FinTech Newsletter: May 2019

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Ever wondered why your mortgage is so damn complicated? Or why it takes weeks while you get bounced between so many different parties? The history of the modern mortgage is a twisty tale, full of many different players and processes. And yet owning a home is a key pillar of the American dream. So how did this come to be? In these two pieces, our a16z general partners Alex Rampell and Angela Strange make sense of mortgages, and break down the why, the what, and the why: why the process behind getting a mortgage got so complex, how it might be possible to change, and what the opportunities are.

Why Your Mortgage Is So Complicated

Top Startup News

Will your newest online shopping addiction be buying… homes? A number of ‘PropTech’ startups have popped up in recent years that aim to reduce friction in the home-buying process. The online real estate brokerage Redfin announced earlier this month that homebuyers can now bid on properties directly through the Redfin website. Using this service means buyers can skip using a buying agent, therefore cutting the closing fees a home seller would normally pay in half. That, in turn, means that homebuyers can offer lower bids that are still competitive— allowing them to take out smaller mortgages and have less debt. Avoiding the use of the buying agent is a major departure from the traditional home buying model; it remains to be seen how successful this new model will be, but bidding on homes directly through a website is at the very least in line with the increased general consumer demand for online and mobile services. If this product takes off, it could signal that the holy grail of a “buy button for real estate” can be achieved.  Link

Commercial real estate company VTS reaches $1B valuation. VTS (View The Space) just raised $90M at a $1B valuation. But what’s really interesting is the path that VTS took to building a company of such value. While VTS started out with virtual video tours of commercial real estate spaces, the core product it has become known for is a lease and asset management software sold to commercial real estate landlords. Using VTS, landlords can track tenants across their portfolio of properties, speed up the time to close tenants on new leases, and better understand market trends on rent prices. With the large supply of space VTS has built—10 billion sq ft of commercial real estate on their platform—VTS is now launching a marketplace allowing tenants to directly find and lease office space from landlords. The benefit here is, again, that tenants and landlords can avoid or decrease the broker’s fee they would otherwise be paying directly to brokers. The general playbook that VTS has used to date is very difficult to pull off, i.e., using one product to build up a large supply and then leveraging that supply to create a marketplace. If VTS’s direct marketplace takes off, this would be another significant shift in the commercial real estate industry.  Link

Rising mortgage fees. What requires more cash? Buying a home in the suburbs of Detroit or, one in the Bay Area? You would think the answer to that would be very obvious. Although prices in the Bay Area are 5-20x those of the Detroit suburbs, the fact is it can actually require just as much cash to purchase a home in Detroit. The reason for that lies in the cost of origination for a mortgage—which, according to a new report, just climbed about $9,000 for the first time ever. This higher mortgage origination cost means most banks won’t originate loans for homes worth less than $100-$150k. That means buyers in lower-priced areas often need to buy their homes outright, which requires as much cash as you would need for a down payment on a much more expensive home in the Bay Area. All of this adds up to a strange housing cost phenomenon in the US, where for certain housing markets, prices are both too high and too low to be affordable.  Link

Housing costs are… relative? Alex Rampell recently pointed out that the way to think about housing prices in the Bay Area might not be in absolute, but rather in relative terms. You can think of housing prices as being largely a function of three things: new supply, job growth, and wage growth. So for example, since supply has stayed flat in Bay Area, prices have risen in tandem with buyers purchasing power (which mirrors the performance of the NASDAQ / FANG). In Detroit, on the other hand, supply has stayed flat and prices have fallen below replacement cost, due primarily to job losses and to a lesser extent wage stagnation. In other words, as Alex points out, “All things being equal, it’s all relative.”  Link

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