This Week in Startups - TikTok takes on Spotify, startup advice + US housing market w/ Redfin & Divvy Homes CEOs | E1523

Episode Date: August 2, 2022

First up, Jason and Molly cover TikTok's recent patents that indicate it might be going after Spotify (2:23). Then, the duo breaks down a recent WSJ report about VCs giving conflicting advice to founders. (18:05) After the news, J+M are joined by Redfin CEO Glenn Kelman and Divvy Homes CEO Adena Hefets for an in-depth break down of the current US housing market. (33:36) WSJ article: https://www.wsj.com/articles/silicon-valley-lurches-between-deep-cuts-and-bold-spending-11659268801 (0:00) Jason and Molly tee up today's topics and guests! (2:23) TikTok might be going after Spotify's music streaming business with "TikTok Music" (16:45) Policygenius - Go to https://policygenius.com to get a free life insurance quote (18:04) Jason and Molly break down a WSJ report about conflicting advice that VCs are giving to founders re: approaching the current downturn; Jason debuts his "Cash vs. Profitability Matrix" (32:04) Notion - Get $250 off by using code TWIST at https://notion.so (33:36) Redfin CEO Glenn Kelman and Divvy Homes CEO Adena Hefets join and break down their businesses before getting into how a 2022 housing downturn might be different from 2008 (41:36) Prometheus - Go to Prometheusalts.com or download it on the App Store and use the access code TWIST to sign up (43:09) Institutional buyers' impact on housing supply, pandemic migration impact on local inflation, new construction outlook (1:08:36) Rental market outlook, commercial real estate's grim projections

Hey, everybody, happy Monday. Welcome back to this week in startups. As promised on the Sunday show, we have an awesome housing roundtable for you. Yeah, we're thinking about your whole week here Sunday, Monday, Tuesday, Wednesday, all the way to Friday, we take Saturdays off. But what a great roundtable we have today. So interesting. Redfin CEO, Glenn Kelman, and Divy Holmes, CEO Edina Hefetz, who's just a rock star, joined us to break down everything that's going on in the housing markets because it's a lot. Oh, man. Tech, remote work, institutional buyers, eye buyers, rents, everything. which markets are winners, which are losers.

But we got some news to talk about first. We do. We're going to start with TikTok. We're going to throw out the big fat, juicy worm, talking about TikTok, potentially going after Spotify and, of course, the Youth of America. And I jump right on that hook and Holly reels me in. But we're also going to talk about a Wall Street. It's a good talk.

And the Wall Street Journal did a nice story giving credit for this one on the different types of advice founders are getting in this down market. Should they go big? Should they cut burn? what's the best advice? And so I create a matrix based on profitability and how much cash you have on hand to explain this to you. It's a very visual. So if you're on the YouTube channel or the Spotify or iTunes video feeds, it's going to be helpful. But if not, I'll walk you through it. It's going to be a great show. Stick with us. This week in startups is brought

to you by Policy Genius. You could save 50% or more on life insurance by comparing quotes with Policy Genius. Options start at just $17 a month. for $500,000 of coverage. Head to policygenius.com to get your free life insurance quotes and see how much you can save. Notion is one place for notes, docs, projects, and everyday work that goes way beyond a wiki. Go to notion.s.O and use promo code twist to get $250 off an annual team plan. And Prometheus solves the problem of visibility and access. to alternative funds in a way that benefits investors, fund managers, and wealth advisors.

Lower investment minimums means that millions of investors can get involved in alternatives and let professional investors do what they do best. Go to Prometheusaltz.com or download it on the app store and use the access code twist to sign up. Hey, Molly, I saw it in our group chat that y'all were talking about some TikTok bait, trying to troll me. Was a fat, juicy earthworm just for you? I was just, the bass were jumping this morning. I just got on the hook and I was like, wait a second.

And I do know music is a, they're driving music culture because I, I'm a subscribed to Sirius XM to listen to Howard Stern when he does like three shows every two with three weeks. Work ethics a little bit gone there. But he still does great celebrity interviews. And they have like a, they're promo. Moing of TikTok music channel. Yeah. And the music channel just plays stuff on TikTok, but they play the full songs, I guess.

So you can, if you haven't heard the hook, as we talked about, like 17,000 times on TikTok, you can now listen to the full song. So what is this TikTok music thing? Yeah, it's, I mean, I think I know as much as you, but according to The Verge, it looks like TikTok's parent company, ByteDance, filed a trademark application

for a service called TikTok music. They filed for that same trademark in Australia last November, and presumably it would be a music service that could compete with Spotify, YouTube music. I mean, it makes perfect sense. Like, if you go to the Billboard Top 100 on any given day, you'll see that like the top 25 songs or, you know, at least a quarter of the songs on the list are TikTok songs. And even as far back as when it was musically,

remember when TikTok was musically back in the day? that's when my kid got into it when he was seven or whatever. And Billboard magazine wrote an article about how it was like changing the music industry and like it was changing the way that people thought about constructing songs. And now it's got the power to take a song from, you know, unheard of to the biggest hit ever. That's how Lil Nas X has played this perfectly over time with Old Town Road and some other songs that have just like completely blown up as a result of TikTok. So it's not that surprising that bite dance would just like. close the loop here a lot more obviously and create a streaming service. See now I feel the fish is jumping

on the hook now here comes. You know here's the thing this fish is about to jump in the boat. Okay literally last week they were telling TikTok US employees the traders uh in America who work for this propaganda arm of the CCP spying on all of us and using their algorithm to influence us so obvious to me um it should be to all of you music they've lived. They've lived. literally told the employees, please downplay our China Association. So they're literally the traders, the American traders working and taking the quick money from the Chinese Communist Party are in cahoots trying to play down the fact that this is a Chinese own spyware app. And now they want to influence music. Well, okay, that sounds all banal and it's an incredible

app. It's unbelievably addictive, yada, yada, yada. Can't argue with the success of the app and how much joy it spreads and how much fun it is. That's the wolf in sheep's clothing. That is the gift here with the army inside the Trojan horse, if you will. Music has long been how counterculture, how we protest from Bob Dylan to public enemy. This protest music is a major part of American culture. So now this sounds, again, super far-fetched, but if a foreign adversary who spies on their own people, tracks them and programs them and runs them over with tanks, torches, rapes, systematically involved in a Holocaust-level encampment of people on religious grounds, the Uyghurs.

If they were to control American culture, what would be a great thing to control? The news, music, and what people watch. Well, they got two out of three. And now BuzzFeed has a story just recently that TikTok owner of BightDance used a news app on millions of phones to push pro-China. messages, X employees are saying. This company has to be thrown out of the United States immediately. And this is not a partisan issue.

And now that we have competitors that are equally viable, Instagram is now TikTok and YouTube shorts are already. Exactly. Like you were just, I'm sorry, but you're now just carrying the Facebook PR water at this point. I could be doing both. I could be doing both. We should kick out TikTok so that everybody keeps on using.

I'm just saying that this drumbeat about TikTok's evil that market. Zuckerberg has been personally pushing for years now to avoid scrutiny of his own behavior reaching this crescendo at this exact moment when Facebook and meta and Instagram are as weak as they've ever been is not a coincidence. Not a coincidence. It's a bummer. I don't want to sit here and carry water for Zuckerberg. I'm not a fan.

As you, anybody who's heard has talked to me for more than seven minutes. Well, no, I'm not a fan of Zuckerberg and I was a third or fourth investor in Uber. We kind of clear that up in the first five minutes of meeting. The problem is, in this case, he happens to be right. He happens to be right that this company needs to be stopped. I think YouTube is going to win this. My understanding is YouTube shorts are already getting, I don't know if it's an equal amount of time, but a significant amount of time.

And I think that's the antidote here. We don't need to let this Chinese Communist Party company in here programming our kids. It needs to be stopped. Any free country should not allow the manipulation of their people by a communist country. That's simple. That's why India kicked them out, and every other country will kick them out very shortly. That's my prediction. But it is a delightful app. I know it's hard for people to think about giving it up. But don't you find that all the people, like, a chef's reactions, you know, my favorite, it's a reason I go to. The only reason I go to TikTok is to check on how we're doing and, you know, see our clips, Molly, and then chef reactions.

And chef reactions is like, I'm getting banned. They're taking my stuff down all the time. So just get chef's reactions on Instagram or whatever. I'm like, okay, I'll just watch them over there. So I think the setup is almost here. The fact that YouTube and Instagram are doing so good at this. And if somebody created a standalone version, I think we'll be ready to kick it out. My prediction is 50-50 by the end of the year, it's gone. 50-50.

I find that hard to believe. I think that's going to kick off a cascade of pointing out of various hypocrisies that are going to be hard for American business to absorb. Give me the top three. Well, if you kick out TikTok, then you have to have a very real conversation about where manufacturing sites are situated. And those manufacturing sites could be owned by Tesla or Apple or name any other company, right? Do we let Shine deliver clothes to the United States when they're influencing our fashion and our fashion choices and ripping off American designers? Do we let all of the Chinese money that has so far kept Hollywood movies afloat?

