Technology and the Decline of the Broker Centric Model

One Thing the Real Estate Industry Fears Most

Technology and the Decline of the Broker Centric Model

The “full-service” broker-centric real estate model will soon exit the “maturity” segment of its product life cycle, signaling the beginning of a twenty-year decline.  We’ll explore how disruptive technologies triggered the Broker-Centric Life Cycle stages and the alternative business model that will replace the established one.

Less than two years ago most brokers were sure the “backbone” of the Broker-Centric Model—the MLS—would never be at risk, and just months ago most brokers were sure that Robots—computer algorithms—could never replace aspects of their job.  Both events have now occurred.  Let’s explore the one thing the real estate industry most fears: technology and the decline of the broker-centric model.

Economist Raymond Vernon created the concept of a Product Life Cycle describing how a product (or business or an industry) moves through four stages from its inception: Introduction, Growth, Maturity, and Decline.

 

Broker-Centric Product Life Cycle

broker centric product life cycle

 

In Clayton Christensen’s book The Innovator’s Dilemma he postulates and defends that the introduction of disruptive technologies triggers a product to shift into the next segment of the product life cycle curve.  We’ll look at the Broker-Centric Life Cycle while observing the disruptive technologies causing each shift.

 

Introduction

In 1847 the modern real estate industry was born with the first listings exchange.   This innovation of data sharing in a single geographic location triggered Established Real Estate as we know it.

Many countries outside of the US never created a prescribed real estate sales system, never implemented a formal MLS system, and only had a centralized repository of real estate information around the beginning of the twenty-first century with the introduction of various real estate portals.

 

Growth

Approximately 1921-1923 rang in the growth stage for Established Real Estate.  By then 120 real estate boards operated Multiple Listing Services (MLS), and by 1926 the majority of all boards were operating an MLS.

Growth accelerated through 1977-78, as within these years over 90% of brokerage firms belonged to an MLS and over half of all brokerage transactions involved two separate firms.  It was also during the 1970’s the National Association of Realtors (NAR) became the largest trade association in the United States.

This innovation of organized sharing of home data with agreed compensation in many locations, while being overseen by a centralized governing body (NAR,) triggered it into its growth stage and propelled Established Real Estate to ever increasing use in the marketplace.

 

Maturity: A Sharp Line of Demarcation

Around the year 2000, the concept of allowing brokers to display publically all other brokers’ listing information through the Internet Data Exchange (IDX) marks the “event horizon” in the linguistics of physics–the point of no return.

Prior to this event home listing information was vaulted away from public eyes and only available through Realtor gatekeepers.

Had brokers been the only ones publishing MLS style information on the internet this could have been the boon to the sellers, buyers, and brokers it was no-doubt intended to be.  But as quickly as the market discovered this innovation, competitors outside of Established Real Estate worked to improve on and capitalize on it.

Trulia and Zillow quickly entered the marketplace offering innovations such as an AVM and not only more information but actual simplified analyses of housing data.  Brokers were too slow to compete and eventually were relegated to the lower-end of the sites the marketplace visits and trust.

The brokers’ error was not in the public release of the real estate information; this was a true innovation that triggered the Maturity segment in the industry’s Life Cycle.  The error was not having a long-term plan to defend the brokers’ position in the marketplace.

Once Established Real Estate moved from a hidden data model to a public data model it was inevitable competition would ensue.  You never see Apple, Google, or Tesla waiting years or decades between innovations.  Once you move into the competitive world of technology driven products it’s a daily fight for your life through perpetual invention with each competitor striving to leapfrog the others.

Real estate is now a technology industry which sells homes.

 

Near Miss

If the competitors outside of the Broker-Centric Model would have had direct access to the approximately 900 MLS systems in 2004-2006 this would have marked the Decline segment of the Product Life Cycle.  But because they did not and instead chose to use their vastly superior influence on the internet to create an advertising model, this did not trigger the Decline event.  But it did eventually trigger a great upheaval in the core strength of the Broker-Centric Model: the MLS.

The true Decline event of the Broker-Centric Model will occur near the year 2020 as technological innovations automate many separate segments of the home sale value chain and one or more firms combine them offering superior service, efficiencies, and cost savings.

 

Triggering the Decline Event

In his book Crossing the Chasm Geoffrey Moore describes how technology spreads through the marketplace with his Diffusion of Innovation Curve.  We’ll visit how the technology driven changes will flow into the marketplace using his concepts.

