Lockdown, Not Knockdown: #7 Real Estate Apps
Digital Industries Booming in The Covid Era
In lockdowns, people dream of better days. They make mood boards featuring beaches, egg swing chairs, and dinners with friends on lush rooftop terraces. And sometimes, just sometimes, this daydreaming brings them to house-hunting online, and before they know it, they're signing mortgage papers that they've previously looked over with their banker on Zoom. So if you bought a property during the pandemic, even if it was without visiting it, you were not alone by a long shot. Between June 2020 and June 2021, despite all odds, a massive housing boom affected the US, most of Europe, and almost all advanced economies in general.
Due to the historically low interest rates, house buying was already well on the rise before the pandemic. Come 2020, almost everyone switched to working from home, so home offices (and larger living spaces in general) became a requirement. On the other hand, those lucky enough to keep their jobs saw the money rolling in, yet had nowhere to spend it. Therefore, many people's savings as part of disposable income increased dramatically.
Unsuprisingly, all this led to a steep rise in housing demand. In 2021, the housing and rent prices across the wealthy (OECD) economies recorded the 9.4% annual growth rate, which has been the fastest growth of the previous 30 years. As a response to the burgeoning demand, new housing units are being built all over the world at a vertiginous pace. In fact, some cities go the extra mile, shutting down airports so that they can build apartment complexes. (Traveling is complicated these days anyway).
The pandemic, combined with the dizzying housing price surge, had a profound impact on real estate - traditionally a very old-fashioned sector - which then found itself in the middle of a forced modernization. Already around 2017 or so, a new buzzword was introduced to describe this transformation: proptech. Proptech (property technology) is the application of IT and platform economics to real estate markets. Its potential is endless: from healthier buildings, to robotic furniture, to building amenities that you can book with a click of an app.
In this article, I will be focusing on real estate apps only. Although they have been around for a while, they really blossomed when house hunting went completely virtual. When everyone was locked down, the realtors and the buyers had to become particularly creative in order to keep business afloat: the former, by organizing virtual visits for clients and gathering as much data on them as they could, and the latter, by using LinkedIn, Google Maps and mortgage calculators when researching potential properties.
In 2021, the US real estate mobile app downloads increased by 14% relative to 2020. Australian real estate apps recorded a 5% growth, while the UK saw an increase in downloads by 10%. More downloads usually translates to better bottom lines: the global real estate software and apps market is estimated to reach a market value of US $12+ billion by 2025.
Similarly, home decor has been one of the pandemic's favorite activities. The online furniture shop Wayfair saw downloads peak in May 2020, up 175% year over year. Pinterest, the inspiration and mood board app of choice, reported a 36% increase in the creation of home decor boards in 2020. All this is good and well, but how do more app downloads and Pinterest collages contribute to a more efficient real estate market?
Against Asymmetric Information
If you're an Economics graduate, you will likely remember one of Econ 101 introductory concepts. Information asymmetry arises when not all market participants have equal access to information. Under those conditions, only the participants with access to information can benefit. The real estate market is a very good example of information asymmetry. The brokers charge hefty commissions for matching the buyers with the sellers; the sellers have privileged access to information regarding the value of their property; while the buyers often lose out if they don't do their research in advance. Enter technology.
Real estate platforms first appeared in the US around 2000, when it became clear that thousands of properties were sold by the owners themselves, rather than through real estate agents. All of a sudden, interested buyers and sellers could compare and contrast thousands of property market values without having to call or travel.
That said, real estate technology regularly receives pushback from traditional agents who claim that the apps can never replace them. On the other hand, many brokers have realized that there is much to be gained if they switched to technology. Not only can tech be used for better imagery, newsletters, social media, document creation, and storage, but also, as COVID taught us, it can facilitate smart key devices and virtual tours in times when in-person contacts should be avoided.
The US Market: Open Data & House Flipping
The United States is the pioneer of real estate apps where tech is deeply entrenched in the market. More than three-quarters of buyers find their property on mobile apps. The largest of US apps, Zillow, was co-founded by Rich Barton in 2006. Interestingly, Barton also founded two other online successes, Expedia and Glassdoor. As of October 2021, Zillow has 36 million unique visits per month. Upon launch, the platform introduced Zestimate, the value estimate of any property in the US. This was very novel at the time, and too many people tried to check the estimated value of their house on the very first day of launching, when all Zillow servers crashed.
But Zillow is much more than just Zestimate. In addition to its high-quality maps, the company, which went public in 2011, aspires to be an All-in-One real estate platform and offers a number of services, such as Zillow Rentals (assisting with property lease); Zillow Mortgages (helping to calculate them and offering related services); Zillow Home Loans (for loan-related assistance); Zillow Digs (for remodeling assistance); Zillow Premier Agent (for agent-finding); and Zillow Offers, accounting for more than 50% of the company revenue, whereby an algorithm calculates property prices and Zillow then buys properties directly from the sellers, potentially remodels them and sells them further.
This service is also known as instant buying or iBuying. Its major upside is that it saves the seller the hassle of listing their home, having to show it, and finding agents. However, it does not save them the intermediary cost, since those contracting this kind of services still have to pay the 5-7% commission to Zillow or one of its iBuying competitors, such as Opendoor, Offerpad, or RedfinNow. Throughout the pandemic, Zillow was accessed 10 billion times, Barton revealed on the How I Built This podcast. However, despite the massive success, Zillow is not yet profitable.