And by the way, many of which now includes some very not subtle Chinese character who's super sympathetic and or a hero. So we're now going to say like Hollywood, you can't take any of that money. I'm just saying like this is an untenable. Like we either do this as a country or we don't. And so I think what I object to is not. I think it's more subtle than that. Anything that you're saying specifically about TikTok, it's that I think that this particular crusade against TikTok is being driven by. anti-competitive forces, and those anti-competitive forces include social networks that are frankly, like, for purposes of like America and how we behave and see each other and behave with each other are just as dangerous.

Definitely not as dangerous. That's not true, because we're talking about a communist party versus a, you know, local party, you know, like an American that is subject to the policing. No, no, just as dangerous in terms of how we interact with as in terms of the effect on us as Americans. So there's like, there's the question of will China, you know, eclips our economic dominance and become the world power. This is the struggle between the United States and China right now. Then there's the question of what happens to American society when we are algorithmically programmed to keep consuming ads at the expense of our, you know? So I'm saying is Facebook has done just as much damage to the American public more arguably than TikTok. Okay. So are they both using the same techniques and have the same weapon in their hands? The answer is yes. And one has existed here for longer? So has it done more damage? Answer is yes. Then if we look at what's been here? Well, what's been here? A very different approach to how to engage people. Yes. And then you look at it's that they have been totally amoral.

And then you look at the what are the principles allowed to do and what is their track record. If we were to compare the Chinese Communist Party to Zuckerberg. And again, I've been the most critical of Zuckerberg of anybody, I think, in the industry with like few exceptions. But then again, get the money out of Hollywood. Okay, but hold on. But in terms of the track record of the CCP, we'll get to, that's a second, but we'll get to in a minute. So I agree with you that have equal ability here.

But then you look at the track record of the Chinese comments party and what they're doing to the Uyghurs, what they did to Hong Kong, what they did in Tiananmen Square, what they do to people who sell books and VPNs, etc. And if you look at what they're capable of and what they do and the existential risk and then how they're regulated, it is completely different than what Zuckerberg is capable of and how they are regulated. Lena Khan took action against Zuckerberg this week or past last week to stop them from buying like one tiny little VR app. So Zuckerberg is under a massive microscope. People are not buying the stock because of the headwinds of regulation. China is running amok, taking companies out of the app store, annihilating entrepreneurship.

Jack Ma is painting, oil painting. So if you look at what each of those principles are able to do, the Chinese Communist property, Xi Jinping versus Zuckerberg, it is night and day. Now put that aside. Let's talk about your other valid point, which is, okay, where does the line of engagement and disengagement, where does that line now? There's a distinct difference, I think we'd all agree, between wearing a t-shirt from China and having spyware on your phone and access to your photos, access to your location, etc.

whether you're opting it or not. These are two really different things. And then you point out correctly, Molly. The influencing of culture through movies pretty significant. There should be some discussion about that. And then you look at the NBA. Does it influence them? Yes.

And then you look at just one example of what happens. How can you say there should be some discussion about the influence in Hollywood compared to we should ban TikTok? How can you say that there's a difference between those two things? Because of the 100 million. Because it's on 100 million phones. That's the reason. And it's tracking each individual everywhere they go, has access to all of their private information photos, et cetera.

That's the reason. I mean, what happens at the end of, you know, a superhero film or what happened, you know, that 10 million people in the United States see, 20 million people in the United States see is, it pales in comparison to tracking 100 million citizens every day, day in a day out, you would agree. So, and then the NBA, if you look like Darrell Mori said this one thing, he supported Hong Kong, And man, the massive whiplash that occurred is a great indication, Molly, of exactly what the Chinese Communist Party's agenda is. They took the most modest of criticism from Darry, just one GM out of 30 GMs in the NBA, and they banned that team forever.

They banned multiple actors from ever appearing in Chinese films. They're so sensitive to this for a reason. And so here in the United States, you look at the Uyghur controversy from the All-In podcasts, you look at just what we're able to do here in terms of freedom that nobody in China is able ever to do. I mean, you understand that I'm not trying to argue that China is like a good actor in the world, right? Like, I'm not trying to say that everything you're saying is not true.

I just think it's a really nuanced question. Like if we ban TikTok, one, we'll be doing it at the behest of Mark Zuckerberg and I do have a problem with that. So like two things can be true at one. There's other people also who don't want it here. I mean, the country of India banned it. They have nothing to do with America and Zuckerberg, right? So other people are taking similar actions.

They also banned like Facebook's basics program. Like India. Yes, there are sovereign country who, they're smart. They've taken a firm one against all the things that could damage them. I just don't want this conversation to occur in like a jingoistic vacuum and pretend that we're not doing all these other things that we would have to take a really hard look at. Like, there's just no, I just don't find it credible to do the one thing, like, be like, we're banning TikTok, but everything else we're cool with. Which is exactly what we would do and it would be gross. Jingoistic, characterized by extreme patriotism, especially in the form of aggressive or warlike foreign policy.

Just catching everybody up because I don't know what the word chingoistic meant. Okay, everybody, there's your word of the day. Word of the day. From Molly, jingoistic. I'm just literally typing it out. I don't even know how to spell jingoistic. Like, what in the? Holy know.

But it's a nuanced discussion. It's a new on discussion. Many things are true. All at the same time. I don't know how you're, I mean, literally this conversation had. This is why you can tell it's an important conversation. Because you and I keep hitting this roadblock where I detest Zuckerberg's behavior and everything he stands for. And I find myself supporting him in this regard.

And you are completely for civil rights, equity and everything. And you find yourself defending the CCP. That's how important this issue is. I know. I'm not defending the CCP. You are, you are, a little bit. Oh, come on. A little bit, a little bit.

You're creating an equivalency between Zuckerberg and the CCP. Yeah, I'm actually okay with that. That's true. Well, well played. Well played. Satan. Hitler. CCP Zuckerberg.

I'm down. I'm down. Okay. Mussolini. Should we retreat to our safe space then in that case and talk about which comfortable? Trust me, getting life insurance

can give you a ton of peace of mind. It feels great to give all those people around you who depend on you a financial cushion just in case something happens to you. I know we don't like to talk about it. But if you want to get the best coverage at the best price, you need to check out policy genius. It's that simple. Here's how it works.

Policy genius is an insurance marketplace that makes it easy to compare quotes from top companies like AIG and Prudential, you know, all the great names. They help you find the lowest price on life insurance so you don't pay more than you have to. You want to get a great deal. We all do. And you could save 50% or more on your life insurance by comparing quotes at PolicyGenius. Options start at just $17 a month for $500,000 in coverage, huh? Just head to PolicyGenius.com to get personalized quotes in minutes and find the right policy for you and the people you love. And the licensed agent,

that PolicyGenius are working for you. Not the insurance companies. They're there to be thoughtful and thorough through the entire process for you, their customer. They're not going to add extra fees, but they will protect your personal data. And PolicyGenius has thousands of five-star reviews across Google and TrustPilot.

They're just the gold standard. One more time, go to PolicyGenius.com to get your free life insurance quotes and see how much you could save. That's PolicyGenius.com. Let's geek out on some quadrants. All right. journal published an article about how VCs, basically about the trouble that startups are

having, navigating this confusing time where some VCs seem to be pulling back, others seem to be saying let's spend into this downturn. It noted that even for those who experienced the dot-com crash in the 2008 financial crisis, those events don't give kind of accurate guidance for navigating the economic challenges that are happening right now because of all the reasons that everything about like our economy and economic performance are totally complicated and impossible to predict. Yes. And that led to this to, you know, kind of a whole bunch of questions.

One is just like, what do you do? Yes. If you're a startup, some founders are cutting staff and getting to three or four years of runway. Others are doubling hiring. According to this story, at least, BCs are like all over the map and their advice. It's a great story by the Wall Street Journal, actually. Not sure I had seen. Yeah.

I want to give them credit for the story. I listened to it this morning. I got a little audio app where I convert things from... I've got like three of them, actually. I love this, like being able to just send a story to audio, and then when I'm walking around in the morning, I can listen to the story while I'm have my coffee. It's a good story because this is a complex issue.

There are multiple states that exist. There is the boom time, and then there is the bus time. There is the surge and growth market that we experienced over the last five years, and then there's a recession. How a founder should behave is different in each of those, right? The playing field is different. This is like playing football, you know, in Miami, you know, on a 80 or 90 degree day versus playing in Minnesota on a negative 20 degree day with snow and ice and blistering conditions. You know, in one, you can throw a 30, 40 yard pass and the other one you have to run the ball and not fumble, right? These are distinctly different playing. fields. Then on top of that, you have different types of companies. So we were talking early. I said, let's make a four by four matrix here. And we'll pull it up now, just the four by four, not the other one. So if you have a lot of cash in the bank, if you're not watching this, we have a

YouTube channel, YouTube.com slash this weekend. We have a this week in startup's video feed. You can search for on all the platforms that support video. This is, we should say, this is a custom twist creation, by the way. Yes. Thank you. Copyright. This one's start up. Shout out to producer Nick. All right. So Molly. along the x-axis. I think the X is the up and down and then the Y is the one on the bottom. Is that right?

