These are Dickensian times in the U.S. housing market. Yes, the best and worst of times. Consider that more than half of Americans’ homes are worth about 8 percent more today than the 2007 peak just before the market crashed, and values are continuing to rise. Home prices rose about 8 percent over the past 12 months, and are expected to rise another 6 percent to 7 percent during the next 12-month stint. What’s more, the residential real estate market also finds itself on a far more solid foundation today, with home values rising because of limited inventory rather than demand created by easy credit.
Yet, the housing market is “kind of a mess,” says Spencer Rascoff, CEO of Zillow. It is short on inventory by about 6 million units because building permits issued for new homes has dropped from 3.9 per thousand U.S. residents before the crash, to 1.9 today. That means homebuilders were churning out more than 1 million houses per year prior to 2008, and have since reduced their output to 200,000 to 300,000 annually during the recovery. It turns out that demand recovered more quickly than supply.
The other problem is a housing market is terribly illiquid — which has always been the case — with transactions taking 60 to 90 days. And the process is stressful, to say the least.
Rascoff says he cannot do anything about the inventory problem, though he and Zillow are looking to solve the illiquidity and stress issues by venturing into mortgage originations and the buying and selling of homes with the assistance of technology.
Thematically, the new initiatives are “are all about the on-demand economy,” he said during an interview with Nick Bilton on Vanity Fair’s Inside the Hive podcast. “The consumer now expects to be able to push a button on their smartphone and things happen. Press a button and the car arrives; press a button and the package arrives. We feel that the on-demand expectation is going to make its way into real estate whether we like it or not.”
Zillow literally expects to originate mortgages within days, as well as take all the torment out of the process. Zillow acquired a company this summer that will eventually be rebranded Zillow Mortgages, with the expectation that homebuyers will be able to buy their mortgages from Zillow in a seamless and swift digital experience.
Zillow has already started buying and selling houses in two test markets, Las Vegas and Phoenix, with two more markets coming online soon, Atlanta and Denver. Here’s how it works: Homeowners use their smartphones to upload photos of their home and answer some questions. Within a few hours, Zillow makes an all-cash offer to buy the home. If homeowner likes the price, Zillow sends one of its people to inspect the home and proffer a final offer. If the homeowner accepts the deal they are given a “lottery ticket” on the sale of their home, which gives them the freedom to shop for their next home unencumbered.
Rascoff says the biggest issue for most homebuyers is selling their current home before they can hunt for their next. With a deal in the bag from Zillow, the homeowner can shop for their home and, when ready to close, take the all-cash offer from Zillow, which, in turn, spends about $1,500 to do a light renovation of their home before putting it up for sale.
The seller is basically paying Zillow a fee to take the home off their hands and alleviate the stress and uncertainty of the traditional sell-and-buy scenario.
Zillow is not alone in turning mortgage origination and home buying into a simple smartphone app. There is a spate of startups competing for the emerging space.
Zillow shareholders initially reacted badly to the new initiatives, but Rascoff is convinced the company can successfully leverage its relationship with its customer to succeed with mortgages and the buying and selling of homes, in much the same way Netflix leveraged its data and brand when it moved into original content creation, which, he notes, also got a bad reaction at the time from Netflix shareholders.
“What I’m totally confident of is that the buying and selling and financing process will be radically better five or 10 years from now,” he says. “You will be able to buy and sell in a couple of days rather than a couple of months. You will be able to get much more certainty in the selling process, and speed and ease and convenience.”
Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.