Effect of internet on real estate markets
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Transcript of Effect of internet on real estate markets
The Effect of the Internet on Real Estate Market Outcomes:
Evidence from Craig’s List
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Gabriel Lepine, Brown University
Economics, Entrepreneurship & Technology Spring 2007 Forum
April 2007
Gabriel Lepine
Agenda
Gabriel Lepine
IntroductionReal EstateMarket IntermediariesThe InternetCraig’s List
Underlying TheoryData and MethodologyEmpirical ResultsConcluding Remarks
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Real Estate
Gabriel Lepine
Homeowner Market:
For the average American,RE is the most expensive investmentRE is the largest assetHousing captures ¼ of income
Infrequent transactions
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Real EstateHo
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The Rental Market:
One-in-three households rent their primary residence
34 million renters paying $250 billion in rent annually
Low income individuals devote over half of income to housing
Market Dynamics
Gabriel Lepine
Information intensive & information drivenindustry
Information is the most important factor affecting market participants
Market power unequally distributed due to:Information asymmetriesTransaction costs
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Market Intermediaries
Gabriel Lepine
Function:Disseminate market informationConnect buyers with sellers
Reduce information asymmetries and transaction costs
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Shortcomings ofMarket Intermediaries
Gabriel Lepine
Market information remains imperfect and transaction costs remain high
Intermediaries can constrain and manipulate information to induce preferred behavior
Market dynamics present promising setting for the Internet to improve efficiency
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The Internet
Gabriel Lepine
Most important technological innovation to impact real estate, since the automobile and the elevator
Potential to improve market efficiency by:reducing information asymmetriesreducing transaction costsreducing market entry-costs
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Craig’s List: an Internet-based Intermediary
Gabriel Lepine
Founded in San Francisco, CA by Craig Newmark
A online community supporting information exchange Craig Newmark,
Craig’s List founder
Powered by user generated online classified ads
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Reach of Craig’s List
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Craig’s List expanded into new cities by popular demand
Craig’s List currently established in 450 cities around the world
Information is free to access
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Influence of Craig’s List
Gabriel Lepine
7th most popular English-language Internet site
Each month:15 million distinct individuals visit CL14 million new classified ads publishedOver 5 billion page views
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A Craig’s List Post
Gabriel Lepine
1br Appt.$1400/mth.Castro districtSunroomGardenParkingOpen house
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Underlying Theory
Gabriel Lepine
Craig’s List is a better market intermediary that:Reduces search costsReduces transaction costs Reduces market entry costs
Craig’s List predominately influences rental market
Craig’s List makes listing a property on the rental market preferable to the homeowner market
Trend reinforced by the snowball-effect
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Hypothesis
1. Craig’s List shifts housing tenure in the real estate market away from owner-occupied and towards renter-occupied units
2. Supply movement within the real estate market forces prices to equilibrate in each market
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Data
Gabriel Lepine
Real estate market outcome data (2000-2005) obtained from the American Community Survey
Housing tenure and price variables:Percentage of renter-occupied UnitsPercentage of owner-occupied UnitsGross rentMedian home value
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32 Cities Considered
Gabriel Lepine
Date launched Cities
6/20008/20004/200110/20024/200311/20031/20042/20049/200411/2004
San FranciscoChicago; Los Angeles; New York; San DiegoAtlanta; Austin; DenverMiami; Philadelphia; PhoenixDallas; Detroit; HoustonCleveland; New Orleans; Pittsburgh; Tampa; St LouisProvidenceNashville; Indianapolis; Kansas City; OrlandoSal Lake City; Jacksonville; RochesterOmaha; San Antonio; Tucson; Richmond; Oklahoma City
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Regressions
Gabriel Lepine
Regressed the annual change in housing variable regressed on a Craig’s List dummy variable
Controlling for: market sizegrowth of marketcity fixed effectsyear fixed effects years Craig’s List available
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Empirical Results
Gabriel Lepine
Craig’s List is robust to all regression specifications
Magnitude of shift estimated at 0.77%
Craig’s List found to shift housing tenure to favor renter-occupied units
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Empirical Results
Craig’s List decreased gross rent by $12
Value of owner-occupied units increased modestly over time
Median gross rent decreased, while Owner-occupied units increased in median value
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Concluding Remarks
Gabriel Lepine
Results empirically document effects of an Internet-based intermediaries on the real market estate
Craig’s List improves efficiency by:Improving information accessibilityConveniently connecting buyers and sellersDecreasing transaction costsDecreasing market entry costs
Craig’s List is inarguably a good entity though not the “end all be all”
Other traditional markets can benefit from the Internet to enhance efficiency
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Questions & Answers
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Gabriel Lepine
I wish to express gratitude to Professor Ignacio Palacios-Huertafor his academic guidance; two PhD graduate students –Doug Park and Stelios Michalopoulos – for mentoring me throughout my time at Brown; Erica Olsen for her comments and suggestions.