Or did I... Maybe. Right till Susia, kill that again. Anyway, you make it X, Y, four quadrant. Cash in the bank versus profitability. So on the one axis, on the left, going up, you have no cash. You got some cash, and you got a war chest, right?

So, you know, a bootstrap startup, a one that's run out of cash. Hey, one that's just, you know, raised money six months ago, and they got 12 months of cash in front of them. And they got somebody's got a war chest. They were smart enough to raise $100 million. They got four years of runway. They raised it on an extraordinary valuation.

Then you have the state of your concern. Concern is the old-timey fashion, fashionable word for a business. So your concern, your business, your startup, how profitable is it? Is it burning cash? Is it break-even? Or is it profitable? Now, if you look at those four quadrants, the bottom left would be low cash, right? You don't have any cash, and you're not profitable.

This is the disaster. And then in the top right, you have a ton of cash and you're super profitable, right? So, Molly, what's a company? We talk about public market companies that has a lot of cash and is wildly profitable. We talk about public markets here because private markets eventually turn into public markets. The companies go from one to the other. That's why I'm doing J-trading live on the air. What's a company with a lot of cash and a lot of profitability?

Yeah, I mean, this is your Apple Quadron right here. Correct. and Google lives up there, right? Just somebody who throws Microsoft. Amazon now, sometimes, yeah, right? And Amazon was a break-even company, right? At one point, and high growth, right? So, you know, and they had a war chest as well.

But they were break-even war chest. So break-even war chest is what a lot of public companies do. They're like, we'll just break-even and put everything into the product, right? Other times they want to just be profitable and have a lot of cash. Now, there's two other quadrants here. You could have a lot of cash, but not be very profitable, right? So you raise that money, but you're burning. That is what most companies were doing during a growth cycle.

And now they're saying, you know what? We could burn our cash, but maybe we pull it down a little bit, extend the runway, and maybe get a little bit closer to profitability. But we still want to invest in the business. Now you have low cash and highly profitable. That's a weird, that's weird, right? Like, you don't have cash in the bank, but you're profitable. You don't really see that too much in startups, right?

Sometimes companies inadvertently dip into that. I had that happen with Inside, in fact. The sales team did so great. They sold out all the inventory. We didn't have a ton of cash in the business, but we were all of a sudden profitable. And we were investing in the company. So it was kind of nice. I was completely relaxed running the business.

I am today. And so there are these nice moments. But you can also, so any questions about the 4x4 before we pop up the next slide? Nope, nope. Okay, so here we go to the next slide. So you can also break this up into a four by four. And this is where it's a little crazy. This is where I'm mute the group chat this morning.

There was a lot of quadrant talk in the matrices. There's a lot of quadrant here. So thumbs up for your quadrant if you're watching live. And I share this with everybody. Seriously. We got the quadrant master now with Nick. So here we go. Now you can say, well, here's a company that has no, because now we're really looking at,

you have a war chest, you have some. cash, you have low cash, you have no cash. Or you have high burn, medium low burn, you're modestly profitable or wildly profitable, right? So now you got a four by four matrix. Look at this one on the bottom right. You got no cash, but you're wildly profitable. You know this, or you have no cash or modestly profitable. This actually exists in the wild. You ever see a private equity company where they put a bunch of debt on the company? And they pull money out of the business, right? So they buy the business for a billion dollars. Then they cut the staff. They make it, the company was break-even. Then they cut the staff in half, and they run it for cash, is what they call it. So

now it's throwing off a massive profit. Then they load it with debt. So the company was worth a billion. They cut it to half. Now the company's worth $3 billion, because it's profitable, right? It was a break-even company. Now it's profitable. Now it's worth $3 billion. Then they sell $2 billion in debt. Now they got this huge amount of cash. What do they do with it? They buy back shares. They distribute dividends to the shareholders, right? The private equity folks take the cash out of the business. So you have a no cash business that has debt but it's wildly profitable. Very interesting, right? I would imagine that there's a version of this too that has less sort of financialization and is more like just in time. You know, manufacturing maybe or construction

less applicable to us in the startup world. But I would imagine that there's a lot of just in time businesses that fall into this category where they're like doing fine. But if they stopped, selling, then it would be an out-of-cash situation. And then let's go to Warchest High Burn. Amazon did this for a while. Netflix has started doing it, right? They got this crazy Warchest. They started burning it, making a ton of content.

They started burning it, discounting stuff, Uber, DoorDash, Airbnb, right? Warchest Highburn, right? And then you just have to move along these quadrants. But moving this requires lowering your expenses or raising your prices, right, to have a better, a higher margin. And this is where you can really start to turn dials. And in some businesses like Amazon, you can have two or three businesses, as we discussed, when I did my J-Trade on Amazon. You could have the e-commerce business be break-even, right? It's a break-even business or maybe even lose a little money on it while having the AWS business, printing money.

So you're using one business to subsidize the other. You take the, you know, profits from AWS, you put it into, you know, getting to a higher percentage of all e-commerce in the world at some point flipping it over or, you know, you get more markets for Uber or Airbnb. They expand to more markets and then they turn them and flip them to profitability when they don't have competitors, right? When you can do it. So this is why people get confounding advice. One size does not fit all.

Well, and one thing I want to point out that I think is really interesting is that, and again, if you're not looking at this chart, it's a four by four box. and what I am finding fascinating about it is that most of this matrix is investable. And so you could imagine why, like if you look at this legend on the side, right, you've got everything that's blue is effectively a pretty good situation. You want to own those. Yeah. All of the types of green are risky, but fine.

Yeah, this could be opportunities there. It could be opportunities. Right. Even a lot of the yellow shades, right, are risky. but potentially investable. So you could imagine how this would translate into what the Wall Street Journal calls, mixed messages. Because it's sort of like, yes, there are varying levels of risk like there always have been.

Maybe some of the risky areas got a little bit riskier, but they're all still fundamentally investable, maybe just in different ways than they used to be. Now, you get superimpose both sides of the table. You're a founder. You've been working on your company, Molly, for seven years. You haven't sold any shares in secondary. 99% of your net worth is in this $100,000, $250 million business that you own 30% of, right?

You own 30% of the business. It's $60 million. It's $300 million, whatever it is. You're looking at this going, whoa, I need to be careful here. I need to get into like a blue zone here or a green zone. I don't want to be in this red zone. Now, let's say you're a venture capitalist. This is one of your portfolio companies.

Let's say you have in your portfolio, you already have a company that's returned your fund. So your fund is now, or you got two companies in there that became unicorns. So your fund's 2x already. But you know you really need to have a 3x fund, right? And you got like five companies who are in this kind of decision-making time. What do you want to do with those five companies? Well, you want them to go for the gold. You may very much want them to really swing for the fact.

and have you have a four or five X fund because, man, all that profit just goes to your LPs and to yourself because your fund is in the black. Now your fund is underwater. You haven't returned the cash that you deployed. And it's your first time fund. You're just trying to get to 3x, 2x, so you can still be a venture capitalist. Right. So this is where a board can get ripped apart.

This is where a company can get ripped apart. And from the outside, the press or commentators of which they're, there are many, and people giving advice of which there are many will get very confounded. Because they're like, why are you doing this? Why would you take this kind of risk? And we saw the company fast and bolt, right? So everybody's like, what did the fast board do? Like, what were they thinking, you know?

And they might have been thinking like, okay, well, swing for the fences here. If it happens, it happens. And if it doesn't, okay, I get another zero. I know how much I've lost. I put 10 million and I lose 10 million. But if I don't want to play this game and be on this board for another five years, Molly, to get back my 10 million, if I'm going to put my effort into this, let's swing for the fences. Yeah. Let's turn that 10 into 200 million.

And if it's not going to be that, I'd rather know now and get off this board. Yeah. Just operating in a different risk environment, basically. You have a different risk environment. Rich people might make crazy bets that, you know, somebody who this is their entire life might not take. So there you go. That's the matrix, Molly. Any questions on the matrix? No, but speaking of uncertainty that is sending all kinds of mixed messages and is impossible to understand. Next up, we're going to talk about housing.

Yes, we have our roundtable. A lot of you have been confounded by what's going on in housing. As we have this economic downturn, inflation's going way up. Home prices were already absurd. Then we see rents going up, which was weird to me. Why are rents going up? and then housing prices didn't collapse. They're staying the same, but then the number of mortgages is going down, the amount of inventory is spiking, homes are staying on the market.

We can't figure this out. It's just a little confounding because each of these markets, whether it's stocks, crypto, public, private companies, they each take a lot of dexterity, as you know from your time at the New York Times and marketplace.

Each one of them is unique. And this is a unique, I mean, as much as we want to draw on historical parallels, there are things about this moment that are also unique and hard to understand. So we went and got the best experts we could find, basically. Redfin CEO, Glenn Kelman and Divi Home CEO, Adina Hefetz,

joined us to break down everything that's going on in the housing markets and to try to figure out as much as we can. And they were like, is this too geeky? Is this too in the weeds? Are we getting into too much detail? And I was like, that's the point. We're dumb. We can't figure this out.

