The a16z Show - Real Estate in a Pandemic: Homeowners and Buyers (Part 1)

Episode Date: June 16, 2020

This episode is the first in a two-part series that examines the pandemic’s impact on real estate. Part 1 focuses on prospective home buyers, sellers, and existing homeowners. Part 2 (streaming on 6/17) addresses renters and landlords.How has social distancing shaken up the market to buy? What’s the ripple effect of eviction freezes and a record number of homes in forbearance? And how can tech streamline the inefficient process of renting, buying, and selling a home?Led by host Lauren Murrow, the conversation features a16z general partner Alex Rampell, who has invested in a number of real estate companies; Malloy Evans, Fannie Mae’s senior vice president and single-family chief credit officer;  and Tushar Garg, CEO of Flyhomes, a company that helps buyers in competitive markets by purchasing their desired house in cash, then selling it to that buyer at the same price.The discussion starts with the impact on home prices and volume, as well as the rumored exodus from densely populated cities. Then we shift to focus on existing homeowners. Finally, we talk about ways tech can improve the system, from hard tech to fintech.For more a16z content on real estate and proptech, visit a16z.com/realestate. Stay Updated:Find a16z on YouTube: YouTubeFind a16z on XFind a16z on LinkedInListen to the a16z Show on SpotifyListen to the a16z Show on Apple PodcastsFollow our host: https://twitter.com/eriktorenberg Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Hi and welcome to the A16Z podcast. I'm Lauren Murrow. This episode is the first in a two-part series that examines the pandemic's impact on real estate. Part one focuses on prospective homebuyers, sellers, and existing homeowners. Part two addresses renters and landlords. How has social distancing shaken up the market to buy? What's the ripple effect of eviction freezes and a record number of homes and forbearance? And how can tech streamline the inefficient process of renting, buying, or selling a home? This episode features A16Z general partner Alex Rampel, who's invested in a number of real estate companies.

Malloy Evans, Fannie Mae's Senior Vice President and Single Family Chief Credit Officer, and Tushar Garg, CEO Flyhomes, a company that helps buyers in competitive markets by purchasing their desired house in cash and then selling it back to the buyer at the same price. The discussion starts with the impact on home prices and volume, as well as the rumored exodus from densely populated cities. Then we shift to focus on existing homeowners. And finally, we talk about the ways that tech can improve the system, from hard tech to fintech. The first voice you'll hear after mine is two shars, followed by Malloy.

I'd like to talk about how the crisis is affecting home buying and selling. The pandemic has caused a historic drop in the supply of homes for sale. When the shelter in place got put into place, we were advising our own sellers to only sell if they really have. to. Otherwise, just wait and see what happens in the market because typically when you're selling a home, the way the consumer psychology works is that it's the first weekend is really critical because for some reason if the house hasn't sold in good time, people assume that there is a problem with the house and the house itself gets stigmatized in a very interesting way. Once the house becomes old on the market, not many people want to go see it, right? So in general,

the only setters who were selling the house were folks who were in the middle of a process with a bought a new home or they just absolutely had to go sell. We're starting to see that open up now where sellers are looking to come on the market, particularly with the fact that real estate brokerage became an essential service. But still, it's a harder process. The buyers are also waiting it out because they're nervous about what's going to happen to the market overall. Do you anticipate a surge in volume as shelter-in-place lifts? We've seen that already.

Our demand in May is higher than what we saw in April significantly. So I do believe that there is a lot of families who are looking to buy homes who are just waiting and watching on the sidelines. So I think there's definitely an opportunity there. We definitely saw purchase applications drop off pretty sharply at the beginning of the crisis. You saw people maybe step back from either looking or being willing to put their house on the market. I will say that over the last couple of weeks, we've seen that curve shift back up. I think it's early, but it does seem like folks are starting to potentially explore again after a bit of a low from the beginning

of the pandemic. Now the things are starting to pick back up, do you anticipate more or less competition among buyers? It's really interesting because it depends on how fast the inventory grows. A lot of people will be surprised, but in the West Coast markets, we see that actually the number of offers on the house are highest in the winter months. It's very counterintuitive, just because there's just a lot less inventory in the market. There's a phenomenon where the later half of the summer, the inventory becomes a lot larger. And even though there is just a share number of transactions is higher. The number of offers per house is a little bit more inconsistent.