Trulia, Zillow's former competitor, was founded in 2005 and went public in 2012. Trulia offers GPS features in the app, enabling you to see which properties in your neighborhood are listed for sales or rental. In 2014, the company was purchased by Zillow (who, one might notice, is clearly a fan of Amazon-type growth strategies, consistently purchasing potential competitors). Trulia is now Zillow's subsidiary, and as such, still exists under its original name and attracts 23 million visits per month.
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Realtor.com is actually a pioneer in the digital real estate space. The company was founded in 1995 and remains to this day the official search portal of the US National Association of Realtors, which implies that the data on the app and website is more comprehensive than elsewhere. The app offers price comparisons in different neighborhoods, estimates commute time, and searches for agents in addition to homes. Realtor.com is the third-ranked US real estate portal by monthly visits - 18 million.
Redfin, attracting 6 million monthly views, was founded in 2004 and went public in 2017. The company is primarily a brokerage firm offering both offline and online property search, free house tours, agents' insights, and in-depth data such as information on neighboring schools and local pricing. As mentioned already, RedfinNow is the iBuying service of the company.
Markets Elsewhere: Spain, Leading In Innovation
Outside of the US, real estate apps abound, but very few have the breadth or the level of the US market leaders. Usually, they are listing portals that are strictly country-specific and feature a very limited number of additional functionalities. In Europe, for instance, there is no Zillow equivalent; and given the specificities and legal requirements of each individual country, it is difficult to imagine a pan-European real estate app.
That being said, Idealista, a Spanish property portal, seems to have just that kind of aspirations. Idealista was created in 2000 and has 45 million visits per month. It includes properties for sale and rent by neighborhood and zone, property value estimates, a mortgage calculator, as well as Rentalia, the holiday rental service. Initially limited to Spain, Idealista has now expanded to Italy and Portugal. Other important European portals are Rightmove (UK), Zoopla (UK), and Immowelt (Germany). On other continents, apps are similarly limited to particular countries. Exceptions exist, such as the Mexican company Flat.mx that wants to build a super app for the whole of Latin America.
Spain is probably the most advanced digital real estate market outside of the US. In addition to Idealista and other similar platforms (such as Fotocasa), as well as iBuying firms like Tiko, Spain is also the birth country of Housfy, a Madrid-based proptech platform completely disrupting the market. Only around 50% of all Spain's properties are sold by real estate agents, and Housfy targets the other 50%. To be more exact, Housfy's target audience are the property owners who, given high commissions of the brokers (3-6%), prefer to sell their homes themselves.
Combining technology and data, Housfy aims to combat information asymmetry by educating the owners on how to price, show and sell (a lot of this educational content is completely free), as well as leveraging technology for better marketing of the properties. Housfy doesn't employ real estate agents and demands a flat fee, rather than a percentage, for their services.
Not far away, in Barcelona, another company is disrupting the market by offering virtual tours to real estate agencies. Floorfy converts simple photos into powerful 3D virtual tours. Floorfy was created before the pandemic (2016) and today it is operational in more than 15 countries.
Making Money In The Post-Pandemic Proptech World
The digitization of the global real estate market can be observed in three main stages:
2. Data-driven choices. In the 2010s, and again in advanced markets only, the real estate was disrupted by adding a heavy layer of data to the basic marketplace model. Maps and GPS data, property value estimates by neighborhoods, and mortgage calculators are only a few examples of how GIS and data analytics helped in the industry modernization.
3. Pandemic and post-pandemic proptech. Through the pandemic and coming out of it, proptech has been living its heyday in the form of smart home apps, virtual tours, digital signatures, online property management, or iBuying, just to name some. Only a handful of economies are currently in this stage, with others shyly moving in that direction.
Certainly, the pandemic has made us rethink the role of traditional real estate agent. Many have identified significant cost-cutting factors in iBuying and 3D visits. However, two examples are very telling in this sense.
At the time of writing this article, Zillow is actually struggling with iBuying. Flipping houses, as it turns out, is not purely an algorithmic affair. It also requires human involvement, and that is time-consuming. Whenever the algorithm calculates the price of a house, the company has to send a person to inspect the property. Right now, Zillow doesn't seem to have the necessary labor force to do that consistently.
In that spirit, the company announced it would stop its iBuying service for the remainder of 2021. For its part, after extensive feedback, Housfy has introduced the option of sales agents (for an additional fee). Apparently, property owners are not always inclined to do the heavy lifting of pitching and selling their house to buyers, especially after paying a fee to an intermediary to do that instead of them. This goes to show that while technology is fantastic, it is supposed to be complementary. It cannot replace the human factor entirely.
As of late 2021, the housing boom appears to be subsiding. Will proptech continue its impressive growth following the pandemic? The global real estate market is worth hundreds of trillions of dollars, making it the largest industry of all. There is absolutely no doubt that this behemoth needs technology to keep creating cost-effective and scalable solutions, such as smart key apps. That being said, the industry is also in need of humans able to unlock doors using good old-fashioned keys should the wifi go out.