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

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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

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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

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Function:Disseminate market informationConnect buyers with sellers

Reduce information asymmetries and transaction costs

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Shortcomings ofMarket Intermediaries

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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

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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

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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

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1br Appt.$1400/mth.Castro districtSunroomGardenParkingOpen house

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Underlying Theory

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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

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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

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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

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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

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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

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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.