Introduction

The e-commerce revolution has begun to transform a host of information-based service industries -- including travel services, banking, and securities trading -- bringing new efficiencies, reduced costs, and more consumer choice. A number of industries, however -- including health care, education, legal services, entertainment, some segments of the retail industry (such as auto sales), and residential real estate -- have made little progress on the path to e-transformation.

Given their size, the slowness of e-transformation in these and related industries is troubling and suggests that the overall digital transformation of the U.S. economy and the attendant productivity gains are likely to be slowed considerably. It is not enough to just hope, as many free-market purists do, that somehow market forces alone will lead to rapid and broad-scale transformation. There are a number of market or political failures that stand in the way, including active political resistance to change by entrenched actors; lack of incentives by middlemen to develop digital transformation tools; producers who are too dispersed or small to drive e-transformation; and lack of key government investments, standards, or regulations to support private sector transformation. In order to better understand the barriers to transformation in lagging sectors and public policy's role in accelerating it, PPI chose to examine in detail one such industry -- the residential real estate industry -- focusing on the current state of IT usage, the barriers to faster and deeper transformation, and most important, what public policymakers can do to spur e-transformation.

The residential real estate industry has lagged behind many other industries in e-transformation, still relying largely on face-to-face transactions, paper-intensive processes, and middlemen to negotiate the myriad and complex facets of a typical purchase. We find that information technology has the potential to streamline processes and empower consumers to engage in real estate transactions with less reliance on expensive intermediaries. We estimate that residential real estate transaction costs can be cut in half, saving American homeowners tens of billions of dollars every year. Such efficiencies will not only boost productivity and economic growth, they will also play a key role in helping to expand homeownership, as one of the barriers to first-time home purchases is the large amount of money needed to cover transaction costs.

It should be stressed, however, that the goal of transformation is not merely to disintermediate particular players in the industry, even if doing so would boost productivity. Rather, the goal is to enable buyers and sellers to make choices for themselves, instead of having those choices dictated to them by powerful forces in the industry. Once consumers are empowered with technology tools to take more control over their real estate transactions, market forces and competition will determine the degree of disintermediation that occurs.

While e-transformation of the real estate industry will cut the costs of buying a home and boost economic growth, there are three reasons why we believe the industry is unlikely to make this transformation absent public policy intervention. First, middlemen (e.g., mortgage brokers, Realtors, and title companies) exercise control over large parts of the real estate transaction, either through favorable laws and regulations or control of key assets such as the Multiple Listing Service (MLS), the computerized database of homes for sale. Their efforts to protect their roles in the transaction make it more difficult for consumers to have other choices, including self-service enabled by e-commerce. Second, unlike industries such as travel or securities trading where producers are relatively concentrated (for example, the online travel site Orbitz was initially established by the five largest airlines), the real estate industry is highly dispersed. There are millions of "producers" (home sellers) who sell perhaps once per decade. Because home sellers are a disorganized "industry," the pressures to build IT systems that streamline transactions and reduce the need for middlemen are virtually nonexistent. Finally, transformation of at least one part of the industry -- title search and insurance -- is held back by the lack of government effort, in this case the establishment of electronic "recordation" systems for real property records.

For these reasons we believe that absent smart, new public policies, e-transformation of the real estate industry will be extremely slow, costing consumers hundreds of billions of dollars. This report outlines a strategy by which public policy can spur e-transformation of the industry. It focuses on five key aspects of the home buying and selling process and discusses barriers to transformation and changes in law and regulations for each. These areas are:

1. Improving computerized access to and accuracy of credit reports by standardizing reporting data to allow for one-stop correction at all credit bureaus and requiring more accountability for accurate reporting of credit history;

2. Facilitating computerized shopping for mortgage interest rates by standardizing forms and eliminating protectionist rules that favor in-state bricks-and-mortar lenders;

3. Unbundling the functions of real estate agents by encouraging competition for brokerage and listing services and disclosing alternatives to buyers and sellers;

4. Streamlining the recording process to cut costs and reduce risks associated with incomplete or inaccurate land records by establishing electronic recordation systems;

5. Reducing the costs and paperwork associated with the settlement process by encouraging digital signatures and online settlements.