The Appraisal, December 2023 — Index Year in Review & Housing Market Report 📈
Happy holidays! Welcome to the December edition of The Appraisal, a newsletter on real estate tech. My writing focuses on the 30+ public companies operating at the intersection of real estate and technology. In this edition, we’ll review the Real Estate Tech Index’s strong year-end finish, share Thomvest’s new Housing Market report, and highlight several interesting stories across the real estate ecosystem.
What a difference a year makes. The Index is up 44% in 2023 — a strong rebound from the prior year (the Index fell 42% in 2022). The last 60 days have been particularly good for many companies in the Index, driven by recent Fed commentary indicating three quarter-point rate cuts in 2024. Investors are pricing-in even more aggressive cutting (Morgan Stanley forecasts 100bp in cuts in 2024, starting with 25bp at the June meeting, followed by an additional 200bp in 2025). This positive news has buoyed public equity markets (as of this writing, the S&P 500 is just shy of its all-time high) and has had a particularly favorable impact on the real estate companies that make up our index.
Rate normalization will create tailwinds in the real estate sector, which has experienced sharp declines in transaction volume across nearly every sub-asset class. That’s why companies with the most direct exposure to transaction volume (such as mortgage originators and brokerages) have over-performed as of late. Since my last newsletter, Opendoor is up 120%, Blend is up 111%, Rocket Companies is up 100%, and Compass is up 85%.
Of course, not every company in the Index is well positioned for share price appreciation. WeWork, which we have discussed at length in this newsletter, officially filed for bankruptcy in November. Doing so allows the company to restructure its growing debt overhang and exit or renegotiate under-performing locations with building owners.
It’s also important to note that today’s Index value is still well off its peak. Multiples across every category are down (see below) and many companies in the Index aren’t out of the woods just yet — most have yet to generate durable profits. But the companies that have survived this period of rapid interest rate growth should be positioned well in a declining rate environment — many have rationalized operating expenses, improved gross margins and cut cash burn.
I look forward to continue tracking these companies in 2024. Expect a few new deep dives on individual companies marching towards profitability in the new year.
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Highlight of the Month — 2023 Thomvest Housing Market Report
I just published our annual U.S. Housing Report on the Thomvest blog, which provides a deep dive on home affordability, mortgage activity, housing supply and demand dynamics, and loan performance in 2023. The full report is available for download here, and I’ve included several highlights below. Thoughts and feedback are welcome.
Mortgage origination volume plunged dramatically in 2023, declining 22% for purchase loans and 65% for refinancings. This tracks with rapidly rising rates, as 30-year fixed mortgage rates topped 7% late this year following a sub-3% environment just 24 months ago. Lending fell across all FICO bands but remain concentrated amongst very high, prime borrower cohorts.
Existing home sales have likewise slowed considerably from 2021 peak levels, dropping over 30% on an annualized basis. October 2023 sales run rate sat at just 3.8 million homes, far below the nearly 6.6 million rate seen in January 2022. Supply remains near all-time lows as well, with active listings tapering to 1.04 million units, failing to meet enduring buyer demand.
Rapid home valuation gains and spiking mortgage rates have materially reduced housing affordability this year. We find that fewer than 45% of the 177 major metro areas tracked nationwide have median home prices now affordable to median metro incomes. Mortgage payments for median-priced homes make up 28.5% of a median household’s income — the highest percentage in more than 30 years.
Despite economic uncertainty, mortgage performance metrics like delinquencies and defaults remain surprisingly durable. Only 13.5% of 30 day delinquent mortgages are transitioning to 90+ day severities, well below mid 2000s peaks, while new foreclosures sit near all-time lows, affirming continued strength in owner-occupied housing.
Looking to 2024, industry projections call for renewed expansion of transaction volumes as mortgage rates abate. Existing home sales are forecast to rise nearly 14% with lending volumes rebounding over 10% as well, partially reversing 2023 declines. This outlook depends on mortgage rates descending closer to 5-6% from current 6-7% levels to reboot housing affordability and buying power.
Five Trending Topics
As I did last month, I’m sharing several great articles I’ve consumed recently that cover proptech, housing and the broader real estate market. Going forward, I’ll try to share at least a handful of links in each newsletter.
Home Sellers Win $1.8 Billion After Jury Finds Conspiracy Among Realtors [NYT] Big news in the residential housing world — a federal jury found the National Association of Realtors and several large brokerages guilty of conspiring to inflate real estate agent commissions, a decision that could significantly change the U.S. home-buying process and threaten agent commission structures. This was the first of several major lawsuits that could lead fundamentally change the brokerage model.
A Bull Case for Opendoor [SFR Analytics Blog] Good piece from the team at SFR Analytics examining recent performance at Opendoor. In early 2022, Opendoor faced significant losses, buying over 5,000 homes monthly and losing over $25,000 per home. However, from January to April 2023, the company improved its unit economics, making over $40,000 in profit per home (although volume has dropped 80% since 2022).
Tech 'Unicorn' That Raised Millions for 'Reinventing' Walls Is Shutting Down [Motherboard] Veev, a home-building technology startup once valued at over $1 billion for its innovative "Closed Wall System" in prefab smart homes, is shutting down due to financial challenges and an inability to secure additional funding. It’s an unfortunate outcome that highlights the challenges of scaling vertically-integrated construction businesses.
A New White House Plan to Create Affordable Housing: Convert Empty Office Buildings [Bloomberg] The Biden administration has introduced a plan to convert empty office buildings into affordable housing, offering financial resources and guidance to address the dual challenges of high office vacancies and housing affordability in U.S. cities. It’s an interesting first step in encouraging redevelopment of downtown office high-rises — most of these projects will not pencil without meaningful subsidies at the local and federal level.
Mortgage-Backed Securities Market Waits for Interest Rate Clouds to Lift [Financial Times] Helpful discussion of the current state of the mortgage-backed securities (MBS) market, highlighting its challenges due to high interest rates and reduced demand. The piece suggests cautious optimism in the market, despite these challenges, with factors like tight supply and declining rates potentially supporting MBS prices in 2024.
Thanks for reading! As always, please feel free to share feedback or thoughts on the newsletter — you can respond to this email directly or shoot me a note at nima@thomvest.com.
Note: Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.