The total wealth of Americans is $113 trillion. The major categories are real estate, both homes and commercial, of $50 trillion and stocks and stock funds of $35 trillion.
Technology has had a huge impact on stock trading. 50 years ago, selling or buying company shares was opaque, illiquid and expensive. Now, technology has taken over more and more aspects of trading. Markets are transparent and liquid. The cost of equity trades is zero or close to it.
Real estate not so much. Of course, while every common share of Amazon is identical, no two houses are identical. Throw in emotion, 5-6% commissions and time delays and hassles in buying and selling and it’s no surprise that the real estate market has had low volumes and heavy transaction costs. As a result, only 7% of American homes change hands every year.
American homeowners traded property worth only $1.5 trillion in 2019, paying out about $75 billion in commissions. About $40 billion of stocks are traded each year with less than $10 billion in commissions, which are shrinking. The real estate transaction model is still opaque, illiquid, expensive and stressful. More owners are staying put and this is contributing to the decrease in homeownership in the US to 64%, lower than it was in the early 1990s.
In the last decade, technology has started to gain traction in real estate transactions providing more transparency, more liquidity, less cost and quicker and easier moves. The old real estate model may be replaced by a new one, with lower fees (on a percentage basis) but more turnover and more customer satisfaction. The last decade has seen the birth of a new industry- property tech or “prop tech.” It has attracted $40 billion in venture capital in the last three years. The four biggest firms, Zillow, Redfin, Compass and Opendoor have a combined valuation of $23 billion. Prop tech is fundamentally changing how the real estate sector operates.
Zillow’s “Zestimate’s” 2006 algorithm for pricing used traditional metrics; such as number of bedrooms and baths, square footage etc. Today Zestimate goes deeper and has become more accurate. Homeowners listing with Zillow upload pictures and provide additional detail information. The new Zestimate model has an error of less than 2% (of the home’s actual selling price) as compared to a 14% error back 13 years ago. The next wave of Prop tech could include more hyper-local automated valuation model (“AVM”) elements to their valuation models. Zestimate’s hyper-local AVM algorithm in Washington, D.C. has only a 1.2% error. Zillow’s AVM won’t replace appraisers for mortgages that are needed. However, Zillow believes it could transform appraisers from evaluators to fact-checkers.
Prop tech has also sped up transactions. Discovering listings used to take days. Now Redfin (and others) notifies customers with its “Updates” faster than anyone else about new listings and price changes. Using just a couple of clicks on their smartphone, Redfin customers can “Book it Now” and request a home tour, almost like making an online restaurant reservation.
Another trend is instant buying- or iBuying, offered by both Zillow and Redfin. Sellers can sell in a few days. The companies make prompt, algorithm-driven offers, pay in cash, and sell homes themselves- sometimes after some minor upgrades. Opendoor takes it one step farther. It buys using iBuyer and then resells through the Opendoor app, backing sales with a 90 day guarantee. Opendoor says home buying and selling can be “as easy as buying and selling cars.” Knock is another iBuyer who buys houses for cash and then helps sellers find their dream house. Knock even handles repairs and updates on the old house.
Prop tech may even provide a complete solution. (Think of Amazon meets real estate). Jen Chao, executive at Redfin sees prop tech heading towards such a comprehensive offering. She believes that the overall management of buying and selling a house, including finding the house, negotiating the contract, finding the mortgage, an attorney, a mover and more is a very big deal to many. So much so, that many just don’t move. Chao feels that Redfin can become a one-stop shop, providing a seamless home-buying (and/or selling) experience.
Chao says this automation will not do away with the work of agents and other real estate professionals. “Real estate is a highly personal business,” says Chao. Technology is being used to streamline and get rid of the tasks that software can do really well, to free up time for agents and others to focus on things that require the human touch.
Prop tech proponents believe the future of real estate is rooted in precision and personalization. At DWM, we believe our total wealth management process is very similar. We use technology to streamline and perform tasks that software can do and we use our combined knowledge, experience and communication skills to provide the personalization that is so important. In short, that is how value is maximized for our clients.