The Housing Market is Killing the American Dream

Rex Salisbury

Forget the automobile or the iPhone. Cities, according to the economist Ed Glaeser, are our greatest invention. When people move to cities, they exchange ideas, lower transportation and production costs, and create new breakthroughs.

Today, that virtuous cycle has been thwarted by the housing market. We simply aren’t building homes in regions that are most productive. The American Dream used to be about moving to opportunity—now it’s about moving to where you can afford to live.

Real estate is a massive, inefficient market with huge costs for consumers. The silver lining: New technologies are making housing more accessible, affordable, and attainable. (No, not by building satellite headquarters.)

Historically, people moved from low productivity regions to high productivity regions, which balanced out income inequality, on the whole. (Between 1880 and 1980, per capita incomes in poorer states rose faster than in richer ones.) Now, for the first time in our nation’s history, the opposite is true: People are moving from high productivity regions to low productivity regions, largely to pursue cheaper costs of living. It’s what economics columnist Ryan Avent has dubbed “moving to stagnation.”

What does this mean? What anyone living in a city already knows in their gut: As the income gap widens, housing is getting prohibitively expensive for large swaths of the population. This isn’t just a problem for the griping millennial perma-renter. Annual GDP might be 50 percent higher—that’s $9.5 trillion higher—if people were moving to productive areas, as they did in the past.

It’s an issue compounded by zoning and NIMBY-ism, which shouldn’t be understated. But broadly speaking there are two main pain points in the housing market where tech has a role to play. The first is transactional efficiency. Simply put, the process involved in selling a home is expensive, slow, and difficult. The second is construction productivity. The labor cost to build a home is actually higher today than it was in the 1960s.

Increasing Transactional Efficiency

In markets that are actively building homes, like Texas, tech startups are reducing the time and money it takes to buy and sell. OpenDoor, for example, buys homes directly from consumers within three days, charging roughly the same as a real estate agent would charge for a multi-month process. The company uses proprietary modeling to assess the home’s value, makes the seller an all-cash offer, re-lists the house at a markup, then keeps a 6 to 10 percent commission off the selling price.

In some markets, the real estate platform Zillow now offers a 2 percent cash back rebate on the selling price of a home, meaning more money ends up in the pocket of the consumer, not a real estate agent. Meanwhile, Divvy, a fractional home ownership startup, allows consumers to rent a home with the option to buy a few years down the road. The model supports a new cohort of potential homeowners who might not otherwise qualify for financing. These companies are forging paths to home ownership for a broader swath of the population.

Other startups, like Flyhomes and Ribbon, help homeowners streamline the stressful process of simultaneously selling a home and buying a new one by providing a guaranteed cash offer on the former and flexible closing date on the latter. (Given how error-prone mortgage financing can be, perfecting that timing can be challenging, to say the least.) By creating greater liquidity and reducing transaction costs, these companies allow people more freedom to live where they please.

In markets like California, on the other hand—productivity powerhouses with severe housing shortages—better transactional efficiency has the somewhat of a perverse effect of increasing prices. Why? When transaction costs go down, buyers have more money to buy a house. The bad news is, so does everyone else. More people bidding on a fixed number of homes equals higher prices.

So if improving transactional efficiency does nothing in these supply constrained markets, what’s the alternative? This is where construction productivity becomes paramount.

Boosting Construction Productivity

Even if California’s regulatory barriers evaporated overnight, surprisingly little affordable housing could be built because labor is in such short supply. California currently has 96,480 workers building around 100,000 homes a year; to satisfy demand, the state would need to add nearly 700,000 homes a year, according to a recent McKinsey report. That undertaking would require another 500,000 workers who simply don’t exist.

Thus, to solve the real estate crisis in California and elsewhere, we need to boost construction productivity. One way to do that is by investing in technology that facilitates low cost delivery. In particular, we’ve seen promising advances in two areas: modular housing and so-called tiny homes.

At present, the vast majority of housing is custom built on site. Modular housing, an old idea that’s recently come back into vogue, allows for prefabricated modules to be assembled in a factory and then combined on-site into a complete structure. As a result, housing can be built in half the time at 20 percent less cost, on average. FactoryOS, a Vallejo based startup, uses Building Information Modeling (BIM) software to optimize housing design and reduce material waste. Through digitized design and automated construction, FactoryOS aims to streamline the end-to-end process of building a home. The company recently completed a 110 unit apartment building in West Oakland in just 10 days, cutting costs by 30 percent.

One alternative to FactoryOS’s offsite approach is technology that lives at the building site. The Austin-based startup Icon has developed the software and hardware to 3D-print homes up to 2,000 square feet using a tablet-operated robotic printer called the Vulcan II. The bot erects homes from a specially formulated blend of concrete that’s designed to cure quickly without sacrificing affordability or structural integrity. By replacing human labor traditionally needed to frame the house, Icon can construct units quicker and at 50 percent less cost than conventional building techniques. The company has tackled several small-scale projects; the real test will be whether the technology can 3D-print homes at scale.

Tiny homes may sound a bit like a toy, but they also have the potential to provide affordable housing around the country. Also called “Accessory Dwelling Units,” or ADUs, these structures could alleviate around 10 to 30 percent of the housing shortage in underbuilt cities. On the tech front, ADUs’ diminutive footprint makes them ideal structures to manufacture offsite. When manufacturing takes place offsite, in a controlled environment, it’s much easier to drive productivity gains by tweaking the construction process.

On the business side, new startups are experimenting with novel ways of novel ways of allowing almost anyone to add an ADU, even if they don’t have the time or money to build one themselves. Rent the Backyard, for example, installs ADUs on homeowners properties (including permitting) at no upfront cost; in exchange, the company receives 50 percent of the future rental income. For the homeowner, the logic then shifts from “Do I want to spend $100,000 on this thing?” to “Do I want supplemental monthly income?”

In the case of ADUs, there are even regulatory tailwinds. Last month, the California governor signed new legislation legalizing ADUs throughout the state. If just 10 percent of owners were to construct an ADU, the state would gain 900,000 new units. That’s not as unrealistic as it might sound: In Vancouver, for instance, fully one third of single family homes have ADUs.

Rebuilding the American Dream

The US housing crisis won’t be solved overnight, even if we do achieve synergy between innovation and regulation. Still, ambitious new companies are tackling this issue from every angle: reducing costs, reimagining modalities of living, and experimenting with new business models. If successful, these technologies will help to save humankind’s greatest invention—the city—from becoming a victim of its own success. By easing ingrained structural barriers, these ideas can give people the freedom to move to opportunity once again.

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