To Boldly Go Where No Startup Has Gone Before: The American Dream of Home Ownership

It’s hard to separate the American Dream from owning a home. Home ownership inspires feelings of financial achievement, family stability and retirement security. Decades of wealth creation through home equity have largely validated these feelings.

As a consequence, people were concerned several years ago when the rate of home ownership in the U.S. dropped to its lowest levels in 50 years.[1] What is becoming more clear over time; however, is that it was not just the rate of home ownership that was changing, but also the nature of home ownership. Consumers are showing signs that they think of their homes differently.

There are frankly some good and some bad reasons for these changes, but unpacking how consumers think about home ownership reveals new opportunities for startups, and ultimately some silver linings for consumers who still wish to participate in this part of the American Dream.

One of the joys of investing in FinTech is that we can back teams and products that directly address financial health for consumers, and I believe we have an emerging cohort of home finance startups that hope to do well while doing good. We announced an investment in one of them recently, but first, why are consumers changing the way they think about home ownership?

Do we want to change or do we have to change?

Unaffordability. By far the most significant driver is the double whammy of rising home prices and historic consumer debt burdens. When you cannot afford to buy a home outright, you are willing to re-think what it means to own a home. Housing inventory is at historic lows with fewer than 700,000 homes available, made worse by a dramatic shift to high-end homes by residential real estate developers. Since 2008, 75% of new construction has been for high-end homes.[2] Meanwhile average home prices have risen more than twice as fast as household income. Unaffordability forces people to consider all sorts of new arrangements, from lease-to-own, buy-to-lease and outright shared spaces.

Retirement gap. More than 10,000 Americans turn 65 every day and 25% of our population will be over 65 within 10 years. Unfortunately, this group of Americans has an estimated $4T retirement savings gap between their retirement expectations and resource realities. A savings gap of this magnitude will require multiple solutions, but apart from working longer and reducing spend, retirees have an unprecedented opportunity to tap into their $6.7T of home equity. This reality will seep in gradually, but it’s hard to see a future in which retirees do not shift from a home equity accumulation phase to a home equity monetization phase in which the home becomes a semi-liquid asset.

Shifting demographics and attitudes. I love seeing the broader sharing economy weave its way into notions of home ownership. We see would-be (or eventual) Millennial home buyers enjoying shared dwelling spaces like HubHaus and Starcity, while older, long-time home owners have embraced sharing their homes through Airbnb. Indeed, seniors are the fastest growing segment on Airbnb and earned $700M in 2017. While financial pressures force us to re-think home ownership, it is clear that Americans are also getting more comfortable with the idea of sharing living spaces.

So how are consumers reacting to these forces? There is a subtle, but significant shift in three long-held notions of home ownership:

• from a lifetime financial milestone to a recurring, tactical financial decision
• from illiquid asset to semi-liquid asset
• from exclusive usage to shared usage.

These will play out over years, but with a new set of financial products consumers will get the tools they need to cope with these forces and continue to embrace the American Dream on their terms.

Enter stage left: startups re-think home ownership

As consumers re-think home ownership, startups are emerging to provide new solutions that meet evolving needs. Although some cater to changing consumer preferences, most address the two major financial gaps for consumers — home affordability and the retirement gap. Here is a simple way to look at the landscape.

There are three interesting themes that cut across these approaches.

The mortgage gets a friend: she’s called co-investment. For a long time, buying a home in America meant one thing: come up with enough cash for your down-payment and borrow the rest from your bank. A ‘creative’ bank product was one that gave consumers even larger mortgages so they could put less cash down. This binary home buying model serves most consumers well, but burdens many others with destabilizing levels of debt and monthly debt payments as we saw in 2008, 1990, 1971, and 1961. The cycle continues. And in today’s market of extreme home unaffordability, this model simply excludes many consumers from buying the home they want, or in some cases buying any home at all within commuting distance of their workplace.

Co-investment introduces a third tool to home buying. The best example is an idea called shared equity in which a partner co-invests alongside the consumer, generally providing 50% of the down-payment in exchange for a share of the increase (or decrease!) in home value. Consumers live in their home with total dominion — they hold the title and decide when to sell or buyout their co-investor — but carry less debt and bear smaller monthly debt payments. They pay nothing until they sell their home and only then if the home has appreciated.