That's why you're here. 16 boxes in the matrix. Let's go. Well, yeah, I can do the matrix for this. I can't do the matrix for real estate. So enjoy this conversation. It was absolutely fabulous. And we're going to do more of these, like, really expert roundtables.

I'd like to get one of these going crypto, actually. Get, you know, Brian Armstrong and, you know, whoever on the program. Packed the car maker, yeah. Yeah, whoever, the founder of Salana. And, like, have a really detailed discussion about are these equities or not, you know? So more roundtables coming. Enjoy. Listen, if you're a remote startup, you need to sign up for Notion.

Point blank, that's it. You need this tool. It is a central. hub and I run both of my companies off of it, inside.com and launch and the syndicate. We have just absolutely saved hundreds of thousands of dollars on other SaaS products and building custom software. In fact, I was like, you know what we need to do? We need to build a database and have like a CRM. And so I had my teams go research all the different SaaS products I could use for this. And then they're like, you know, we have to build custom

software. And then two people on my team were like, you know, I think we can do this in notion. We're already paying for it. he built me a database of all the companies I had met with. And then we put hooks into it for all the people applying to come to our accelerator. Boom. Within six weeks, I kid you not, my internal team, which has no developers on it, built our own CRM. Now, this is on top of us taking notes for the podcasts or me doing my to-do list and my punch list. It's just amazing what the flexibility of a wiki style piece of software combined with a database combined with some hooks. it and just a whole community creating templates every day. It has changed how we do business and it

will change your business. And I want you to just go to notion.s.o right now and use the promo code twist and they'll give you $250 off their annual team plan, which is going to be a couple of months if you're a growing startup. It's notion.s.o and use the promo code twist during checkout for $250 off. All right, everybody, welcome to another episode of this week and startups. Molly and I were talking and we had a lot of questions about the housing market, because let's just, you know, call it what it is. We had the crypto market implode, the stock market implode. We're in a recession, depending on your definition.

Let's just go with the standard definition. Why not? But housing always trails and is a very weird market, isn't it, Molly? It's very hard to get a handle on what's going on in the housing market. Yeah, I mean, housing has been, you know, effectively, totally unaffordable across almost the entire country for a number of years. which contributes to economic hardship in a lot of different ways. But in a time of historically low interest rates,

all of a sudden houses that were unaffordable become a little bit more affordable. And so as interest rates are rising, you know, I mean, I think they've doubled. I bought a house in 2020 just like everybody else and they have doubled since then. And so that is just slamming the brakes on the housing market, which is already unaffordable. So it's this weird, good and bad situation where if houses become more affordable, that's good. But if the housing market all of a sudden comes to a dead stop, that is generally speaking, historically, been a bad thing for the economy writ large. So it is 100% a huge topic to talk about. It's confounding because you also have these eye buyers who are introduced. Then you

have Airbnb. People are buying homes. Rents are going up. Some cities are losers. Other cities are winning. We can't figure it out. So we figured, hey, who are the smartest people we know in the space. And they've both been on the show before. One of them is my old friend, Glenn Kalman, from Redfin. He's been on the show many times. And then our new friend from Divy Holmes, CEO and co-founder, Adina Heffitz. Heffitz. Yes, I'll get that right. So we thought we'd unpack it with two people who are doing this every day, running very large companies in the housing space. Welcome to the program, Glenn and Adina. Good to be here. Hello. Oh, my God. Fun, roundtable. Also, housing is the only thing I ever want to talk.

about because I live in the Bay Area. So just like setting aside every macroeconomic trend, this is what I do at every party. Adina and Glenn, do you know each other? Have you met before this? Obviously, you're aware of each other's companies, but have you met before this? Glenn has been kind enough to be an informal mentor and advisor to me. So I tell Glenn all of my problems and he gives me founder therapy. So yes, we've gotten to know each other and I'm extremely thankful for all of his guidance. Maybe we just start out where you each just explain what each of your companies does, and then we'll get to the state of the market. You first, Adina.

Okay. So Divi creates homeowners. We're a rent-to-owned company where we let our customers pick out a home. We buy it on their behalf. They then pay us rent, and part of that rent goes towards building equity in the property. They can build up to 10% over the course of three years, go slower, go a little bit faster, take their time. And then ultimately, they can roll that equity onto a mortgage if it will. when they're ready or cash out their equity and walk away with a lump sum of money.

We've been around for about five years, have about 300 employees, and yeah, excited to be here with Glenn. Okay, Glenn, and I've used Redfin. I'm a customer to buy two homes and love the process. We've been friends for a while. Maybe you could tell people a little bit about what Redfin does today. It's a technology-powered real estate broker, as Jason already said, which means we charge a 1% fee to sell a house.

We sell it faster for more money and less risk. We have a lending business. We have an eye buying business. We try to offer the total package. And the idea behind it is that technology can make the process more efficient and get people into homes faster can give you a leg up. So I've been doing it now for 16 years. I can't believe it.

It's been the most fun I've ever had doing anything professionally in my life. Okay. Let's just start with rising interest rates and the impact that's having on the market. obviously people's payments are going to be significantly higher on mortgages. I don't know if mortgages are harder to get, but what has the impact, Glenn, been just in terms of this rising interest rates and mortgages being more expensive on the market? Well, it was slow and then it was fast. So there was a major rate shock on June 10th, and that was probably the breaking point for the housing market where people were worried that maybe it was slowing down, and then it became an absolute

bare market. So rates hadn't gone up that fast since 1987. Then they went up again, the following Monday and Tuesday, turned into a 75 basis point rate increase. And now the Fed has actually stepped back from that, said that there's light at the end of the tunnel. Rates have come back some, but the whole stock market got waxed. People are worried about the overall economy, inflation, gas prices and everything else. And so the housing market is just in a tizzy. You had to pending sales down 20% year on year in July. And now, just going from June to July, sales decelerated 9%. Economist consensus was one. So that's a whopper of a miss. That's month over a month. Yes, a 9% deceleration in sales. Prices are down about 5%. But there's some selection

bias in there that we can talk about. Only the pretty homes are selling and everything else is being pulled off the market. So we're having a real reckoning here, to Molly's point, it's probably good that houses are becoming more affordable. I just wish it would happen a little more slowly. Well, and Adina, what, talk to me about affordability, because I would imagine a solution like Divi exists because of affordability problems. What is your sense of whether, like, the rising interest rates actually cancel out the price drop? Yeah, so rising interest rates actually have a tremendous impact. So everyone who goes to get a mortgage gets underwritten based off of something called a debt to income ratio. And that includes generally your future mortgage payment. And so

if rates are increasing 2x and your payment is increasing 2x and your income hasn't increased, well, that just means you can buy less home. And as we said, or Glenn had just said, homes are really expensive for the last couple of years and have been rising previous to the last couple of months, which means now rates have increased, home prices have increased, and it means that demand is going to fall off a cliff, right? And so we've seen that. We've seen demand for home buying probably drop, I think, around, we're down about 30%, I want to say, year over a year, and that just basically translates into lower intent to buy, and then inventory starts to build up. So we're seeing inventory build up, and so there's been an increase in inventory. Now, it's a bit of a tale of

of two cities where there are a tail of many cities, which is it's hitting different metro regions differently. And so there are some that are a little bit more hard hit, which we can dive into than others. But we're starting to see this kind of ripple out across multiple markets now. Let's pull up this chart of investor bought homes. This is from Redfin. And it's, we had, I think this is the eye buying craze.

Is there investors buying homes in order to monetize them, correct? Glenn? It's everything. So institutional investors have been very active. Ibuyers have been active. I think you also have a greater proportion of homes being sold by builders who act like investors. It normally takes somebody who's lived in a house for 30 years, months to see the writing on the wall and lower her price. But a builder, an institutional investor, an eye buyer is going to mark that property down every single week. So it's made the housing market more volatile. You have price discovery happening very quickly. And that means that the correction is going to be sharper, but maybe it's also going to be faster. I want to tell you about an awesome new community. It's an app. It's called Prometheus,

and I'm addicted to it. It's basically a hyper-focused version of Twitter, but it's focused on markets, venture capital, trading stocks, and it's filled with people who are fund managers and who are capital allocators. It's like my dream come true. And if you love Twist and you're into that stuff, then you've got to go sign up for Prometheus at Prometheusaltz.com right now. And here's a secret sauce. This is a bunch of fund managers and potential LPs on a platform talking to each other about raising capital, deploying capital. I started putting my J-trades on there and I'm getting tremendous feedback from the community. If you're an accredited investor, Prometheus is going to help you find new fund managers to back, like me. And if you're a fund manager, like I am, you're also

