Glenn Kelman on Market Trends, Home-Buying Hacks and Redfin Insights | E1871

0:00People our age own a house and have seen it appreciate like crazy. but there's another group where the latter got pulled up at just the wrong time and it's creating all sorts of discontent. People wonder why this TikTok generation has bad vibes about the economy. Well, you would too if you were sleeping on your parents' couch, if you couldn't even have anyone over, how are you ever going to get married? So it's a real problem for American society that we don't have enough houses. We're about 5 million short. This Week in Startups is brought to you by Lemon.io. Need to speed up your product development without draining your budget?

0:36Hire vetted engineers from Europe at Lemon.io. Go to Lemon.io slash twist to get 15 % off for the first four weeks. Squarespace. Turn your idea into a new website. Go to squarespace.com slash twist for a free trial. When you're ready to launch, use offer code twist to save 10 % off your first purchase of a website or domain. And OpenPhone brings your team's business calls, texts, and contacts into one delightful app that works anywhere. Get 20 % off your first six months at openphone.com slash twist. It's time for another appearance of my guy, Glenn Kelman. He is the president and CEO of Redfin since 2005.

1:18We've been friends for decades. And this is his fifth appearance here on This Week in Startups. He gets the five-timer jacket. That's in the mail, Glenn. Welcome back to the program. I can't wait to wear my jacket. It's a pretty gray jacket. Yeah. It's, you know, it's Armani Zenia fabric. It's pretty nice. And the inlay, it has the five episode numbers you've been on. It's quite nice, but we don't talk about it too much here on the program. Hey, listen, this has been a crazy couple of years. Obviously, you're the CEO of Redfin. It's been a crazy couple of years for housing. We had COVID hit. Housing market went on a complete roller coaster.

1:51Everybody moved to Austin, Miami, whatever. Then the boomerangs, people came back. And all of this was going on during this 12-year bull run. All of a sudden ZERP ends and we start raising interest rates. But the Fed just said, hey, maybe interest rates, it's time for a pause. And which means then mortgages, I guess mortgage rates will come back down. So what is the state of the residential real estate market in the United States today as we end the year in 2023, which seemed like a really tough, difficult year? Tenuous, but hopeful. I've been on CNBC 15 times over the past six months saying that housing is dead as a doornail, that it's a whale turd at the bottom of the ocean.

2:36But now, with rates lowering, there is hope. And even before that happened, we were seeing a flurry of listing activity. This has been the weirdest correction, Jason, just because normally, when you have a correction, listings pile up, prices fall. But this time, we didn't even get that. There was a standoff on the buy side. There was a standoff on the sell side. Everybody who could have listed their home decided to hang on to a 30-year mortgage at a 3 % rate. And so it was an absolute standstill. But just in the past two months, more and more people have been saying, I'm planning to list my home in January, which makes me one step more hopeful about more sales volume in the first quarter.

3:17Yeah, it does seem like there was a standoff. And the standoff happens every time. You have people who are emotionally connected to their home. and you've told me this, they'll anchor their price to whatever the craziest price was around their home. Just like a startup might coming out of an incubator be, oh, what was the highest price anybody got out of my accelerator class? That's the price of my company. Without having any other information, hey, maybe this home has a movie theater in it. Maybe it's got gold faucets, who knows? So let's talk a little bit about the standoff. Why didn't the standoff eventually break down with the seller saying, hey, I got a divorce.

3:54Hey, I need a bigger place. Did the sellers never hit desperation because unemployment is so low? What happened? Why did the standoff not break like it did in the past? So in 2008, you did guess it. Maybe it wasn't even a guess. Maybe you know a little bit more about housing than you're letting on. But in 2008, housing dragged the rest of the economy into the abyss where unemployment, low wages, all sorts of economic problems forced people to sell. Nobody wanted to sell in 2008. The bank forced them to do so, either through a short sale or a foreclosure. That ripped the bottom out of the market, creating all this distressed inventory.

4:30We got over it faster as a result. You had 50 % price drops in places like Phoenix. This time, people are still worried about affordability. It's at a four-decade low. So the buyers are in full flight, but the sellers are sitting pretty because employment is strong. Productivity is strong. Wages are strong. So the rest of the economy is doing just fine. And housing is at this standstill. Okay. For a young person coming into the market, let's say they're a young professional. They got a great job. They're making six figures. Maybe they even have a spouse now. They got a fiance. And they are also making six figures, dual income, no kids.

