I’ve been a proptech founder (backed by Pear VC) for the past year, which has been an absolute roller coaster given the changes in the U.S. market. I’ve been compiling my notes on the residential market as well as problems and opportunities I have been noticing in the space. Personally, I think we’re at an inflection point for real estate, where we have the opportunity to completely disrupt the industry leveraging a combination of AI and an incentive-aligned business model to transform the real estate brokerage.
Note: Many of these views are highly contrarian and there are a good number of brokers, agents, and even proptech founders and VCs who have built their entire livelihoods around the current establishment that I’m criticizing below that will likely take offense to this blog. (Out of respect for a lot of great fellow founders, I’ve omitted names of companies that fell into certain pitfalls I’ve observed when studying the market, but email me at [email protected] if you have any questions.)
Warren Buffett sold off recent holdings he had in D.R. Horton, Lennar, and NVR in Feb. 2024. What’s striking about these investments in residential homebuilding is that recently purchased shares in these businesses back in June 2023. This move is particularly striking since Buffett once said in a letter to shareholders: “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”
As we have seen in the market, higher interest rates in the last 3 years have directly impacted 30-year fixed mortgage rates. While the average rate in has dropped below 7% in the last 2 months, interest rates are at an all-time high over the last 30 years since the Great Inflation of the 1980s.
Source: Federal Reserve Bank
This has made homebuying particularly unaffordable for Millennials and GenZ who often prefer to rent over buy in the current market.
This is all to say that any way to reduce the burden on homebuyers in dollars spent on transactions will have a significant impact on real estate transaction volumes going forward.
The official ruling and changes of a massive settlement against the National Association of Realtors (NAR) that came into effect earlier this year have confused buyers, sellers, and agents/brokers. Prior to this ruling, a seller would offer a 5-6% commission to their agent, and when an interested buyer chooses to move forward on the property with their buyers’ agent, the buyers’ agent would negotiate their commission on the deal directly with the sellers’ agent.
The new ruling now states that:
The impact is clear from an agent’s perspective. If no commission is being offered on a specific listing, they will not be as incentivized to show a home. Another clear impact is that commissions will definitely be coming down on the buyers’ side which means many of the 1.5M agents in the NAR will likely leave the industry.
Because every real estate agent at a major brokerage is a 1099 contractor in the United States that pays a nominal “desk fee” for technology and training services to a brokerage, 90% of real estate brokers in the U.S. focus on one north star KPI: recruiting top agents as sales talent that can complete deals because every single brokerage operates on commission splits with agents - usually 60/40 or 70/30 in favor of the agent.
As a result, there is no incentive structure for brokerages to NOT RECRUIT bad agents because this is a numbers game to them!
In reality, the north star KPI for revenue generation is transaction volumes (their revenue is in fact a percentage of this), but unfortunately with the brokerage model, that’s been lost in translation.