going to be able to get access to potential new LPs, limited partners. If you're just a civilian, you're not an LP, you're not running a fund jet, but you're into tech, well, you can just go there and you can learn. And it's really the only platform where you can talk to these verified professional fund managers. It's all signal, it's no noise. Prometheus solves the problems of visibility and access to alternative funds. And it has lower investment minimums. So more investors can get involved. Here's what I want you to do. You go to Prometheus Altz, P-R-O-M-E-T-H-E-U-S-A-L-T-S dot com,

or you just type in Prometheus and you find it in the App Store, but you have to use the promo code T-W-I-S-T-T-T-T-T-T-T-T-T-T-T-T-T-E-L-S-T-T-T-L-E. Well, look at this chart and this sort of massive increase in investor-home purchases. I mean, what has this done to supply? you know, we keep sort of hearing about it, but it seems like that's, that seems pretty straightforward that chart. Yeah, well, it's all about interest rates. So the fact that capital has been so cheap and that rents have been so high has made it easy for investors to monetize a home. Basically, half of America can't qualify for a mortgage. And so the other half is buying a home and renting

it out to that half. And that means that you can get somebody to cash flow a property in the first three months or in the first three weeks of every month. So that's what's been behind all this investor activity. And it's the same whether you're just one person looking for passive income by running three Airbnbs or whether you're BlackRock running a portfolio of thousands of properties. It's just become really popular right now to use cheap capital to buy houses and then command high rents. Yeah. And I would jump in and just say that. So, you know, we've had in for landlords, whether that's invitation homes, American homes for rent, any of the big buyers, single-family rental companies,

they've had record low vacancy rates, right? So they're 98% occupied, some of them even slightly higher than that. And so as a result of that, right, you have a ton of demand. You go out and you start to purchase inventory. Now, they were purchasing up to a certain point, at which point now we are,

interest rates have risen. We're going to expect that home prices are going to decline. So we've seen investors pause home buying overall in certain markets. So like Phoenix, I think most of the single family rental companies have paused buying, Denver, definitely Austin, Boise, some of those areas. And they're waiting. They're waiting for home prices to drop because as home prices drop and homes become less affordable, people need to live somewhere, right?

If you're not buying, then you're going to need to be somewhere. So you're going to start to rent. That increases demand for rentals at a time when home prices are now cheaper, which ultimately means that returns are going to increase, right? Rent is increasing. Home prices are decreasing overall. That's a better return on your yield. And we're starting to see this, but I don't think it's fully trickled through. And I guess I say I don't think it's fully trickled through because rent also is quite a bit delayed and I can go into that if interesting. Well, but let me just summarize quickly because it sounds like what you're saying is that investors

have been buying when interest rates are low. Now they have paused, but as these prices start to drop and some people are like, yay, I can finally buy a house that Black Rock is going to be right around the corner scooping up the whole block. Well, I don't know, scoping up the whole block, but when the ratio between where the home price is and to rent reaches a certain level, so when you make enough rent, right, that it's worth investing in that home price and you don't think fundamentally over the long run, when you hold it, the home price will decline. Yes, they're going to get in there and they're going to start to buy. Now, inventory levels are starting, we track one, inventory levels built up.

over the last couple of months. So as sellers had homes on the market and demand dropped, inventory started to increase. So we look at months of inventory, which is how many homes, how many months it would take to actually clear out all the homes listed for sale. And so we have, that's kind of the general metric in the industry that we track. What we have seen, I'd say in the last week or two, which is really recent data, is signs that sellers are starting to slow actually putting homes up for sale, which is really strange. We're only seeing very small inclings of this. So it's still pretty new. But what we're thinking is that given the rise in home prices, given more people locked in interest rates, there's a lot of sellers right now who are

thinking, let me pause from actually selling, staying that house a little bit longer, not have to pay for a more expensive home until home prices actually go down a bit and ride out my lower mortgage rate. And Glenn, I'm not sure if you've seen that in the data. I totally agree. And I think it's the second factor. It's rate locked inventory. There's so many people who got the deal of the century with the mortgage at two and a half percent who are never going to give that up. So when we meet them to talk about selling their home, they decide to rent it out instead because they see that they can get someone else to pay for their mortgage on that property. So in 2008, nobody wanted to sell either, but they had to. What ripped the bandaid off was foreclosures. Here, there is so much equity in

the market. People have not gotten over their skis. Their credit has been really good. Their debt to income ratio is fantastic. And so people don't have to sell. They won't, which is why I'm not that concerned about inventory. I'm actually worried just that the market is going to be quite stagnant, that there aren't going to be that many sellers and there aren't going to be that many buyers. And when you're in the business of putting those two together, you could be a little, ah, well, this makes sense. I was able to, in November, when we bought our second home, we bought the ski house in Tahoe, we were able to, they were like, do you want a mortgage? And I was like, I'll just buy. and they were like, well, we can get to like 2.4 or whatever.

I was like, okay, that's ridiculous. You know, inflation's happening. Sure, we'll set it up. And now I feel like a genius. And I just happen to get lucky doing that. But you're exactly right because I was like, well, if we move, I would just rent that and put it in Airbnb or give it to one fine stay, whoever wants it to do that. Now, here is something that I found super interesting.

There are a lot of houses falling out of contract. And here's your chart. And you can see during the pandemic, we had this, you know, 17.6% of, homes fell out of contract that month in March of 20, I assume because people, you know, just couldn't go visit the homes. They were on lockdown. But now all of a sudden we see in June 14.9% of homes that were scheduled to sell. These were pending homes, correct, Len? They fell out of contract. So what is happening here? They didn't qualify for their mortgage or something or they backed out? What happened? Well, if you agreed in May to buy a house and then the price is dropped

in June or July, if there's a way out, people are going to find it. So they may wait for that property to go right back on the market and buy again just at a lower price. Adina mentioned Salt Lake City, Boise, Denver, over half the listings there have had a price reduction. And in Boise, I think it's 62%. So the market is just in freefall, especially in the places where there has been this pandemic boom, these tiny little towns blew up. And now all the list. listings are being reassessed. And even the algorithms can't keep up with it. If you look at the estimates on Redfin or Zillow or anywhere else, we're looking three, four months back. But the houses that people are looking at, only comparable sales are three weeks ago, four weeks ago, because so

much has changed so fast. Glenn, can I ask you for this chart, which I'm not sure actually the data on it? How much of it is due to home prices starting to fall in those areas versus how much is actually due to mortgage rates increasing. And now when you go to lock your mortgage, you're now paying way more than you had thought you were going to. I think it's mostly that prices have fallen and people are wondering, what am I doing? In some cases, people have lost their jobs or their down payment got nuked in the stock market.

If rates had fallen, or excuse me, if rates had really spiked, you'd actually want to stay in the loan. If you locked a loan in early June and then rates spike, you'd actually want to stay in that deal. So I think it's more about the underlying asset and maybe the economy. Well, I was going to say is there a universe where lenders are backing out because they locked in, you know, they committed to rates. I am not saying I had this happen with a refi situation. I'm just saying I'm pretty sure that's what happened where I was like, wait a second, now it's been 30 days and I don't think you can get a jumbo loan at the rate you promised me.

And that's why you're all of a sudden like low-balling me on the appraisal kind of thing. That always happens, but there is so much pressure on the line. lending industry. If you look at quick end guaranteed rate loan depot, they're laying off not just hundreds, but thousands or tens of thousands of people. And so they have slashed prices to the floor to keep people employed. They're making almost no margin on the loan. So even though the cost of capital has gone up, their markup has gone down and the whole industry is being compressed. So mostly I see lenders selling their sister and I don't know what to get a loan to close. because they're so desperate for volume.

Yeah. So what I was going to say is it's interesting because demand is declining, but the amount of inventory or what is going to be put on market, right? We're also seeing signs that that's going to slow significantly. And if the government is not forcing a bunch of foreclosures, right, supplies declining, demands declining. And when people think about where home prices are going to go, it's a ratio in between those, right? It's which one is falling faster and what's the relationship between those?

those two. And so to kind of Glenn's point, which I think is really interesting, I don't think we are going to see a mass drop off in home prices similar to what we saw in 07. I don't think anyone really thinks that. I think we are going to enter a period of stagnation. Now, again, similar to the stock market, there's no way this year, we're not going to be down year over a year by the end of 2022, because it would just mean such a correction for the back half. The first half of the year just grew so much in terms of home prices. But it's really a question of 2023. And we're, we're home prices are going to go based off of that relationship between demand decreases and supply decreases. This is an interesting chart on inflation and migration, Molly. And you and I have

been talking about this with work from home and what we see in terms of, you know, executives moving all over the country. Redfin flow of user migration on the bottom, there are negative 50,000 all the way to plus 15,000 on the side, consumer price index percentage annual change. Looks like San Francisco, not surprisingly, is losing a lot of people. And then Keith Rabeau, moving from San Francisco to Miami, Florida is the Keith Rabeau effect right there. What are we seeing in this chart, Glenn? And then what can you tell us about work from home? You're just seeing people try to escape high prices on houses, on on everything else, by moving to other places.

