets to a greater degree than in NYC).  It is easier to start a small boutique real estate company in a MLS market than it is to start the same in NYC; that’s just a fact.  The existence of large consumer portals like Realtor.com, Trulia, and Zillow makes it easier for the independent brokerage to compete for business with the big guys.  That too is just a fact.

Change Could Be Good!

Note that both of the above — price pressure and fragmentation — could be wonderful consequences of transparency.  There may be many who believe that real estate agents make too much money from an inefficient system; transparency –> efficiency –> lower prices for consumers could be a wonderful thing then.  A strong argument could be made that having certain large firms control the real estate market of a major city is not a good thing; breaking them up via transparency of information may indeed be a wonderful thing for everyone.

So the consequences are not good or bad in and of themselves; the answer will depend on who you are.  If you’re the agent losing your job because of transparency, well, then it’s probably not great for you.  If you’re the small independent who will pick up 30% more business in a transparent system, then you’re probably a big fan.  Consumers may benefit from transparency, or they may not — it isn’t clear.

However, the point is that there ain’t no such thing as a free lunch: everything has a price, and someone has to pay the cost of innovation and change and efficiency.  The real and serious argument for change, for any change, including that of greater transparency, should make the consequences clear… then argue that the benefits outweigh the costs.

So then… transparency for real estate: good or bad?

Meh… the answer is the deeply unsatisfying, “Depends on who you are”.

Transparency in real estate: inevitable?  Perhaps.  Is this something realtors just have to get used to and get behind?  Meh.  Perhaps.  But “inevitability” seems like a dodge rather than real argument; it’s an attempt to avoid arguing the benefits and costs.

So… a question for the supporters of transparency (and to the skeptics as well): Why do you support transparency in real estate?  What do you think the benefits would be for you?  Why would that changed world be a better place for you, for the industry, for the consumer?  Let’s hear the actual arguments articulated.

Thanks,

-rsh