5:11And they're ready to, they're 30 years old. They saved up a couple of hundred K. They're living in a great city, Boulder, Phoenix, Miami, or whatever. And they say, I want to make the jump. I want to buy a home. Is now the time to buy a home or is now the time for them to rent? How would you advise them if this is your niece and nephew, your kids? Yeah, well, I would just base the decision on how long they want to stay in the home because timing the market is for the birds. It's hard to do that in the equity markets. It's hard to do that in the housing market. What really destroys wealth is buying a house and then having to sell it two or three years later because the transaction fees will eat you up.

5:45When you trade a stock, you pay almost nothing to trade it. But when you trade a house, you give up about 5 % to 10 % of the value, which is really about half of what you've put into it because your down payment was 20. And so Warren Buffett tells you to buy and hold stocks. I would give the same advice to people. Make sure you're buying the right house and you're doing it for the right reason because you want to live there for a long time. But the real issue is that two people who went to Harvard, got six-figure jobs, haven't had kids, haven't even put cheese on their cheeseburger, are still struggling to buy a house.

6:20You've got this four-decade low in affordability, and you've got this arrested development and family formation and all this other stuff because America's forgotten how to build houses. Just one brief stat for you. at this point in baby boomers development when they were turning 30 they owned about 30 percent of u.s national wealth but millennials at this point when they are coming of home buying age they're starting to have kids they want to get married they own less than 20 percent and so what's happening is that the housing market went kaput at just the wrong time prices shot through the roof baby boomers are sitting pretty even people our age own a house and have seen it appreciate like crazy.

7:02But there's another group where the latter got pulled up at just the wrong time. And it's creating all sorts of discontent. People wonder why this TikTok generation has bad vibes about the economy. Well, you would too, if you were sleeping on your parents' couch, if you couldn't even have anyone over, how are you ever going to get married? So it's a real problem for American society that we don't have enough houses. We're about 5 million short. 5 million short. And so before we get into that, you had mentioned like, hey, you got to be in a place for a long time. Okay, let's imagine in our scenario here, the dual income, no kids, six-figure earners, went to Harvard or a great school, whatever it is.

7:40Maybe they don't have their student debt. They've been working that out. They're in their early 30s. And they can work remote. They're part of the blessed keyboard class. And they can pick any city. So they don't necessarily have to be in New York City, San Francisco. they could be within 100, let's just say, you know, 100 miles of a major city. So they're going to pick some secondary market. So they're going to buy. But what is the number of years to stay in a place? You mentioned if you're going to be there for a long time, buy. If you're going to be there for a short time, don't. So I just want to put a number on that for folks.

8:09Is the number five, six, or seven or a different number? What's a long time? Five's the minimum, but I'd feel a lot more comfortable with seven. Got it. I think five is a good number. So we'll go with seven. If you're going to be there for seven. Or you can go with seven. Yeah. Okay. So let's go six or seven. If you're going to be there for six or seven, consider buying. Under five, you're probably going to rent. Let's talk about building homes. I saw Joe Jebbia from Airbnb is working on the ADU company now. He was on the pod talking about that. We got to build more houses. But everybody I talk to, and I'm talking about rich people I know who are trying to build right now, they were telling me it's taking four, five, six years to build a new home.

8:47Yeah. And that it's costing$1 ,000 or$2 ,000 a square foot. In other words, they're going to lose money building a new home. And even if you're rich, you still have to push and push and push to get it done in four years. This seems insane to me. Is this an intractable problem or is there a solution? Perhaps ADUs or mobile homes. I don't know what. Factory building of houses. Because why is it so effed? Why is building new homes and construction so effed in America? Well, part of it is the regulatory regime. Even a place like California, where you live, has finally pulled its head out of its fanny and said, we've got to make it easier to build houses.

9:26The whole reason a place like Orange County exists is because somebody who ran an Orange Grove made a deal with a developer and said, we're going to create a city and we're going to build 20 ,000 houses in two years. So the federal government probably needs to get involved. We've gotten industrial policy for semiconductors, for green cars. We should do the same thing for housing because you have to cut through county and municipal regulations. There's all sorts of zoning and environmental reviews. And I am an environmental nut, but I also care about affordable housing. And so we have to cut through that and make it easy to build housing.

10:02The people who care the most about affordable housing, crunchy left-wing folks, need to go arm and arm with developers and cowboy boots and help them build more housing at market rate, luxury homes, affordable homes, all of it trickles down to benefit people who are trying to get a break and buy their first home. Right now, startups have to do more with less. And fundraising, well, we all know that's really hard today. So if you need tech talent, but you don't have the time to interview dozens and dozens of candidates, you need to check out Lemon.io. They have thousands of on-demand developers to choose from.

