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Effect of internet on real estate markets


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  • 1. The Effect of the Internet on Real Estate Market Outcomes: Evidence from Craig’s List EconomicsHonorsThesis Gabriel Lepine, Brown University Economics, Entrepreneurship & Technology Spring 2007 Forum April 2007 Gabriel Lepine
  • 2. Agenda Gabriel Lepine Introduction Real Estate Market Intermediaries The Internet Craig’s List Underlying Theory Data and Methodology Empirical Results Concluding Remarks EconomicsHonorsThesis
  • 3. Real Estate Gabriel Lepine Homeowner Market: For the average American, RE is the most expensive investment RE is the largest asset Housing captures ¼ of income Infrequent transactions EconomicsHonorsThesis
  • 4. Real Estate HonorsThesisPresentation Gabriel Lepine 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
  • 5. Market Dynamics Gabriel Lepine Information intensive & information driven industry Information is the most important factor affecting market participants Market power unequally distributed due to: Information asymmetries Transaction costs EconomicsHonorsThesis
  • 6. Market Intermediaries Gabriel Lepine Function: Disseminate market information Connect buyers with sellers Reduce information asymmetries and transaction costs EconomicsHonorsThesis
  • 7. Shortcomings of Market 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 EconomicsHonorsThesis
  • 8. 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 asymmetries reducing transaction costs reducing market entry-costs EconomicsHonorsThesis
  • 9. 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 EconomicsHonorsThesis
  • 10. Reach of Craig’s List Gabriel Lepine 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 EconomicsHonorsThesis
  • 11. Influence of Craig’s List Gabriel Lepine 7th most popular English-language Internet site Each month: 15 million distinct individuals visit CL 14 million new classified ads published Over 5 billion page views EconomicsHonorsThesis
  • 12. A Craig’s List Post Gabriel Lepine 1br Appt. $1400/mth. Castro district Sunroom Garden Parking Open house EconomicsHonorsThesis
  • 13. Underlying Theory Gabriel Lepine Craig’s List is a better market intermediary that: Reduces search costs Reduces 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 EconomicsHonorsThesis
  • 14. 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 EconomicsHonorsThesis Gabriel Lepine
  • 15. 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 Units Percentage of owner-occupied Units Gross rent Median home value EconomicsHonorsThesis
  • 16. 32 Cities Considered Gabriel Lepine Date launched Cities 6/2000 8/2000 4/2001 10/2002 4/2003 11/2003 1/2004 2/2004 9/2004 11/2004 San Francisco Chicago; Los Angeles; New York; San Diego Atlanta; Austin; Denver Miami; Philadelphia; Phoenix Dallas; Detroit; Houston Cleveland; New Orleans; Pittsburgh; Tampa; St Louis Providence Nashville; Indianapolis; Kansas City; Orlando Sal Lake City; Jacksonville; Rochester Omaha; San Antonio; Tucson; Richmond; Oklahoma City EconomicsHonorsThesis
  • 17. Regressions Gabriel Lepine Regressed the annual change in housing variable regressed on a Craig’s List dummy variable Controlling for: market size growth of market city fixed effects year fixed effects years Craig’s List available EconomicsHonorsThesis
  • 18. 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 EconomicsHonorsThesis
  • 19. 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 EconomicsHonorsThesis Gabriel Lepine
  • 20. 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 accessibility Conveniently connecting buyers and sellers Decreasing transaction costs Decreasing 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 EconomicsHonorsThesis
  • 21. Questions & Answers EconomicsHonorsThesis Gabriel Lepine I wish to express gratitude to Professor Ignacio Palacios-Huerta for 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.