62 Finance & economics The EconomistFebruary 15th 2020
21moving home quicker, easier and cheaper.
As recently as 2012 venture capitalists in-
vested just tens of millions of dollars in
property technology, or “prop tech”, each
year. By 2019 that had climbed to $6bn. The
four biggest prop-tech firms, Compass,
Opendoor, Redfin and Zillow, have a com-
bined valuation of $23bn. These offer a
range of services, from online listings to
tools that make estate agents more produc-
tive. Some act as “intermediate buyers”,
making cash offers to sellers to speed up
the process of homebuying.
Technology has already transformed
other big asset markets. Fifty years ago
trading company shares was opaque, illi-
quid and expensive. Ray Dalio, who worked
on the trading floor of the New York Stock
Exchange in the early 1970s before found-
ing Bridgewater Associates, now the
world’s largest hedge fund, bemoans prac-
tices that were once considered normal.
“Dealers had to entertain fund managers,
and no one would know what the prices
were.” But technology has taken over more
and more aspects of trading. Today markets
are transparent and liquid. Transaction
costs are close to zero.
The market for houses is structurally
different from that for stocks. Every share
of Microsoft is identical, but no two homes
are exactly alike. Emotion plays a bigger
role in the decision to move house. Most
buyers and sellers are links in a chain. Two-
thirds of Americans selling a home are also
looking to buy another. A delay at one point
in a chain holds up transactions all along it.
But these difficulties cannot justify the
fees Americans pay. Fees across the much
of the developed world have fallen, thanks
to the entry of online platforms that allow
would-be buyers to search for properties
themselves. American brokers argue that
they provide a more holistic service than
estate agents elsewhere. But a bigger factor
may be the network effects associated with
the multiple-listing service (mls)through
which nearly every broker lists and search-
es for homes, and the nar, the industry as-
sociation that regulates it.
All agents that are registered with the
narmust post their listings to the mlsin
return for access to other listings. The con-
vention in the industry is for sellers to pay
the buyer’s broker, with the listing specify-
ing the fee. Maisy Wong of the Wharton
School of the University of Pennsylvania
finds that brokers steer buyers away from
properties that offer less than 3% commis-
sion, keeping fees high.
This used to prevent online platforms
from allowing buyers to search for proper-
ties, because agents could opt out of having
their listings posted on other brokers’ web-
sites. But in 2008 the Department of Justice
(doj) ruled that mlslistings data could not
be restricted this way, and should be shared
with online platforms. Zillow and Redfinnow publish mlslistings. But commission
norms still make it hard for “discount” bro-
kerages to get a footing. Purplebricks, a
British company that expanded into Amer-
ica in 2017, offered to sell homes for a fee of
around $4,000 regardless of price. After
two years of making losses, it withdrew.
rex, a brokerage founded in 2015, will re-
turn half of the fees it collects to the buyer.
But such rebates are illegal in many states.
Disgruntled home-sellers have mount-
ed class-action lawsuits against their es-
tate agents for anticompetitive behaviour.
They want to cut the ties between buying
and selling fees, arguing that they are
forced into paying inflated fees for buyers’
brokers. The dojis also investigating anti-
competitive practices in the industry. It is
looking into whether brokers can search
listings by commission rates.The new middlemen
A better comparison for real estate might
be the market for bonds rather than shares.
Bonds vary by tenor (the length of time till
they fall due) and coupon (interest) rate.
That makes matching buyers with sellers
harder. To create liquidity, institutions
such as investment banks act as intermedi-
aries, holding an inventory of corporate
bonds and guaranteeing to buy from or sell
to clients at any time. Fees are a little meati-
er than those paid to trade stocks—but still
much lower than real-estate commissions.
Similarly, intermediaries known as in-
stant buyers, or “i-buyers”, are muscling
into the property market. Opendoor,
founded in San Francisco in 2014, now op-erates in more than 20 cities. Zillow and
Redfin began i-buying in 2018.
These firms use vast quantities of data
and whizzy machine-learning algorithms
to appraise homes and make an initial of-
fer, often within hours of a seller asking for
one. A couple in Covina, in greater Los An-
geles, requested an offer from Zillow on
Christmas Eve 2019, had their home in-
spected on December 26th and accepted
the bid the next day. They chose to set a
closing date in March 2020, but could have
opted for December 28th. Once they move
Zillow will sell the house on—often within
30 to 90 days. The fee is typically around
6-7%, almost the same as a seller would pay
an agent—but for a much quicker and easi-
er process. Knock, another prop-tech firm,
follows a different model, buying a new
home for a homeowner and selling the old
house once they have moved.
At the national level, i-buyers are still
small. They bought 60,000 homes worth
$8.9bn in 2019, or around 0.5% of transac-
tions. But in the 18 markets in which they
buy, their share is 3%. It is even higher in
places like Phoenix, Arizona and Raleigh,
North Carolina, where i-buyers have oper-
ated for several years.
Some markets are better suited to i-buy-
ing than others. The model works best
when homes are new and homogenous.
Parts of the suburbs of Dallas are packed
with cookie-cutter houses. These are easy
to price, because it is likely that a similar
house has sold recently. Two identical
homes built next door to each other in 2010
can only be a little different. By contrast,Home truths
United StatesSources:Redfin;CBInsights; International Real Estate Review; Bloomberg;Surefield;CensusBureau;Remine *Excludesnew-buildhousing2002 20151.5
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0
2000 05 10 1915Value of home sales*
$trn
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OR NV WY SD IAMN
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NM KS TN NC SC DC
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