Just like newspaper classified ads have shrunk due to Craigslist, eBay et all, local real estate agents are becoming less important in finding the house of your dreams.
The real estate industry has been based on what economists call information asymmetry, which simply means that one party (typically the seller and seller's agent) knows more about a product than the other (the buyer). It's an opaque market that encourages obscurity and leads to flawed pricing. But now through the Internet technology, entrepreneurs are making real estate more like a stock exchange, a transparent market where all information about every property is readily available, and as a result pricing is perfect.
For example, Zillow Inc., based in Seattle, operates a Web site (www.Zillow.com) that offers free estimates and other online tools for real estate buyers and sellers. It draws revenue from online advertising. The two men behind Zillow are a pair of former Microsoft executives named Richard Barton and Lloyd Frink. Their company is trying to create a perfect market for real estate. Mix E*Trade, Craigslist, and the Multiple Listing Service together, and you begin to get the idea.
In the year since its launch, Zillow has made millions of Americans familiar with the computer-generated estimates of home values, created a new online addiction and become a staple of dinner-party chatter. The Wall Street Journal recently looked at transaction prices recorded for 1,000 recent home sales in seven states, using data from First American Real Estate Solutions, a data provider in Santa Ana, CA, and compared those prices with Zillow estimates, which didn't yet reflect the sales. The median difference between the Zillow estimate and the actual price was 7.8%. The estimates were about equally split between ones that were too high and those below the mark.
Zillow came within 5% of the price in a third of the transactions studied by The Journal. It was more than 25% off target on 11% of them. In 34 of the 1,000 transactions, Zillow was off by more than 50%. Like a four-bedroom five-bath house in Fall City, WA where Zillow's estimate was $661,756 but sold for $2,690,000.
Real estate agents and appraisers tend to sneer at Web site valuations and insist that consumers still need their local expertise to get a true idea of values.
Sources: The Wall Street Journal, February 14, 2007 and FORTUNE, February 19, 2007