As we approach Real Estate Connect, the time is right to figure out where real estate is headed. The conference provides insight into where the industry stands, what will shake it up and where it is going. Connect involves a diverse set of players who together help us answer questions about the future.

Where does the industry stand?

Short-term, the real estate industry is trimming down because the housing market is threatened by a serious downturn. Predicted to be mild, the shakeout is more severe than expected. However, the industry’s moody blues run counter to the giddy online real estate experience where everyone is happy and flush with innovation. Venture capitalists are investing in online real estate, thanks to Zillow, and new online products are proliferating as the online real estate industry capitalizes on new social networking, mapping, blogging and video tools.

What will shake up the industry?

Is the timing right for an alternative business model that alters the old world? What is the old world? Brokers on both sides of the transaction agree to split a commission on the home sale, paid by the seller, and together promote the home listing. This legacy business model keeps commissions steady and retains a tight grip on where the listing inventory goes.

Is there an alternative? Redfin represents current outside-of-the-box thinking, but despite all the hoopla it has not deviated much from the status quo. The Seattle company relies on the split business model — proof is in how quickly it retreated from breaking MLS rules with its blog posts on listings; it feared its properties would not show up on the local listing service.

This trend reminds me of YHD in New Jersey three years ago and California-based ZipRealty five years ago; they both started out bold, but then moved to the middle. They underestimated what consumers naturally turn to when selling a home, how difficult alternative business models are to execute on, and what obstacles the traditional industry will put forth to block any threats. In fairness, other discounters have penetrated local markets, but have a lower profile nationally.

Where is the industry going?

New dynamic online tools are giving consumers the power to do more of the home shopping analytics themselves, saving Realtors time, helping the market better price property faster, giving consumers more control, and shifting the customer relationship from the local Realtor to online services.

This shift has prompted Realtors to move ad dollars from newspapers to online alternatives to grab customers quickly. Online real estate companies have consistently defaulted to collecting ad dollars and avoided the riskier commission-dollar disintermediation play, which is ill-defined and fraught with political and market risk.

Generally, the ad-dollar shift does not worry the industry, unless the context is NAR and Move, which sometimes suffers from a conflict of interest.

The bigger industry fear is someone positioning themselves with the consumer to earn more than just Realtor ad dollars — earning commissions or ratcheting down the commission rate. This is the “lion over the hill,” which has not yet materialized.

Nevertheless, this new generation of online relationships with the consumer is deeper than newspapers ever hoped for. Print publishers offered a pure advertising model. The new models offer more than ads — replicating the offline real estate conversation, deepening relationships with the consumer, creating platforms that have new power.

Not to worry. The companies doing the best job — Trulia, Google Base and Zillow — promise to earn money by grabbing real estate ad dollars, not threatening the industry with radical new business models.

The longer-term fear is that the shift in the customer ownership relationship from Realtor to online services will shake up some other part of the transaction.

For now, major online companies have chosen to use cool new features to build free traffic and get a bigger share of online industry advertising dollars., HomeGain and HouseValues represent the first generation of this business model. Presumably, this ad market is big enough for the new, well-capitalized companies like Trulia and Zillow, which do not pay for traffic — they get it through strong consumer features — so their margins are higher. But is it large enough to match their promise to investors over the long term? We will see.

For smaller innovators — cool new applications, blogs and vertical focused sites — the challenge is even greater. They will probably not become major lead generators or ad-generated verticals. They risk going down the path of long-gone companies from the last dot-com bust, going out of business or being sold at low valuations to the online or offline leaders. Many of them will offer useful tools for tech-savvy Realtors who will monetize the features, selling real estate the old-fashioned way.

At the end of the day, mega real estate companies such as HomeServices and Realogy sit at the top of the real estate value chain, until something more fundamental alters the business landscape. That is why “60 Minutes” upset the status quo last month; the show suggested something more fundamental is taking place, when there is scant evidence anything truly radical is taking hold.

There is lots to sort out. Join me at Connect and we will figure it out together.

Click here to add your thoughts and join a discussion at the Inman News blog.

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