And what's interesting about that is actually inflation is now strongest in the southeast because there's so many people there competing. for so few goods. So that buffered the housing market. If normally San Francisco gets too expensive, people look in Oakland. And if Oakland gets too expensive, they look in Walnut Creek or Lafayette. And eventually, they just can't drive an hour and a half every day. And so they get priced out of the market. But now you had people saying, well, if San Francisco doesn't work, I'm going to do Portland. And if Portland doesn't work, I'm going to do Denver. And they get all the way to Arkansas before they stop looking for a home. And so that has kept sales volume fairly high through the first half of the year, even as people got priced out of the major cities because there was always another place to go.

And now, I think we've run out of room that even in places like Nashville, like Boise, like Salt Lake City, homes appreciated so fast that enough was enough. But we are still single on a tale of two cities, I think, where Phoenix, we're, we're We saw inventory is up, I don't know, 150% year over year or some insane amount. And Atlanta is kind of in line with the national average, which is interesting how both areas are reacting a bit differently. Now, a lot of that might be due to also high buyer activity or the prevalence of investors, right, in each of those areas.

But both Atlanta and Phoenix, and I don't know the exact percent of investors as buyers, I imagine slightly higher in Phoenix, but Atlanta's still a pretty active investor market. Yeah, I feel like Phoenix always gets. waxed in a correction. There are so many investors there. There are so many Phoenix and Vegas. Tell us more. Tell us more about that. Why? Because it turns out you don't want to live there. Just kidding. That first chart you showed, it didn't look like a housing market chart. What it looked like was a stock market chart and a really volatile stock market. And the point there is that housing has become more volatile because of the investor

activity in the places where there is the most investor activity, there is also the most volatility. Investors are just going to be much more quick to react to market conditions. They're going to price homes more aggressively when they have to unload inventory. And so it just plays hell with the rest of the housing market where people are just looking for shelter. So that is real. That impact is real. There was a piece in the Atlantic that suggested like, no, it's not investors. It's nimbism, right? It's not building more houses. But it seems like the investor impact. wait a minute. Is really real.

We do need to build more houses. I know it sounds crazy, but rents are high. I am basically in favor of lower housing prices. I know that that works against the whole way we make money, but everyone should have a home in America. And almost every other country in the world is better at building housing for its people than we are. And it's this perfect storm where the liberals are so worried about chopping down a tree or density or putting one building into shade with another building that's taller.

And sometimes more conservative cities just aren't focused on the affordable segment of housing. But that means that there are all these people literally left out in the cold because they can't get a roof over their heads. So we need more housing. That's what you're saying. There's no question about that. We should keep building it. But at the same time, I think investor activity is just another factor making the housing market more. more volatile. And if you want to argue about which factor is more important, I guess we could

spend half an hour on that, but who cares? I think that we want market equilibrium, right? We want a level at which there's the right level of inventory for buyers. And I agree with Glenn that part of the issue has been the lack of affordable housing, right? And so it is build housing, build housing that is affordable. Don't overbuild in certain areas, right, which is going to lead to pricing corrections. But at this point, I don't think we're at risk of overbuilding. I we're more at risk of underbuilding from what we've seen over the past decade, and especially underbuilding in affordable housing. With the average home price, right, I remember founding Divi five years ago, average home price was about $200,000, right? And now, what is it, 350 for a single family home,

maybe is slightly higher in some, obviously, market dependent. And that's fundamentally unaffordable for a family. Even with a 10% down payment, you're going from $30,000, right, to $45,000 when incomes have largely stayed stagnant, or even gone negative when you're, when you're looking at a real wages. Well, we have inflation happening, yeah. And so when you say affordable housing, we're not talking about the projects in Brooklyn when people said affordable housing. We're talking about the affordability of housing for the average American, for all Americans. And even if salaries were going up, they're not going up as much as inflation, certainly not as as much as houses have gone up. Are there markets where people are really getting new housing

starts happening and new inventory coming on the market. And then what is this stagnation? If we're going to have like a frozen market, what does that do to home builders? Because it seems like the builders were also the eye buyers kind of, and they're making this huge profit on that. Are they now going to have the inability to make more homes because they can't afford to get loans? What's going to happen in terms of new inventory, which I think I keep reading the number seven million. I don't if that number's accurate or how they come up with seven million more homes are needed. But where are we at in terms of starting more homes? New construction, obviously, the home builders currently are putting a major pause.

And the reason why is they were going to build a ton of homes. Home prices are now, they're nervous slightly going to be correcting. And so they're pausing some of it. But that doesn't mean that homes take years to build, right? They don't get built overnight. And then the lack of supply, right, the lack of labor has all led to homes being delayed from actually entering the market. So a lot of what we look at is not homes that are completed from new home builders, but homes that are going to be completed and when are they going to be completed and how much inventory

is going to start to increase there. And so home builders seeing this trend, seeing where mortgages are going, are saying, hey, we have enough inventory that's coming online. Let's actually pull back from a lot of new construction. And so I actually think that we're seeing new home builders start to pause the level of growth that they had. Now, I think home builders can take quite a bit of a hit on where they're currently pricing housing. Housing prices have risen so much over the past couple of years that you saw their margins, their spread on how much they were making increased pretty significantly, which means that even they can start to to take some haircuts in terms of pricing and still make a pretty healthy profit margin. What were they making? What were these builders making in

Miami or in Austin or wherever, California? It varies, but you're looking at they were in the high 20%, so like 27 to 30%, all improv of margins versus actually being at historical levels closer to like high teens, low 20s. So they saw a pretty nice increase there, which means that ultimately they can continue to take a little bit of a hit on pricing and still put more inventory out there. Now, we're seeing that slow. We're seeing a lot of cancellations and a lot of has to do with like cancellation lists coming in and people getting nervous about where the economy is happening trending. And again, that goes back to Glenn's point, which is the bigger fear is stagnation. a lack of transactions, a lack of access to capital to have transactions, more than it is,

I think, a real worry about home prices dropping off a cliff. I was just going to say that the red states are doing better than the blue states at building houses. I think it's obviously part of the progressive agenda to make housing affordable, but market-driven solutions so far have worked much better. I think we talked on the last show about Minneapolis versus Atlanta. Minneapolis has really tried to zone its way into dense housing. And a place like Atlanta or Nashville has just said, build, baby build. And that has led to more affordable housing.

So I know we want communities where people can walk. We're not everyone's drive at half an hour just to get groceries. So I am an urbanist. I want density. But I think letting people build wherever they want has made housing more affordable. As painful as it is for me to concede that, the market-driven solution is working much better. Who? Let's kind of keep going on this geography trend because, you know, as we alluded to,

it sounds like there are markets where it's just sort of investment making everything weird, but there are markets that really did benefit from this like migration, the work from home migration. Who, in your mind, what are the cities that are going to be like winners and losers in a, for example, a stagnation situation or maybe even an overbuilding? Be specific about the southeast. like just Florida? Is it Arkansas? Like what do you mean? It's Florida. It's Georgia. It's Carolinas. It's even Arkansas. And definitely Texas. I used to feel that the future happened first in California. That's why I lived there for most of my professional life. And now it is definitely Texas. You go to that state and people got the swagger. Almost everyone is from somewhere

else in exactly the way that California used to have that immigrant energy. People came there to build a technology company to make a new future that is happening in Texas. And so it may change the politics of those states. They may become more mixed. Yeah, purple. But definitely it's the sunbelt. Yeah, we're saying within the sunbelt, bidding environment is still quite competitive.

Homes are still staying on market on average less than a week in like Atlanta before they're actually getting sold. So what we're seeing to Glenn's point is that the markets we operate in the some belt region are definitely holding up a lot, a lot better than they are in other parts of the U.S. What about all those places that people went during the pandemic like Boise or my family's in Montana and they were like, people are buying houses sight unseen and I can't wait to see what happens to them when they get their first winter.

I wonder like, is that going to, is that going to hold up? I think Boise is the market that's turned the most, the fastest. Interesting. Austin, Texas is another one that even though the future's in tech, is if you look at just one month, prices drop there so much. Compounded across the year, it would be a 43% price drop. And so suddenly small cities where inventory is very low, you just print really big numbers off a very small base because it's just a very constrained market.

So it's going to be a little bit more up and down. In general, the West is softer than the East and especially to Southeast. And for whatever reason, whenever there's a real estate correction, excepting Detroit, the Midwest, just very solid, just like the people there. Very solid. Well, I mean, it's very interesting. I was the one destination we are still considering is moving to Austin. We got a lot of friends who move there, a lot of opportunity.

It's nice and central in the country. I looked also at Miami. And when I was looking, there are no reporting states. So you don't even know what homes were selling for. And I'm trying to study it like I was, you know, I'd be on Redfin. I got all my searches. I got all my filters. I can't figure out what's going on there.

And then I'm getting worked. And they're like, yeah, this place is going for $2,000 a square foot. This is $2,500 square foot. I was like, wait a second. I live in the most expensive place in the world, the Bay Area. They're like, no, not anymore. We're more expensive than Atherton. I was like, that makes no sense to me.