A company or companies will introduce the Tech-Broker Model (TBM) not later than the end of 2018, capturing the group of Innovators designated in Moore’s Diffusion of Innovation Curve.  Innovators jump on the first introduction of a technological advancement offering new and better ways of doing something relevant to them.  The new TBMs will strike a chord with this initial market.  But this tiny segment accounts for only 2-3% of the entire home buyer and selling public, thus this introduction will not trigger the Decline event.

 

innovators

By the end of 2020 enough of the Early Adopters designated in the Diffusion Model will embrace the BTM to signify an actual decline event.  This will go unnoticed in the brokerage community, being written off just as a new “By-Owner” service.  Only in hindsight years later will this point in time be noted.

 

early-adopters

One reason the moment triggering the decline of the Broker-Centric Model goes unnoticed is that through 2020 the National Association of Realtors (NAR) membership will continue to grow to over 1.3 million broker members, matching or perhaps exceeding their prior membership record of 1.36 million members (2006—pre-recession level).  Another reason is that up to this point the economy will be strong enough and housing prices rising fast enough to keep the designated Early Majority within the Diffusion Model from noting and using the effectiveness and cost savings of the TBM.

 

innovation chasm

Moore emphatically states that getting a technology to jump the chasm between the Early Adopters and the Early Majority is the most difficult job in diffusing innovations into the marketplace.  If prior to this point NAR or one of the major brokerage franchises can purchase the leading TBM and disseminate their skillset throughout the marketplace they could continue their control of the marketplace.  But they won’t do this.

Christensen demonstrates over and over that the leading companies in any industry almost never capture disruptive innovations early on and apply them in the marketplace.  He uses a buffered term “Value Network” to describe this effect, essentially saying if the company’s customers (brokers) don’t want the change then neither do they (NAR/Franchises/Brokerages).

Denial is great fun until somebody gets killed.

The entire Broker-Centric Model is built on volume of individual agents.  The current system of 1.5± million agents required to sell 5 million homes yearly maximizes NAR’s, the major franchises, the largest regional brokerages’, and even Zillow’s incomes.  Neither the agents nor the governance of the Broker-Centric Model desire a change.  But the marketplace does and so do an edgy group of competitors.

 

Effects of Change

Since the inception of IDX the marketplace has desired and taken advantage of ever more autonomy.  Per Exhibit 3-4 of NAR’s 2016 Home-Buyer and Seller Generational Trends Report over fifty-percent of home buyers age 36-50 found the home they actually purchased by themselves on the internet.  In exhibit 3-10 a staggering seventy-one percent of this same group found that home via a mobile application.  And per exhibit 3-11 this same group was the least satisfied with the home search process—and this is the major portion of the home buying and selling segment for decades to come.

The standard real estate industry deflection of this change is within exhibit 4-1 demonstrating that eighty-eight percent of this group used a broker to purchase the home.  However, this also demonstrates that over forty-four percent of the time a broker was paid for not finding the buyer a home.  This has served the Broker-Centric Model well for decades but only because the home seller pays the buyer’s agent.  With additional technology tools and further autonomy for home sellers this may not be the case much longer.  Then what percentage of sellers or buyers will pay a broker for not finding the home the buyer purchased?

The standard defense to these facts from agents is that “I negotiate the deal and much of my value lies there.”  A problem arises in exhibit 4-4 with this key market segment weighting “help finding the right home” as their most important factor 48% of the time, and only rank help negotiating the deal as the most important factor 13.5% of the time.  The home search service segment most desired is already automated.

 

diffusion of innovation late and early majority

Real Estate Industry’s Future

The real estate marketplace desires greater autonomy brought about through superior technology-based services via the internet.  Once the Tech-Broker Model crosses the chasm into the Early Majority segment the brokers’ future is settled.

The full decline of the Broker-Centric Model will take about 20 years.  The initial few years will go mostly unnoticed, but five years after the Decline Event expect 20% fewer agents in the marketplace; ten years in expect 50% fewer agents.

There will always be niche markets for full-service agents, such as exotic and very expensive homes—with a market segment which can afford high prices for high services.  But the vast majority of the marketplace with a more typical home sale will have 75% of their needs met via technology automation ten years out, with specialized niche services provided for portions of the sale/purchase process by Tech-Brokers completing ten times the volume of transactions as the average realtor today at much less cost.

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