The Appraisal, October 2023 — Index Performance Updates & Ten Trending Topics
Welcome to the October 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 recent performance and highlight several important new stories across the real estate ecosystem.
The Index is up 22% in 2023, although down 12% since our last update. Notably, the Brokerage & iBuying category is down 45% over the last 90 days. After a strong start to the year, several companies in this category have trended downwards, driven by in part by weaker than expected earnings and an updated interest rate outlook that anticipates a “higher for longer” Fed posture. Opendoor and Compass are down 46% and 44% over the last 90 days, respectively. Most bond market analysts have revised their 10-year Treasury rate expectations upwards, including Goldman Sachs in a recent analyst note:
We now project that the benchmark 10y UST yield will end both 2023 and 2024 at 4.3% (previously 3.9% and 3.75% at YE2023 and YE2024 respectively), with an intermediate rebound early next year to roughly current levels.
Goldman also revised its mortgage forecast upward, to 7.1% for year-end 2023 and 6.8% for year-end 2024. Higher borrowing costs create an obvious drag on transaction volume and revenue expectations for many real estate companies in the index, leading to more muted performance over the last quarter when compared to activity earlier in the year.
Other notable company events across the Real Estate Tech Index this month:
WeWork continues to teeter on the edge of bankruptcy. During its Q2 earnings call, the company warned that “substantial doubt exists" about its ability to continue operating unless it can improve liquidity and profitability over the next 12 months. A new management team and board was brought in, most of whom have specific experience in corporate restructurings. The company’s stock is down 96% on the year. In order to avoid a potential bankruptcy, WeWork is attempting to renegotiate nearly all its leases — an important exercise to reduce its lease obligations and convert legacy master-lease structures into management agreements.
In August, Porch, the home services and property insurance provider, announced weaker than expected Q2 earnings, driven by excess losses in its insurance segment resulting from catastrophic weather events and a legal dispute with a reinsurance partner resulting in a $48m net receivable write off. The company also revised full-year net revenue guidance down and issued $333m in senior secure bonds. Property insurance is a difficult business, particularly in a hardening reinsurance market — dealing with potentially fraudulent reinsurance partners makes the task much more difficult. In response to news, Porch’s insurance business was placed under temporary supervision by the Texas Department of Insurance.
Property management software business AppFolio is up 72% on the year, driven by a strong Q2 in which revenue grew to $147m (a 25% increase from the prior-year quarter) and net loss shrunk to $700k (compared to a net loss of almost $30m in the prior-year quarter). It’s a good example of companies driving to profitable growth during a period in which capital is no longer free and software investors are increasingly favoring free cash flow improvement over top-line growth.
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Ten Trending Topics
In lieu of a deep dive this month I am sharing several great articles and podcasts 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.
Fannie Mae’s Chief Economist: ‘We Don’t Expect Spreads to Come Down Anytime Soon’ [HousingWire] This post discusses the widening mortgage spread phenomenon (which I covered in my last newsletter). Mortgage rates have increased by another 50 basis points or so since the August newsletter. Fannie’s chief economist forecasts mortgage rates to range between 4.5% and 6% in the long term. His base scenario is for the Fed to start reducing rates at the end of 2024, based on a “mild recession” is expected for the first quarter of next year.
This Is What an 8% Mortgage Means For the Housing Market [Odd Lots Podcast] Despite surging mortgage rates, actual home prices in the US have been resilient. This has created a historic shock to affordability. The Odd Lots team speaks with Jim Egan from Morgan Stanley about the impact of this rate environment on the housing market, and why at this point the key variable is whether more supply comes onto the market.
Why Denmark’s Housing Market Works Better Than Ours [Home Economics] A great piece from Aziz Sunderji of Home Economics, a graphics and data-driven newsletter about the American housing market. Sunderji discusses the “golden handcuffs” scenario facing many American homeowners today who are locked into low interest rate mortgages, thus suppressing for sale home supply. He highlights the Danish mortgage model, which allows borrowers to buy back their loans at market prices in the secondary market, reducing the impact of “lock-in” effects.
Crunch Time: How a Real Estate Credit Crunch Could Benefit Investors [KKR] Good piece from the KKR team discussing the implications of a pullback in real estate debt markets on the asset class going forward. This dislocation creates opportunity, particularly for lenders who are enjoying lower LTVs, better interest coverage on higher interest rates, and more lender-friendly covenants and structures.
Why PropTech Is Poised for a Comeback [Citi Ventures] The Citi Ventures team discusses the decline in venture capital funding for US-based proptech startups in 2023, but takes an optimistic view on the category’s prospects, arguing that the sector is on the verge of a resurgence. The piece also draws useful parallels between the growth trajectories of fintech and proptech, suggesting that proptech might be a few years behind fintech but has the potential for significant long-term value creation.
US Real Estate Brokers' Commission System Faces DOJ Antitrust Risk [Bloomberg] The National Association of Realtors (NAR), representing 1.5 million agent members, is embroiled in a lawsuit filed by the US DOJ. This dispute could lead to major shifts in the U.S. home brokerage industry's commission setup. The standard 5-6% commission and 90% agent involvement, which drive the $100 billion yearly commission for 1.6 million Realtors, are most immediately in jeopardy.
Redfin is Leaving NAR [Redfin Blog] Redfin founder & CEO Glenn Kelman recently announced the company’s decision to withdraw support from the NAR due to disagreements over NAR policies, particularly those requiring a fee for the buyer’s agent on every listing, and concerns about recent sexual harassment allegations within the NAR. Will others follow suit? 2024 may be the year that the NAR’s influence in the residential real estate sector begins to fracture.
What Happened to San Francisco, Really? [New Yorker] A good piece that attempts to see past the online chatter to uncover the “real” San Francisco. The author attributes the city’s decline to a combination of factors including tech-driven gentrification, housing crises, and political missteps, while also highlighting the resilience of its communities and the ongoing efforts to reclaim its iconic identity.
Apollo Global Management U.S. Housing Outlook [Apollo Academy] Several useful charts from the Apollo team showcasing the state of the housing market in the US and the interplay between rates and housing supply. I am updating my annual post on the housing market now — expect to see it as part of the next newsletter.
Further Thoughts on Sea Change [Oaktree Capital Management] Last but not least, Howard Marks from Oaktree discusses the evolving dynamics of today’s financial markets in his latest memo, emphasizing the significance of understanding market cycles, the potential risks associated with disregarding historical precedents, and the importance of maintaining a disciplined investment approach amidst changing market conditions. Valuable read for every investor.
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.