You have so much land here. And they're like, yeah, these hills over here are worth $2,000 a square foot. I'm like, well, what's the hill next to it worth? They're like, $600 a square foot. I'm like, wait a second. This makes no sense to me. And you look at the prices. And now all those people who were working me are now sending me.

are now sending me inbound. And it's the same homes from six months ago that they wanted $15 million for that now are at 12. Jason, having you know, shame. It's like Sillel dearest

telling much people on YouTube that you're buying a $15 million house. I was going to say, Jason, this is a... And now we're on to the $15 million Austin Hills house. I'm not saying I was going to buy it.

Those are the ones they were offering me. But, you know, I'm looking for... But they don't offer it to you unless you're interested in it. All right, fair enough. Fair enough. But I, you know, I was like, This is a, this is in a river. This is a muddy creek.

And they're like, yeah, it's waterfront. I'm like, on a muddy creek. You can't get $3,000 a square foot for this. Are you crazy? It's just like startup valuations. It got a little crazy, but it's definitely correcting there. And they have so much land. The amount of land they have there is nuts.

I was looking at Bastrop. I knew some people going over there. Like, you drive 30 minutes outside of Austin, downtown Austin, and things are super cheap. and there are so many large acreage places. And my friends who have bought there are like, yeah, you go. And they're like, we ask them what we can build. And they're like, yeah, can I build this?

Or like, well, it's your land. I don't see why not. And they're like, well, I would like to build like, you know, a place for people to rent for Airbnb on this side and then my home. And then I want to put a, you know, an event space over here. Yeah. Yeah. No, no, but I know people who are buying 10 acres. He's being it.

He's trying to get the office. audience here. There are people who are going there and they're shocked that in California, you're like, I want to change my fence and they're like, okay, well, that's going to be two years. And then they go there and you're like, yeah, you can build whatever you want. You want a ranch. You want horses. You want an Airbnb. You want to put a restaurant, barbecue pit. Whatever. You can blow a fireworks. Do it. It's just 100 degrees for 100 days there. Are you tough enough to take that? Well, no. I would go to the, you go to Tahoe for those days, obviously.

He'll go to his third house. for that, yeah. For that. Two is enough. Trust me. It's way too much. You've been talking for a long time about getting out of California. What are you going to bite the bullet?

I want to do it. I want to do it. I wanted to wait until after the pandemic was over. Now that the pandemic's over, trigger warning for the 5% of people who refuse to have it end. It's over. It's an endemic. Sorry.

But, you know, that's what I wanted to see. And that's kind of like this is the summer, because last summer was going to be the end. That was the head fake. And this is actually the summer. So I'm very interested in seeing. who stays in Miami. I know Keith is staying in Miami until he dies.

I'm wondering my friends who went to Austin, a number of them, are coming back to L.A. or California or other places. So I do think there's going to be some boomerangs, but I think the tax situation and the affordability situation, even for somebody of my means, is a problem.

You know, I look at it and I'm like, it's very hard to live in an area like the Bay Area. It's way too expensive. It's just annoying how expensive it is. And I would like, to be a place that's got a better attitude. That's the other thing for me is I want a place that's more hopeful. The Bay Area does not feel hopeful and, you know, interesting to me.

Like you were saying, Glenn, that you go there and has swagger. Like, the Bay Area is like anxious and hand-wringing all the time. It's not a cool vibe anymore. I'm just trying to picture the first Greek cowboy on his horse. I'm going to, kidding me? I can make it work anywhere. Anywhere I go, I can make it work. It's not a problem.

I lived in New York, L.A. and the Bay Area. I can make it work anywhere. What about rents? This is a key thing, Edina, that people are talking about. I thought rents would come down. Okay, the market's coming down. And now, everybody's telling me rents are going up. I don't understand.

Explain to me why rent is going up. Well, when people can't get a mortgage and they need some place to live, they head towards rentals. And there's not very much supply. And there's not a ton of supply of rentals and vacancies are at all-time lows, so you can start to raise pricing.

What's actually interesting is, so institutions on less than like 2% of the overall rental market, most of it is mom and pop. What we're seeing is that rental renewals on average across the U.S. are roughly increasing, but I call it 10%. So 10% increase for renewal rents. And then there's new leases, right? So that's when someone actually leaves a house. You bring in a completely new tenant.

That we're actually seeing, and it varies anywhere from 15 to 20% increase in what you were able to charge versus what you're able to charge versus what you're previously charging. Now, again, home prices have also increased 20%. You know, the landlord's cost of capital rates are also, right, increasing. And so you need to also charge more and get more from the market because you need to be able to cover these higher costs now. Right. So the cost for landlords have increased at least in the last couple months pretty significantly. As a result, they have more demand. They have lower vacancy. And they can actually increase rents and charge more. I think this is actually going to persist for a while.

And I think that what you're going to see is the average rent step up is now being blended between renewals and new leases. And I actually think you're going to see an even larger step up as more people turn over and there are new tenants that come into homes. Give us a sense of that a bunch of new inventories coming online, Adina, pressure is going to ease on rent. But what new, sorry, when you're saying a bunch of new inventory for renters, I mean, maybe it's the case, but then those two things don't go with what you said before, right?

if people, right, if demand isn't going to increase, right, you need to move from one house to the other, even if you're going to rent out your former home, right, which would then drive up slightly demand on one side, right? Something will give on one side or the other, but you're not going to move and not have a house, right? I just think it's more multifamily that the big apartment buildings are going up at a higher rate. Well, they were coming up from, yeah, well, they were coming from a lower base. I mean, they're coming up from a very low point. That's the rates. Rates are going up, not buildings? Like, rents are going up in multifamily.

I'm in a slightly different place than Edina on rent, where, yes, it's really gone up since February of this year. More people are searching Google for rentals than for sale properties. But even though demand is up, I think the supply is coming in the second half of the year. If you talk to most of the big property management companies, they have more condos coming on the market. they're just anticipating slightly higher vacancy rates, and that's going to limit their ability to raise rents.

Well, I would say, though, the folks who are moving, though, I would say, though, there are many people who probably, and you may make this argument, but are going to be going from a single family home back to a condo or a multifamily property. I actually think that that trend is maybe not going to be as prevalent. Now, there is a case where, right, multifamily starts to see somewhat of a resurgence. And by the way, rents fell off a cliff.

during COVID for a multifamily. And so they are increasing from a slightly lower, from a much lower base, right? And so there's room to kind of increase there and be a parity. But it's a question of where people want to live in what you believe in terms of lifestyle and choices. Do people want to move from their three bedroom to bathroom, right, 500 square foot bag yard back to a condo? I don't know. Right. I think a lot of it has to do with the fact that for single family, at least, supply is not going to be much higher. I mean, no one's buying right now. All the major people paused, right? So there's going to be a ton of single family, right? And so I think that so long as demand even hold steady and

supply decreases, right, rents will increase naturally. And another fun fact is single family rents, even if you go back almost 50 years, have never on a year-over-year basis with the exception of it, like, being roughly flat. I'm going to call it in 2009, have never decreased, right? And part of is you're locked into long-term contracts, right? You're in a three-year. It's a sticky number. It's a sticky number. And so it's hard to actually see mass declines in that. So I don't know. multifamily might be a little bit different. Condo space. I have to see recovers a bit from where at least it was because they got demolished during COVID. What happens to all these expensive condos made in major cities? I saw Austin had all these really tall buildings going up, really unbelievable

rents. San Francisco absurd rents for these luxurious, you know, dormant building, you know, with gyms and other shared spaces. What happens to those? Because if you could afford afford one of those and living in downtown, and Soma or living in downtown Austin, but you no longer have to commute. It's kind of dumb. Like, why would I pay $7,000 for a three-bedroom when I could pay $7,000 for a mortgage

on a million-dollar house with an acre 20 minutes outside of there or I could literally hire a driver to drive me around Austin. Yeah. And by the way. Jason, you've always got the right solution. I love it. I mean, I'm just trying to be the every man here, Glenn. I mean, I look at these things.

and I'm like, I can buy a house there and get a private jet for the money I saved buying a house. Oh, man. We are entering. Jason is not representative of the majority of Americans. Let's just throw it out there. Yeah. No, but you, I mean, it is crazy when you think about how ridiculous, Adina, it is to pay $7,000, $9,000 for a three-bedroom in a downtown area when you don't have to go to your office. Yeah, I'm not as bullish on multifamily.

I'm actually quite nervous. My view is that everyone, that, you know, we looked at a stat recently here because we're starting thinking about whether we go fully remote and divvy, we have a couple of offices and we looked at other companies. And he's like 70% of companies are considering going fully, fully remote. And I agree that that impacts multifamily, the hardest out of everything, which is like, why do you live in a downtown area and have less space? I don't care if it's a dormant building, but have way less space than you could in a single family home. So I may be glad in slightly different, but I don't see multifamily in the long run holding up.

