Common wisdom suggests that home ownership is a good thing or are at least correlates to something positive, which explains the widespread concern about the depressed home ownership rates in the aftermath of the Housing Crisis. What happened to approximately 5 million formerly home-owning households as the rate dove from over 69% to under 65%?
As it turns out, many migrated into the Single Family Rental (“SFR”) market, a $3 to $4 trillion segment that has grown by over a third since home ownership rates reached their apigee, and which together with its near-neighbor of two-to-four unit properties, make up over half of the entire residential rental market.This growth in SFR mapswell to the departed homeowner class, providing evidence of a neutral zone that separates dyed-in-the-wool renters from the confirmed homeowners, filled with consumers who could go either way depending.
Here is a key front in the battle for the future of housing-an opportunity to reboot the notion of home ownership, and a veritable Jurassic Park where proptech insurgents face off against dinosaurs, incumbents in their habitat. Like the movie’s humans, busily engineering spinoffs of the traditional dinosaur in their labs, these insurgents have been hard at work innovating to provide consumers in this neutral zone options for attaining and maintaining their homes.
In the process, they are moving the current binary state of dwelling (i.e., own vs. rent) towards a consumer preference-driven continuum with schemes like pathways to home ownership (e.g., Divvy), fractional equity (e.g., Point, Unison) or evolved sale-leasebacks (e.g., Figure). Common across these schemes have been their customer-first focus, supported by technology that transforms the relationship.
But the movie showed that the humans did not fully anticipate the dinosaurs’ dominance on their home turf. Equally, don’t be lulled by the plodding banks and agencies, for alongside the brontosauri are their more cunning cousins, the velociraptor equivalents who have thrived due to their adaptive skills and are gunning for that very same neutral zone.
These velociraptors, also known as private equity (“PE”) firms, have also been busy restacking residential real estate in the aftermath of the Housing Crisis to create entirely new market categories. Starting with opportunities found in distress, they ended up constituting non-bank mortgage companies that taken a sizable chunk of the business. They have also institutionalized Single Family Rental as an asset class, having, as a group, purchased 300,000+ homes since 2010, over 60,000 in the past two years alone.
Powered by access to capital and a willingness to deploy it at high velocities, the PE firms are focused primarily on the asset and not the customer. They may lack a holistic consumer-driven vision or leading edge tech stacks, but, run by traders, they are adept at seizing the inside of the OODA (“Observe-Orient-Decide-Act”) loop and scaling up.
Just as in Jurassic Park, hiding in the cupboards from these velociraptors is not an option. We already see a blurring of the lines between them and the insurgents with examples including Amherst’s Bungalo, a tech-forward consumer facing brand that markets homes for purchase, and Home Partners of America’s leases with “right to purchase” options.
Viability for our intrepid insurgents will require dramatically scaling up towards the levels of the leading private-equity players, several with portfolios of 25,000+ units. They must achieve some manner of flywheel effect to drive the transaction volumes need to derive data/insights to fine tune their product-market fit. But how? Here are some ideas:
Imitate.PE firms are judged by their operational/financial effectiveness in accomplishing their trades and best have enviable track records on both fronts. Insurgents don’t need to disrupt everything and instead find areas to follow the PE roadmap, enhanced with technology.
Collaborate.Insurgents can find areas where mutual agendas do not come into conflict. One that comes to mind is the use of PE firms to drive better execution as seen in the adjacent iBuyer category where they are a prominent sales channel.
Rescope.Sometimes it takes a T. Rex to get rid of the velociraptors. However scary, remember that the leading PE firms together occupy only about an eighth of the entire market. Partner selectively with those of substantially larger scale can be a power reset button.
Outflank.In optimization parlance, the PE firms are constantly angling for local optimas while the best insurgents are on search for a global optima. This could be an advantage because PE firms do not think in terms of strategic vision, total addressable markets, or lifetime customer values. An advantage provided you survive to see tomorrow.
To the proptech insurgents engaged in rebooting the notion of home ownership, we’re all rooting for you. Are we increasingly a nation of renters or are we a nation of those yearning for differentiated housing executions that provide us a sense of belonging and hope?
After all, in the words of Laura Dern’s Dr. Sattler, “Dinosaurs eat man… Woman inherits the earth.” Victory (eventually) goes to the insurgent humans…
Marvin Chang’s roles at Caliber Home Loans, First Data and Citigroup have provided him a privileged view into both the future of residential real estate and the evolving patterns of consumer behavior around housing and credit. He can also be found commenting on these and other topics at https://www.chinamanschance.net/. All views in this article are his own.