Despite the prospect of rising interest rates, years of oversupply and falling prices, the real estate market has sprung to life in most of the country over the last year. Even in some of the areas that were hardest hit during the financial crisis – such as metro Las Vegas and parts of Southern California – home prices have rebounded to near pre-2008 levels, while housing starts are beginning to ramp up again.
This is welcome news on multiple fronts, as an influx of new construction jobs and rising home equity values will hopefully help fuel more economic growth, consumer confidence and spur hiring among companies.
At the same time, however, it also highlights how maddening and painful the home buying process can be. It’s difficult to fathom why an industry sector that is so vital to the economic well-being of the country consistently wastes so much of people’s time, money and energy.
From the very first open house to the often contentious bidding process and the mountain of paperwork that is typically associated with each closing sale, it’s difficult to think of a market that operates more inefficiently.
The source of the problem is simple: a lack of an electronic, efficient market.
Home valuations can vary greatly and are almost always purely subjective. Prices are often set by self-interested real estate brokers seeking to squeeze every last cent out of commissions generated on each property or, even worse, individual homeowners, who in many respects are even more compromised, as there is perhaps no one more ill-suited to appraise a piece of real estate than the person who owns it.
Because of this, owners often spend months balking at any offer below their asking price, which forces potential buyers, exasperated after trading unsuccessful bids and counter bids, to move on to the next opportunity or – just as frequently – walk away from the real estate purchase process entirely.
And if the marketplace ultimately achieves its objective by matching a buyer and seller, it is frequently only after the price of the home has come down and the parties involved have absorbed significant opportunity costs.
Here is the fix: The real estate industry desperately needs what stocks, bonds and commodities investors have had for decades: a transparent, predictable and liquid market that not only captures supply and demand dynamics but allows for expeditious, low-cost and hassle-free transactions. Such a market would increase activity, lower broker fees and make it easier for homeowners to unload properties.
Think about it: Why is there an open exchange for Bitcoin, a virtual, online only currency that has taken on a mythic quality in recent months, but not one for the real estate market?
It’s a good question. But not one with a good answer.
This gaping hole in the marketplace is begging for a company – or a joint effort comprised of multiple companies – to fill it. Potential candidates include the following:
•EBay – There’s no question that EBay is the leader in auction-based selling. The company has created markets for millions of goods. Additionally, it’s worth noting that the company also owns PayPal, which could be used to expedite the purchase of a house. Just imagine a “buy it now” button or bidding option on each house with full transparency. As such, there is no company better suited to running an online marketplace for real estate – and handling the trillions of dollars in real estate transactions across the country – than EBay.
•Zillow – Zillow has revolutionized the data collection and presentation in the real estate industry. The company has cataloged every house in the country, almost acting in a fashion like the Google of the real estate market. By aggregating all of the real estate data available on each property, consumers can learn everything about a house they might be interested in. Zillow also uses comps to come up with an estimate of a home’s value. Perhaps not surprisingly, such data driven estimates are usually pretty close to true value and a great starting point for creating pricing in this hypothetical new real estate exchange.
•Blackstone – Having large investment firms with lots of real estate inventory jump starting this national real estate exchange would help get the critical mass generated to build an efficient market right out of the starting gate. This is where Blackstone would be a great fit. Most people know of Blackstone as a premier private equity firm, but not that many people are aware that Blackstone is also one of the largest owners of single family homes in America. With tens of thousands of homes for rent or sale, they could jumpstart the process of creating an efficient, electronic national real estate marketplace by putting their whole inventory on this exchange. This would save Blackstone time and allow the firm to easily manage their inventory of homes.
•Realogy Holdings Corp – Of course, a true market will still need the support of thousands of real estate agents. Although an electronic market will cut their commissions in half it will also make the home buying process way more efficient, increasing sales volume and decreasing the time and energy put into each sale. Certainly a more efficient process, more sales per agent and less paperwork per sale will more than make up for lower commissions. Real estate just like most markets will still need agents and it is crucial for agents to support a real estate market exchange. This is where Realogy fits: As one of the largest real estate brokerage firms in the country, Realogy would be well positioned to play a leading role in the development of a national real estate exchange.
Although creating a truly electronic real estate market has many challenges, if the major players in the market got together and created this exchange it would revolutionize a truly inefficient market. It would help consumers by lower costs and fees as well as creating a much more efficient market to buy real estate. Buyers will really get the house they want without the personal issues of the seller and sellers will know that their house will actually sell, although they must accept the true market price of the house. With more transactions, less hassles and standardized paperwork and procedures, this electronic real estate market will revolutionize the industry.
Though a company creating, developing and overseeing a real estate exchange may seem like a pipe dream, it shouldn’t be – it should be the goal.
The equities markets work because they are fairly efficient with many players all determining pricing. The same cannot be said about the current state of the real estate market, and the time is right for a company or team of companies to do something about it.
Investors who are serious watchers of the real estate market and seeking to place long-term bets on truly disruptive players with significant upside potential should continue to monitor this sector closely.
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki, an independent investment advisory and wealth management firm with approximately $200 million in assets under advisement. Clients and employees may own positions in various companies mentioned in the article, but readers shouldn’t buy anything without doing their own research.