What happens to those places, Glenn's? You know, if people don't want to live in Soma or in Seattle or whatever downtown area it is, what happens to the $7,000 or $5,000 rent? One reason is the commute. I understand that. I just think there might be a second factor, which is just there's this huge millennial generation

that's come of home buying age. So nobody wanted to live out in the burbs. It was just the most uncool place in the world. sort of mocked in all these movies about growing up because it was just hip to be in New York. It was hip to be in L.A. It was hip to be in San Francisco. You could go party with your friends. And now all the people who were doing that in their 20s are having a baby, getting married,

moving out to the burbs. But every time we think the city's down for the count, it comes back. I think it's going to go through a really tough cycle. We don't know what to do with all the commercial space. You can't convert it into residential. You might as well just demolish it. Why can't you convert it? I know.

That's expensive. You really should just take some TNT and do this. Oh, God, come on. Why? I mean, I lived in a commercial law firm. When I was in Manhattan, I lived in the Star at Lehigh building illegally. It's 2,000 square feet. I paid $9 a year for it.

Do you want to go to a bathroom with 10 journals? I know. I literally went to a Home Depot. I hired three guys in the parking lot to bill me an illegal bathroom. I mean, I converted it. It took me a weekend. You're not the every man, dude. That's intensely weird.

Okay. But my point. is why can't you convert it? Is this a lack? We converted the entire Wall Street buildings. I think what Glenn is saying is you can convert it, but the cost of converting it is not worth the rental stream that you're going to get for having your tin bathroom and it might as well just knock it down and rebuild as a residential. So the ROI isn't isn't particularly strong, I think is what Glenn is saying to actually make that conversion versus just starting over rebuilding. I'm going to make, I'm about to propose a whole.

Except for you. Go ahead, Molly. proposing. Well, I mean, there should be like a, frankly, there should be a climate-related subsidy for doing that instead of knocking it down and building it again. And that would be great. I just sort of want to ask generally, like, it seems like all of the trends that we're talking about are corrections in progress, right? The cure for high prices is high prices. Rental prices will get so high that if housing prices come down, people will buy houses instead. Houses in the suburbs will become so expensive that all of a sudden we may, like, I'm listening to you guys and I'm like about to go. buy an investment condo, which I'm not going to because I'm not Jason, but maybe Jason wants to buy one because it feels like you're describing cycles that are going to come right back around again. Somebody's going to be like, the suburbs are so expensive. And you know what's kind of fun living right by my friends and not taking care of my yard? Housing does tend to boomerang quite a bit. So, yeah, I mean, I have no doubt that things are going to come in cycles.

I would say right now my view is similar to Glens. We are going to be in a period of stagnation in terms of number of transactions. I don't see housing, single family housing prices, I don't see is declining tremendously. So I think those will stay roughly stable. Rents will continue to increase. And if you want to get an investment property and you don't have to pay a 6% your fixed rate mortgage, which I think they're down to 5.3% now. Then maybe it's interesting for you.

Yeah, it's my message to young people. Go find a retail space, rent it and make it into your, like, the front is like your architecture office and then just live in the back. That's what we were all doing in New York. And do it in Texas where you don't need any permitting. That's not just do it illegally. This is J-Cal's best advice. It's just do it illegally.

No, people get creative with the use of space. When I lived in New York in the 90s, in Tribeca, people would buy the, nobody, there were no storefronts down town. Below Canal Street, no storefronts. Therefore, people started taking the storefronts and they would put like, this is, I know a guy who was an architect. He's like, what's my architecture office? And then he'd have us over for dinner.

It was literally the first 300 square feet was like three. desks and then behind it was his 2,000 square per apartment when he lived in the back of the storefront. It's a lack of creativity. I think when you look at what happened to Manhattan, we took all the factory buildings, the garment buildings, we turned them into super dope lofts, and then we turned all of the financial district into what was at the time in Manhattan. The financial district was super cheap. That was like the cheap rent because nobody wanted to live down there because there were

no restaurants and now it's turned into like a hip area. We have to convert those areas. is like Manhattan. If you go to downtown Seattle, even downtown San Francisco, it's a ghost town. Ghost town, San Francisco. It's bonkers. It's a financial district that's just been completely eviscerated. So no commuters. Yeah, but lower Manhattan in, I don't want to date you, I assume it was the 90s. It was the 90s, yes. I was in my 20s. Lower Manhattan in the 90s still is this bustling center of commercial activity. During the day, and then it turned to a ghost down. Did you just see Amazon has like six towers they paused on and they said, we'll build the outside, but we don't know what

we're going to do with the inside. Because we don't know if it's going to be hybrid or not. And should we be building, should these corporations, Glenn, be building housing? Like, because I know that some people started to dabble. Like Facebook was like, we're going to build some units. I don't know that they should be building anything. I mean, maybe the height of pre-pendemic madness was the idea that Facebook was going to build housing for its employees, Instead of letting them work wherever they wanted to work, it was going to force them to come to Silicon Valley, and then it was going to build housing. They already had the sushi chef and the dry cleaner and the massage therapist on site, but now they were going to take care of them 24-7. And instead, companies are discovering that if we let people work everywhere, it's cheaper.

I found that the companies that were most reluctant to go all remote were the ones who had gone all in on some big office. Amazon owns a ton of building. Actually, our commercial broker, they got us into our building is also Amazon's commercial brokers. So I always get the skinny from him. And basically, they tried to get everybody to come back. They're tough as nails. And they couldn't do it. There was a revolt.

And the reason they had to try is because they own so much of Seattle. Adina, any thoughts on this, as we get ready to wrap, on commercial real estate and what happens there? I mean, you guys are struggling and you're nervous about your business. just in terms of like, hey, the velocity of deals and are we building enough homes? What is going on with your commercial real estate contemporaries? Are they just at this point, curled up under a desk, shaking and saying,

make it stop? Like, it seems to me that their lives are over because they spent so much money buying these buildings, Adina, that there's no hope of ever renting them for what their capital cost is, is there? So, Jason, first of all, correction, Divi makes money off of rent and not transaction. So I'm riding a good wave over here.

But in terms of my colleagues on the commercial side, I think it is a pretty scary place to be. I think that you saw rents decline, vacancies increased during the last three years when you had the exact opposite impact on single family. And I don't see that changing. I think companies are going to stay fully remote. And I think folks who think that they're going to get people to come in on a regular basis are kidding themselves. And look, there'll always be some companies that may be hardware companies or folks who actually have to be there in person. but otherwise I see that as being a fading trend. So I am not bullish and long on commercial real estate,

especially in some of the downtown areas. Now, to Glenn's point, New York will always be New York. Downtown San Francisco, I think, is going to be a net loser out of all of this. And I think we've already seen that. And I think that we are going to see, and we have seen it, net migration towards the sunbelt. And maybe some of those downtown areas are more interesting, right? Maybe the time Molly is not to buy condo in downtown SF,

but to buy a condo in downtown Atlanta. I could do that. Atlanta seems great. Yeah. You guys think Starlink is going to have a big impact here? I've heard from many people who were like, I want to live this far out. Like, we're talking about seriously far out, you know, somewhere in Reno or whatever. And they're like, I got Starlink, it works.

And so like I literally know people who went, I was talking about Bastrop, which is the town, way east or, you know, Bashrop, I think is, yeah, there's like two or three of these that are like, let's call it 40 minutes from downtown Austin. and they're like, yeah, no, I got Starlink. It works. And it's like, really? Yeah, like, is that going to change this? The fact that you can have high-speed internet anywhere? What's the wait list time on Starlink right now?

You're on Starlink now? That's not. That's not a wait list. No, no, no, I'm not. But it takes... Not that bad. All right, well, better maybe... Well, and there's two competitors coming.

Amazon has one and then it's a third one. So there's going to be three offerings. So in two years, you're going to be able to get broadband. I mean, literally, anywhere. You could be super off the grid. I think it's going to be a change that people didn't anticipate. This has been amazing. If you need to

rent to buy, go check out Divi Homes. Then go rent to buy. And you can make that transition. If you need to sell your house, why pay all this money? Go to Redfin and just do 1%. Keep it tight. Keep it right. Great interface.

Log into Redfin. You put in all your searches. You can just draw on the map what you want. How many bedrooms? And it sends updates in real time. And you can sort and you can even export the data from Bradfin into a Google sheet like I do. And then you do your, that's what I do. I look at my price per square foot. But you can't do this in Texas. Why can't Texas be a reporting state? Is that going to change, Glenn? Oh, my goodness. The real estate industry doesn't want it to change. They say it's about privacy, but it's really about limiting.

manipulating people like me. Online data. They're manipulating people like me. It's not as crazy say. Glenn Kalman, Adina Heffitz. You guys are just dialed. Thank you. This has been a great episode. Thank you. Thanks for having us. All right, everybody. Thanks so much for tuning in and thanks to Glenn and Adina for joining us. What a great roundtable. Yeah. If you have suggestions for future roundtables, producers at this week and startups.com, we'd love to hear them. And of course, make sure to follow us at Jason, at Mollywood, at TWA startups on Twitter. Yeah. Yeah, give us a review if you want. Yeah. You know, if you feel like it. You just click the five. Keep it simple. And we'll see you tomorrow for

More news, startups, and interviews. Bye-bye.