My partners and I at F-Prime Capital are excited to have invested in Unison, a clear leader in this space. Thomas Sponholtz leads a truly mission-driven team that is deeply committed to helping Americans reduce their debt burden while still participating in the American dream. They are a true partner to the homeowner with some legendary stories of helping consumers like a co-investor when times got tough.

Another example of co-investment is the emerging lease-to-own product. Startups like Divvy and Verbhouse give consumers a way to move into their desired home immediately while making lease payments that build home equity gradually. When they have built up sufficient equity to get a mortgage, then they can buy the home outright, or not. The consumer has newfound optionality.

From hard to semi-liquid asset. Barring a financial emergency like college or hospitalization, few Americans contemplate using the equity in their homes to pay for life’s expenses. The home equity market is only $72B compared to $1.3T of primary mortgages annually. Reverse mortgages are even smaller at $9B. There are many reasons for this reluctance, but chief among them is inviting yet more debt into their lives along with the stress of monthly debt payments, precisely at a time they are scrapping for cash.

Shared equity products from Unison, Hometap and Point are changing that by providing consumers with a way to monetize their home equity with no cost until they choose to sell their home.[3] Here too they take the risk of the home value increasing and decreasing. It’s hard to overstate how helpful this product can be to millions of Americans who face the poor choice of selling their home to free up equity or taking on more debt to pay for large expenses. For asset-rich-cash-poor retirees, shared equity will become a critical, consumer friendly way to address their retirement gap.

I’m especially excited by how shared equity products are helping people re-frame their home as a semi-liquid asset. Even though one’s home is the largest single asset for most Americans, almost no one imagines taking equity from their home simply to diversify their exposure and invest in potentially higher yielding investments like stocks and bonds. For the first time, we have products that seamlessly allow true asset diversification to those who desire it.

Mi casa es su casa. We have all felt the shift to a sharing economy and it’s pretty cool to see it penetrate home ownership. The clearest examples are co-dwelling spaces like HubHaus, Loftium and Ollie that sit somewhere in between traditional renting and coops. To some, these sound like fraternities for adults, but they do represent the mental bridge from ‘I rent; you own’ to ‘this is our shared home.’ Leveraging home sharing platforms like Airbnb are even clearer examples of the willingness to share one’s home with others as a way to manage the financial burden of owning the home.

So what could possibly go wrong!?

Consumer finance is not for the faint of heart entrepreneur. Home finance? Well, you had better have really thick skin. Startups will be judged by their outcomes and their outliers, not by their intentions and their offerings.

In the case of shared equity, some consumers will still buy homes they ‘really can’t afford,’ only now with equity not debt. Some consumers will pay high effective APRs when their home appreciates dramatically, and regret or forget that they could not have bought their first-time home without the co-investment, or that the startup would have shared in the losses had their home depreciated.

These complaints are inevitable, but startups must err on the side of consumer-first product design and extreme product transparency. Startups must take the high road and demonstrate true partnership with consumers when times are tough. With authentic and mission-driven founders like Thomas Sponholtz of Unison and Jeff Glass of Hometap among others, I am optimistic we will see several startups breakout and become major new home finance brands.

TL;DR

For better and for worse, the American dream of home ownership is changing. Unaffordability and high consumer debt are forcing Americans to consider sharing their homes with others — whether physically or virtually with co-investors. Fortunately startups are creating a range of novel financial products to help, including shared dwelling, lease-to-own and co-investment. Over time, the home may even be seen as a semi-liquid asset that can be managed and diversified like other financial assets.

I’m excited to see these mission-driven startups grow and help consumers reshape, but retain the American dream of home ownership. They can do well while doing good, but as with all financial products that touch financially distressed consumers, I hope we see an unwavering commitment to consumer protections, product transparency and the spirit of partnership.

[1] Ownership levels are even lower for African American (41%) and Hispanics (46%)

[2] Milken Institute

[3] Devils are in the details like how long a consumer can stay in their home before they have to sell or buyout the shared equity investment. Unison is currently 3x longer than alternatives at 30 years and excludes home improvements from value appreciation.

Originally published at https://www.linkedin.com on July 17, 2018.