Zillow's Big Bang Is Just the Beginning

 | Jul 28, 2014 | 4:00 PM EDT
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I used to be a competitive long distance runner and got involved in it in the 1960s while in grade school in San Jose, Calif. We used to travel the state and run cross country meets in the mountains in the area. Running in California in the 1960s was THE sport. You just did it because everyone did.

Running in steep mountain terrain required strategy and energy conservation that you either trained for or you learned the hard when you were on the course. Everyone started out with the same strategy based on the difficulty of the course, but as the race wore on, individual strategies and decisions about how to manage the course appeared. The most difficult of those choices fell to the front runners. At some point someone had to make a break from the front pack and choose to lead. That was when the race really started, and the risks to the front runner, too.

The most common risk was that if you broke from the pack too early you might burn out and be taken over by those who chose to conserve their energy and let you take the lead. But more importantly, there the risk all leaders face: there's nobody to follow. The decisions are all up to you.

I remember breaking from the pack to take a commanding lead in one race only to lose because I had unknowingly run off of the course when I missed a turn that was poorly marked.

The business and investing applications of this analogy are obvious and also bring up another rule of thumb that is most understood by journalists, but has wide applicability. That is the prudence in making your goal to be "first to be second."

The fear of being wrong prompts many to allow others to take the lead, to discover not only possibilities, but also identify pitfalls. Once committed, leaders must be hyper-vigilant about both.             

Four months ago, I wrote:

"All of the technology necessary to allow individual residential real estate properties to be listed for sale, financed, purchased, transferred, titled and recorded similar to the way the same is done for stocks, bonds, commodities and currencies already exists.

The only reason it hasn't been made available to the public and retail owners, buyers, sellers and mortgagors of residential real estate is because of the technology owners' fear of the political power of the real estate lobby with federal, state and local legislatures."

That fear kept every sector involved the residential real estate industry moving together in a pack, even though everyone knew that the industry was changing and that someone was going to make a break from the pack to lead the industry where it was already destined to go.

Zillow (Z) acquiring Trulia (TRLA) is not a stand-alone or one-off event, nor is it simply about how consumers gain access to information about available housing.

It is the real beginning of the race for control of the direction the entire infrastructure of the industry that allows for the financing and transfer of residential real estate. Until these companies merged, or one of them became singularly dominant in the sector, there was a risk that the one choosing to lead would stumble and allow the other to capitalize. That risk is now gone and the industry trajectory is being defined by Zillow and Trulia under single leadership.

Although Zillow is presenting this move as beneficial to buyers and sellers of homes, as well as real estate agents, the reality is quite different. This move benefits consumers and disadvantages real estate brokers and agents.

The majority of Zillow's revenue and earnings still come from agents and brokers, by way of ads, so the company is trying to mitigate backlash.

But the move has been made and the rate of change in the industry is going to accelerate from here, driven primarily by the shift to the buying and selling of real estate by individuals without the help of a real estate agent.

For investors in Zillow and the associated industry of mortgage lending it's important to know that just as Zillow's technology platform is allowing it to disintermediate real estate agents, it also allows for the same with respect to mortgage lenders and loan officers by way of strategic partnerships with the nascent peer-to-peer lenders.

I don't know how long this process will take, but I believe it is now inevitable that Zillow/Trulia will move to create the one-stop shopping experience for real estate consumers.  

The company most at risk from such a move is Wells Fargo (WFC).

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