Disruptions to Home Sales: Tech & Debt

Research tools and Millennial’s student debt is changing the housing market’s norm

By Rick Palacios Jr.

Technology has permanently taken two months off the time required to sell a home. New real estate technologies empower: A new group of highly informed, quick-close, all-cash buyers; very informed homeowners who are increasingly choosing to rent the house rather than sell it, or to sell the home themselves to an all-cash buyer. Traditional first-time and move-up home buyers have a competitive disadvantage in this new market. Zillow, Trulia, Realtor.com, Redfin, and others now provide home buyers and sellers with a treasure trove of free real-time research tools. They have transformed a historically opaque industry into one that is now almost completely transparent. Armed with better, faster information as well as smart phones, buyers and sellers quickly make informed decisions on homes— sometimes from the comfort of their couch and sometimes from their cell phone standing in front of a home that was listed for sale just hours earlier.

These new technologies have created multiple disruptions in the resale market:

Less time to sell. 4 months of supply is now the new normal, compared to 6 months of supply only 10 years ago. Homes can be bought and sold much more quickly than in the old days when it took 30 days to run a newspaper ad and hold the first open house— and another 45 days to get the mortgage approved.

Professional landlords. Using proprietary pricing algorithms and local experts, newly formed professional landlords like American Homes 4 Rent, Invitation Homes, Colony Starwood, and Progress Residential can quickly and confidently enter escrow within days or even hours of a listing being posted. Technology also set the stage for companies such as Roofstock to launch an online marketplace for investing in single-family rental homes, reducing much of the acquisition uncertainty for investors while simultaneously driving down costs for sellers.

Lower homeownership. First-time buyers who need the seller to wait for the mortgage approval or a contingent sale are frequently losing out to all-cash buyers, many of whom intend to rent the home rather than occupy it.

More home sharing. Airbnb, HomeAway, and other startups have made it easier for homeowners to rent a room or even the entire house, allowing a retiree in need of cash to own their home longer than they would have otherwise. Roughly 5 million people turn 65 this year, and we expect an increasing number of retirees to utilize home sharing as a supplement to savings. Seniors are the fastest-growing demographic of Airbnb hosts.

Fewer realtor transactions. New companies like Opendoor and OfferPad will now purchase your home for cash in as little as three days, similar to the model CarMax has used to facilitate used car transactions.

Fast and free information has significantly streamlined the home-selling and renting process. Four months of supply is now the new normal.

Debt

A generation of young adults saddled with student debt and who have experienced economic growth at less than half of the rate of their parents will almost certainly be unable to equal the homeownership of prior generations.

In 2014, we wrote a 30-page paper concluding that student debt was costing the US $414,000 transactions per year, or $83 billion per year in home sales. Younger households will buy about 932,000 homes per year instead of the normal 1.35 million. For the first time, we are making the 2014 paper available to non-clients. 5.9 million households headed by someone under the age of 40 pay $250 or more per month in student loans. These payments make saving a down payment extremely difficult and reduce these prospective home buyers’ mortgage qualification by at least $44,000.

With these demographic headwinds, we find it very hard to believe that so many people believe homeownership will rebound.

However, this is not a death knell for housing. The homeownership rate is just a calculation. 15.8 million renter households (of all ages) are expected to become homeowners over the 10-year period, and they would much prefer a new home if they can afford it. Companies like LGI Homes, DR Horton, and Smith Douglas have been building affordable homes on the fringes, and many other builders are building townhomes and detached homes on small lots closer to employment centers. We feature the most innovative, cost-effective, high-density designs each month. While new homes have become an even larger premium per square foot over resale homes, the rise in educated couples who married and had children later also means they are further along in their careers and making more money. Our consulting team is seeing a rise in 30+ year old first-time home buyers, which is a trend we think will continue. We just won’t get back to 65 percent+ homeownership.

Rick Palacios Jr. is Senior Vice President, Director of Research at John Burns Real Estate Consulting. He may be reached at rpalacios@realestateconsulting.com.

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