How do you see the pandemic impacting home prices? I know in the short term, they've dropped slightly. Every geography is different. And ultimately, every price is set by supply and demand. So the way do you really get changed is if one of those curves actually shifts, as opposed to saying, okay, how many more buyers are there at this price versus that price? But if I can just work from home, then why do I live in the highest cost of living part of the country in the San Francisco Bay Area? Why don't I move to Montana? And if I move to Montana, then the supply demand curve has been shifted quite a bit. Like that's somebody popping off of the demand curve in the San Francisco Bay Area

and showing up on the Montana demand curve where it's like you can imagine certain low-cost markets getting more expensive. Right. There have been a slew of kind of anecdotal reports that people are moving away from cities, where the cost of living is high. And there was a Harris poll that found that nearly a third of Americans are considering moving to less densely populated areas in the wake of the pandemic. So that, of course, would have a major effect on residential real estate and home prices. Ultimately, if a lot of people that are better paid end up moving to places where things

are cheaper and those pay rates stay constant, then that could have very, very significant changes on how these markets work. because normally it's totally been focused on local market supply and demand. It's always unclear what's causing what's effect. So do engineers in the Bay Area get paid well because housing prices are high or housing prices high because engineers in the Bay Area get paid well? I would suspect based on what Facebook announced, which is they're going to pay people differently based on where they're domiciled.

I would suspect, therefore, that housing prices are actually a function of labor and what people are paid. Now you have a new variable if it turns out that hundreds of thousands, of employees can now work from home. And that's the current count. I mean, if you add up Square and Twitter and Shopify and all of these other companies that every day are saying, nobody's going to show up in our office for another year and you can now work from anywhere, you're going to have people that might make changes. And there's actually, there was a cool website that I saw that said, okay, plug in a price. You plug in like $500,000. It shows you what that buys in San Francisco,

which is a closet. And then it shows you what that buys you in Tennessee or North Carolina. and it's like the biggest mansion in the entire world. And before it's like, well, I can't move because my job is here, my family's here, but oh, now I can move there and I can buy a hundred times more. That's a whole other factor on supply and demand, which I don't think any of the three of us can really predict, but it's definitely going to change it. I think it's a little too early to say where exactly the move is going to happen.

The other thing that's traditionally been a very important factor in at least residential home purchases is around school districts. So what's not clear to me right now is, are they going to move, you know, in the Bay Area closer to the school district? Does that be the trend? Or would it be that let's actually leave the Bay Area itself and go somewhere else? And all the amenities are going to have to come with it. So I think work from home is a big factor. But how do you think about schooling from home and sort of what does that look like? We talked about how home prices and sales volume are both slightly down. Zillow recently put out a report that estimated that home prices will rebound to pre-COVID rates,

by late 2021 and that sales volume will spring back by 2022. It seemed optimistic to me, but I'm interested in what you think. I think it's really hard to say. There are just so many confounding variables right now. And I mean, there's also just a lot of economic damage that results in political change as well. The other thing is that every state is different. And then within every state, like the LA housing market is not like the San Francisco housing market, places that are pro-Nambi or not the same as.

places that are very yimby like. The other question is, what do taxation policies look like? A lot of these things are going to have lasting repercussions. But predicting a two year ahead to the decimal point housing model is not something that is possible. One bright spot in all this is that interest rates are lower than ever. So as you say, you can get more for your money. Should we assume then that if you have the means, it is a good time to buy? I think interest rates, they apply to everybody. It's not like only I can get a good interest rate, you can get one too. So if interest rates rise, then again, that just changes the shape of the demand curve. The way that I always think about it is people that are not super duper rich buying homes

for all cash, they say, how much can I afford per month? And a lot of people that make the jump from renting to buying, they say, okay, I'm paying $2,500 a month in rent. And I've saved up $150,000. Wait a minute, I can go plank down that $150,000 into a down payment and then pay $2,000 of my interest in principal payments every month. That's a killer deal. I should do that. So if interest rates go down, theoretically, my interest payment every month would go down as well. But then that's true for everybody as well. So they're like, wow, now I can go buy this nicer house than that actually affects the asset price. The amount that people get paid every single month in their after tax income is the biggest impact in terms of what they can afford. And therefore, that's the thing that really shifts the

asset prices. But I don't think for like competing for new homes, interest rates are really that big of a thing, although it does take the market a little while to catch up. So if there was a house that you were looking at for a long time, you're willing to put the work in to make it a fixer-upper, nobody else wants the thing. And now interest rates have gone down. That's going to be a bank error in your favor, so to speak. But otherwise, within a year, I don't really see that as being a big impact. Yeah. The housing market is a little bit lagging to the interest rate changes. It's only in the short durations that this creates an opportunity, but you would imagine in the longer run, the asset price and the interest rates that have balanced one another out.

