The 2008 U.S. housing market crash was a powerful and pervasive force that reshaped many parts of our economy. While the negative impacts, such as foreclosures, loss of workforce, shuttering of banks and market volatility, are held as prime examples, less understood is the impact to the real estate technology space.
The 2008 housing crisis largely influenced the first generation of real estate technology. It stands to reason that our impending housing crisis will create the conditions to change the landscape of real estate as we know it.
Crisis strikes the housing market
Worth $32 trillion, the U.S. housing market is the largest in the world. As an example of scale, the entire U.S. retail market is $3.5 trillion. When a crisis hits the housing industry, it is catastrophic.
Between the mid-1990s and the mid-2000s, the average price of a home climbed 124 percent. At the same time, Federal Reserve interest rates hit an all-time low of 1 percent. These conditions created a situation for investors and consumers to flood the market, continually pushing the price of real estate higher than it should have been.
At the same time, banks did not want to miss out on the market growth, so they began making loans to people who were not qualified, thus creating subprime adjustable rate mortgages.
Many different factors led to a crisis in the U.S. housing market; the short version is that the federal government tried to correct the market by hiking the interest rate 17 times from 2004-2006. By this time there was a lot of risky lending, and borrowing became expensive.
The overcorrection first hit those with variable interest rates, causing them to tumble out of the market, followed by a tsunami of defaults and foreclosures.
One of the first and most visible signs of a housing market crisis is a shrinking market. In the first five years following the crash of 2008 the industry was shaken by a drastic drop from 1.6 trillion transactions to .7 trillion per year.
Not only did transactions and investments in the market plummet, but housing values went down and large banks and investment companies closed. Additionally, there was a dramatic change in the workforce with the loss of one-third of real estate agents from the market.
The housing market is fluid and changes in response to several factors. As we saw in the 2008 housing crisis, one of the primary drivers of housing prices were artificially set federal interest rates. When interest rates are low — as they have been for the last eight years — purchasing a home is more affordable. This leads to increased demand. If the supply of homes in the market remains consistent, the increased demand will lead to higher prices.
In an alarming repeat of history, prices for homes have now peaked over 2006 prices, outpacing inflation by three times as much. It is likely a trend we will continue to see given a trifecta of slow income growth, rising construction costs and reduced construction of single-family homes.
Opportunity for innovation
Crisis creates a space for innovation. After the market crashed in 2008, there was a squaring of the shoulders that took place in real estate companies across the spectrum. We saw this in the online marketplace with Auction.com and Zillow.
In 2011, REDC, one of the largest auction houses in the nation, was rebranded to Auction.com to meet growing digital needs. Capitalizing on the needs in the market, the company expanded its residential and commercial distressed property auction business.
Distressed property along with traditional real estate transactions provided explosive growth, allowing Auction.com to capture 1 percent of all transactions. The subsequent push into digital by leveraging market intelligence offers broad reach into all 50 states.
Zillow and Re/Max
Zillow, launched in 2006, was born out of the idea that there was a great need for tools to empower consumers. In this way, Zillow’s database of U.S. homes (now over 110 million), including properties not currently on the market, helps demystify the process for potential buyers.
In the years following the crash, the site also became a popular source of information for real estate agents. Those that remained in the workforce had to find a new way to generate leads. They could no longer rely on word-of-mouth referrals from friends and relatives because people were not buying homes like they were before the crash.
The online capabilities provide access to hyper-local markets, allowing real estate agents to specialize in specific niches, trends and neighborhoods. The now $7 billion company achieved this reach by expanding from its roots as a real estate advertising network to include a series of features that captured prices of properties off the market, a system of aerial images and rental listings.
With the housing crisis, we saw the offline world update itself too. For instance, 2006 marked several changes at the Re/Max corporate level with the listing of all U.S. homes for sale (including competitors), and the addition of the Re/Max University and training library.
Leveraging resources at the corporate level provides agents with access to industry training, brand recognition and a way for agents to purchase a franchise rather than work off a singular transaction model. This business model has made it possible for Re/Max to expand in over 100 countries.