Because the listing prices and how people are pricing their homes or what they're willing to sell it for, that mentality doesn't change right off the bad. It's also becoming increasingly difficult to buy. I know we're seeing some new hoops in the process. Some lenders are enacting stricter qualifications and credit requirements. What does that look like from a buyer's perspective? That's one thing that a lot of the buyers are worried about at the moment is can they get a loan or not and can they qualify for a loan. Particularly, we are seeing secondary market and Jumbo's sort of

going away. So the criteria for the Jumbo loans have changed. And some of these criteria are also changing in the middle of the contract. So people are looking to go buy a house that just got into a contract and they find out a few days into it that the loan that they were looking to go get is no longer available. We have seen listing agents going as far as even trying to inquire where do the customers actually work? Just trying to speculate, would that mean that they would have a stable job, would that mean that they would have enough of buffer if the Jumper program changed to come up with the extra money? Of course, we don't share that information with anybody, but it just goes on to show how much anxiety is there in the market in the transaction process.

I think the speed with which the pandemic has impacted the economy and employment may be driving some of the changes from an underwriting perspective just because that speed breeds volatility and a little more conservatism on whether or not that job's going to be there, 45, 60 days from now when someone wants to close. I think some of this is a short-term change, right, to try to make sure that that sustainability stays in place. I'd like to shift and talk about the impact on existing homeowners. There's about 4.7 million mortgages, which is 8.8% of all home loans now and forbearance. Alex, can you put it into context for us? Well, it's a very big number, but it doesn't really mean that much yet because at the state level,

a lot of places have said, okay, evictions are on pause. We're going to give you more time to pay your rent. I think right now it's still in the wait and see phase because I think the market's working correctly. The market working is saying it doesn't make sense for banks to take over millions of homes that are a couple months overdue and start foreclosure processes. I think the real question is going to be what happens when things return to normal. Like I might say, hey, I don't have to pay my rent. I'm not going to pay my rent.

Hey, I don't have to pay my mortgage. I'm not going to pay my mortgage. Normally, if you don't pay your rent, you can get evicted. If you don't pay your mortgage, eventually your home can be foreclosed upon and you can be evicted as well. Both of those are off the table right now. As we know, the mortgage market is complicated and there's many players involved. If homeowners stop paying and this lasts longer than.

a few months, what is then the chain reaction? Well, right now, there's a very, very reasonable reason why people are not paying their mortgages, and it makes sense for all parties involved to work that out. Nobody wants to seize the asset because the assets are also stressed as well. Like if you had to go repossess millions of homes and then go sell them, guess what that would do to home prices? It would crash them. And it doesn't really help anybody to go do that.

At some point, though, if people don't pay their mortgages for you, years and years and years, the owner of that debt has no choice but to foreclose. And that's what normally happens. It's not exactly an aberration when there is a foreclosure event. It's an aberration when you have one at mega-mega-megas scale. How does this compare, for example, to 2008? That was more of a mortgage crisis that became an economic crisis. This is a health crisis that's become an economic crisis. It's not like what's going on right now is people got a bunch of 98% loan to value mortgages. You have people that, you know, two income households, everything was fine, and now there's zero income households, and hopefully that reverts over time.

I do want to touch on the ripple effect this has. If you have four million homes that are not current with their mortgage after two years, I mean, that's a problem, and there probably will be foreclosures. Figuring out the ripple effects on the entire housing market is tricky. Like, what happened in 2008 and 2009 is there were a bunch of single family reits that popped up, to go buy properties that were being foreclosed upon. This is what Blackstone did. They built a company called Invitation Homes. In Invitation Homes bought tens of thousands of homes because rents have remained very, very stable,

whereas the housing market was collapsing. What would happen is that somebody who says, wow, this house used to cost $400,000, now it cost $200,000. I could buy it for $200,000 and rent it out for $2,000 a month, $24,000 a year. That's a great return. I'm going to go buy that house. And a lot of that happened in 2008, 2009, once the wave of foreclosures began, like those were the people that were buying the homes out of foreclosure, it's financial arbitrage of,