Success and failure after the dot-com crash
Crisis paving the way for innovation is not a new story. In fact, we have seen it before with the dot-com crash of early 2000. The prevailing narrative of that time centers on horror stories about companies that rapidly raised tons of cash and investments to get to initial public offering (IPO) and failed, thus disappearing from the face of the earth.
The companies that held up as examples of this crash are Pets.com, Disney’s Go.com and grocery delivery service Webvan.com.
However, if we step back and look at a few companies that were in early stage before the dot-com crash, we see a different story. Giants such as Google, eBay, Amazon and Netflix, were all founded in the mid to late nineties during the full swing of the dot-com era.
Although they all differ in industry, they have a couple things in common. All of them had a sound financial and management base and planned to grow. And where they are today is not where they started.
Giants Netflix and Amazon
Netflix, for instance, took an inventory warehouse model like Blockbuster and made it more convenient for the consumer. Instead of requiring the customer to visit a storefront to select and return movies, customers can now order movies from the comfort of their home and keep them as long as they want.
Netflix continues to evolve with on-demand streaming of television programming and Netflix originals, turning it into the content gateway it is today.
In 1994, Amazon was established as an online book retailer. Many analysts and journalists predicted Amazon would fail in a saturated marketplace, however, founder Jeff Bezos had different plans. He understood the potential for internet growth and began to expand in other areas, including merchandise, consumer electronics and other goods.
To underwrite his belief that Amazon was a technology company rather than a retailer, he launched a platform of web services, cloud computing and data storage. Even as Amazon continues to branch out in different areas, online retail drives the bulk of the company’s revenue.
The dot-com crash created room for companies like Netflix and Amazon to utilize their sound management and finances to grow, change and innovate in the technology space that was free from competitors. That same thing will ring true for the real estate market.
What does the future hold?
Eight years ago, when the housing crisis was in full swing, the Feds dropped the interest rate to effectively 0 percent. Although it has slowly risen, it remains lower than it was when the bubble burst in 2007.
The low interest rate in combination with tighter city planning and zoning laws has caused demand to outpace supply, squeezing out affordable housing options. Add this to the stagnation in salaries, and we see people getting further displaced in the market.
If things continue in the same manner, we will have a new housing crisis on our hands. When we do, we are going to see the number of transactions and investments fall, we will see home values dip, real estate agents will drop out of the workforce and investment in technology is going to decline.
However, the next housing crisis is where you are going to see a profound and transformative change in the market. A crisis in motion provides us with fresh perspectives. A few trends will arise.
There is a fine line between chasing opportunity and lacking focus. Successful early-stage companies can find gaps in a market by leveraging technology to provide convenience to the consumer. Working through a SWOT (strengths, weaknesses, opportunities and threats) analysis by leading with opportunity can give a company an edge to facilitate innovation in the marketplace.
What will happen to real estate agents?
We know the tech bubble and the 2008 housing bubble gave rise to companies (like Netflix and Zillow) that created systems to make the consumer’s life easier — we will see another push for this in our next housing crisis when there is a seismic shift in how people look for places to live.
Real estate agents will have fallen out of the market, forcing consumers to look to tech-powered companies. Consumers will demand transparency in transactions and technology will allow companies to rise to the occasion.
One area in the U.S. housing market that represents significant growth is the tech space. Tech-powered solutions are approaching every aspect of the market from commercial to residential to property management, yet they currently only occupy 0.04 percent of the market. However, the trend is on the upswing with billions of dollars being invested in real estate technology each year.
While companies that existed before the crash such as Auction.com and Zillow did well, today’s market is significantly more solid. If you look at how investments have accelerated from 284 million in 2007 compared to 1.25 billion today, it is clear that today’s companies are better poised to take advantage of the next crisis.
It is going to be rough and bumpy, but exciting for whoever is coming into the real estate tech space. The housing industry will again be reshaped — we will see some companies die out and we will see companies trying to reinvent themselves.
Companies that are already well-funded and well-structured stand to become the juggernauts of tomorrow and create a barrier to entry for those that fell out of the market.
The housing industry is ready for disruption that will bring transparency and efficiency to transactions in all corners of the market. Investors, it is a time to be bold. It is time to be part of the fantastic story among the startups and early-stage technology companies that are going to change the entire real estate market as we know it.