I'm going to buy the house and then rent it out. People know about this opportunity. And it's almost a stabilizing agent for asset prices because people know they can now turn a property from a owned and resided in property to a short-term rental or a long-term. You can put it on Airbnb. You can rent it out for a three-year-old. least. There are a lot of things that you can now do to monetize a property much more easily than 15 years ago. I think there is also this massive pent of demand which further creates this idea

of stabilization. There's just a huge shortage of homes to begin with. And there's a lot of people who have actually not become homeowners yet. And with the fact that most people are not looking to come out of the homes right now because of the forbearance process, we've seen that there's still a lot more of demand on the buyer's side and the inventory continues to stay at all. I think folks have leveraged innovation and technology to try to streamline the mortgage process now as part of their crisis response. If you think about the traditional origination process, there are a number of face-to-face interactions, appraisals, inspections, the loan closing itself and settlement. So we've worked on some flexibilities to try to prudently give people alternatives to things like in-person appraisals. We're leveraging desktop appraisals and technology across a number of different data sources

that enable appraisers to continue to provide estimates on homes, but without COVID infection concern. That's an interesting point that the appraisals always a sticking point in the mortgage process, more so now with social distancing in place. Appraisal waivers have actually increased to 30% from 10% since coronavirus hit. Many are leveraging these technology. Do you think that is a lasting shift? When the shelter in place came in, one of the biggest issues that our customers faced in the closing process was delayed the appraisals. Every day of ambiguity there was very stressful.

So that's been a big change. At Flyhomes, we were actually using desktop appraisals just for the scalability and speed sake. We've been working with that framework for a while. I think it's interesting to see, of course, that that's something that's been applied much more broadly as a long-term player appraisals. that probably is the future of where appraisals go just because of the subjectivity and variability. I think over time, anything that's done by a human in a very automated way eventually gets done by a computer. If you have a whole if then checklist, it's like, okay, if the lights are broken, then do this. If the floor is bumpy, then do that. And that's a lot of what goes into an appraisal. And there's a lot

of subjectivity as well, which is why if you send five different appraisers into a property, you're going to get five different numbers potentially. So having that done in a more automated fashion is hopefully the future. I think every financial institution would want that to have less variability and have one statement of truth. That was probably going to happen anyway eventually and this might end up pulling that forward. We've been working on some of these variables over the course of the last few years. We started collecting a uniform data set on appraisals starting back in 2011 or 2012. I think it is complementary to what the appraisal industry brings to the table. If everything's in a new development and one of three models, that becomes a little bit easier. But we've got a lot of housing stock

that is unique and we're going to need that expertise. So I think this is a way to arm our appraisers with even more tools and information to help them do their jobs. I think that eventually technology is going to solve a lot of these things. I mean, just like you now have digital notaries, that's easy, doing something like digital internal underwriting, I think it's a solvable problem. It just hasn't been done yet. Even in normal times, no one would call the real estate home buying selling process efficient or easy. Are there areas in that buying and selling process that you think there is opportunity to streamline? I think the biggest thing is the way we look at the industry

is traditionally being operated as a brokerage model, there's a mortgage model that is titled and escrow. There's so many different parties involved and all of them. operate under different umbrellas with different set of processes and systems. There's just way too many elements for every consumer to fully comprehend and no one size kind of fits all. So how do you sort of bring the right level of coaching and the right level of data information, transparency through a digital stack, I think would be a critical element. It's not clear why in the future does somebody need to be present with you to go see a house? I mean, with Airbnb, the element of trust has already come where there's a level of insurance

that the company guarantees and people can see the houses. So for my advantage point, I believe consumers will have a lot more options and choices and would be backed through a level of diligence that their company would provide to them. We have sold one house where it was completely 100% virtual in LA where there was no human interaction at all. But I am still not sure if that's going to be the trend because I do believe most consumers would like to go see the house that they're looking to move into. So selling, I think, would become much more virtual because selling is more of finance

versus home buying is a bit more romance. You're trying to understand sort of how do you build your life? here together. But for most other things, I think online notary, online appraisals, it's going to get really simplified. Alex, I'd like to get your perspective on this as well. Where do you see the opportunity for tech to streamline some real estate processes? Well, I think there are many there. There's the actual, like, hardcore tech of can I put on my VR goggles and explore what the bathroom looks like? The thing that I learned the first time I bought a house is, wow, like there's no noise barrier between like the TV in the lower room and the bedroom and the upper room.

And like, I wish I knew that before I bought the house. That's a technical problem, but it's not like somebody builds a website technical problem. That's like how do I build some complex tool that goes and does that? If you look at just what a real estate website looks like in 2020 versus in the year 2005, I mean, it's actually pretty good. Like you have these 360 degree walkthroughs, but that's going to get even better. And you can do that for acoustics. You could do it for lighting. That's one area of tech. The other area. of tech is just around marketplace efficiency. I think eBay was started in like 1996. And if I'm selling a PEZ dispenser, I'm selling an iPhone, anybody can bid on that around the country. And

you know as a seller you're getting the highest price, you don't have that for housing. It's a really bizarre market and you have two million registered real estate agents and a mode number of transactions per agent per year is zero. So you're actually getting value at or value subtraction and you're paying five to six percent for the privilege. So that's another area where tech can change. Can there be a real competitor to the MLS? It's not a VR goggles tech problem. It's a marketplace building and aggregating supply and demand tech problems. And then there are all sorts of financial tools that are somewhat of a fintech problem, which are around the trade in. Like, I can't buy my new house until I sell my old house. It's more of a financial engineering thing.

We're big believers in, you know, should you put 100% of your net worth, it really feels like 400% of your net worth into your home, the answer might be no. Can you buy part of your house or can you rent to own your house? And those are all financial engineering problems, but they're primarily done by fintech companies that really manage the entire process. So I think it's those three. It's the hardcore tech around things like the audiovisual sphere. There is the marketplace mechanics around how do you make the transaction more efficient? Just like buying and selling on Amazon, can you make that a home buying process? Then the third part, is the fintech problem of just making homes more affordable or just giving more flexibility. Some of the stuff that we've been working on, if any may, for the last couple of years, is being able to go obtain asset income employment information from the source of truth directly instead of having to get the borrower to produce a pay stub or a bank statement, those things are, I think, starting to be table stakes in the transaction process. itself. Well, and that's kind of the big question that runs through much of this conversation is we're seeing many real estate trends that are atypical and in some cases unprecedented. So which

elements of this pandemic fallout do you predict will be short term and we're going to bounce back? And are there aspects that you think will fuel more long-term change? Well, I think the work from home thing, I would have said two weeks ago, it's a little bit too early to call out, but now that more companies have jumped on this bandwagon and have said conclusively, this is not just an experiment. The experiment is working well. Productivity seems just as high, if not higher, so therefore companies are saying, hey, why don't we just have work from home? That obviously has massive implications on commercial real estate, because why am I spending 40% of my gross revenue on a physical office? Why don't they get rid of that? It has impacts

on housing. So I might say, well, I don't know how long this pandemic might last. If there's a second wave, I'm not getting stuck in my closet. I'm moving. I'm sure there are some people that are going through those thoughts right now. What does that do in terms of portability and almost arbitraging housing costs versus employment income? That's an interesting one where there's no question it's going to have an impact. And then you have kind of the technological improvements where, all right, well, maybe you don't need to have an appraiser go toward your kitchen and you're going to do some of these things more directly because these things might get sped up by the crisis, but then we're going to keep that going. One example from a different industry is in health care.

Everybody's talked about telemedicine for a very, very long time. That happened and that got sped up because of the pandemic, but that's not going away. So you have temporary dislocations that will revert to the norm as opposed to some of these things where it just pulled forward. or the future. I think a further bigger notion is the idea of trust. And I think we've traditionally the society associated the idea that in order to build trust in a relationship, you have to be face-to-face or meet in the office. And I'm finding, you know, slowly the trust is starting to come in. So for instance, in home buying, we at fly-homes used to meet every single customer before we started the onboarding process because the idea that you would buy a home

with somebody that you never met in person was not something that we felt the consumers were ready for. but now as we see the customers meet us online and have super effective calls on the Zoom meeting at their own convenience and still be able to find the level of trust and start working with us. But used to be more of an exception as becoming more of a norm. If we develop and truly embrace that the trust can be built online and sort of build the systems in that way, my presumption is a lot of the places where we thought that we must go in person would sort of turn upside down, where the question now would be, why do we need to go into physical interaction when we could sort of do this thing online? Thank you for joining us on the A6 and Z podcast.

This was fun. Thank you very much. It was great to be here. Thanks for having me.