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11:20So they've been tested, battle tested, in fact. So here's a very easy call to action. I want you to go to Lemon.io slash twist and find your perfect developer or tech team in 48 hours or less. And Twist listeners get 15 % off their first four weeks. So stop burning money and hire developers smarter by visiting Lemon.io slash twist. So all units matter. All units matter. If we get any units built, all units matter. But I think the second thing is because the building and sales cycle has gotten longer and capital is so volatile right now, I think we need to guarantee some kind of loan for builders because the reason they won't stick their neck out and do a really big plat and build a large number of homes at a lower margin is because their cost of capital can shoot through the roof.

12:07If they're holding the bag on a really expensive loan and the rest of Americans who are owning homes actually get a 30-year guarantee, we need to provide some of that stability to the builders to make it easier for them to build housing. This was something I was shocked by. The building loans versus what we pay in mortgages. A mortgage right now is 7%, I guess, something in that range. Yeah, yeah, yeah. What does a builder pay if they need money for two years to build a house on spec? Where are they going to get charged? Well, it's just going to vary from week to week. So they're going to have a project that looks profitable, and then the cost of their capital varies with the debt market.

12:48So you know this because of all the startups you're involved with that have venture debt, and suddenly the rate on those loans shoots through the roof. The same thing happens here where they're in a very volatile world with a long sales cycle and suddenly they're left holding the bag and it's made them very risk averse. By the way, if we're playing kink for a day, I've got more ideas. I think we ought to tax unused land so that people either build on it or give it up. There is so much land speculation in the United States right now. There's this crazy kind of tinfoil hat movement to eliminate all sorts of other taxes and tax unused land.

13:27And even like respectable mayors of Detroit, folks like that have suddenly embraced this. So that's something that I'm really excited about too. This is a very interesting concept. People are sitting on plots of land because you have money and you need to park it somewhere as an affluent person or a business or a fund. And a great thing to do is buy land. We know it's not going down. Historically, that hasn't happened. It's possibly good. But generally speaking, it's a protected investment. So they buy plots of land and they land bank. They just sit on it, knowing it's going to grow 10 % a year.

14:03We should get tax rates to people. Well, if the land is undeveloped, you're paying a very high property tax. Whereas if you put it to good use and you actually build a home that someone lives in, that person pays a lower property tax. And the higher property tax is basically subsidizing a lower tax for people who are living in houses or people who are building properties and using that to run businesses. So it's 1%, generally speaking, in places like California, Texas, 2 % tax on the cost of your home. It's high. So let's just take Texas as an example. So I'm in Texas, I got a million dollar home, I'm paying 20 ,000 per year.

14:42I don't have a state income tax, but I got to pay on my nice home. So then my neighbor or some land baron has 10 plots of land and they're paying 2 % on it as well. You would push their rate up to what? To loosen up that land? I don't know. Maybe three and then have the other one go down to one and a half or something like that. I like it. What's interesting to me, by the way, is that I hadn't heard about any forced sales except in Austin, Texas, where suddenly we have heard that people who are running Airbnb empires in a city like Austin, which has been so boom and bust, are now saying, I have to sell these properties.

15:22There are a bunch of sales right before property taxes were due this fall, because they can't get anybody to rent those properties out. The regulatory regime has definitely turned against these Airbnb empires. And so all sorts of people, both institutional and retail, are liquidating some of their investments. And that's helping ease the market just a little bit so that there is more liquidity in the market, more inventory in the market. Yeah, it was very interesting. We talked about this on a previous episode. We were considering, hey, maybe we'll try Austin for a little bit. A lot of my friends moved there.

15:51And I was looking at it, listen, I need a nice home. And they were asking$2 ,000 or$3 ,000 a square foot. And I said, wait a second, I'm coming from the most expensive real estate in the world, or at least in the United States, the Bay Area, where$2 ,000 to$3 ,000 per square foot, if you can imagine it, I know for some people this sounds insane, is the norm. And then Austin, I was like, well, shouldn't I be getting 800 or 900 or 1 ,000? Shouldn't there be a discount because it's Austin? But I guess so many people rush there at once. Now I'm seeing the same homes I had looked at two years ago, still on market, being repackaged, redone, and they're at$1 ,000 a square foot.

16:24So it has returned to the mean there, I believe, for the high end. Yeah. And I was going to say that most markets have not had any price drops whatsoever. People keep worrying about it and it hasn't happened. The exception are these little boom and bust markets. Austin would be at the far edge of size on that. Boise would be at the lower end where Californians and New Yorkers have played havoc where they flooded in and then left. And now Austin is in free fall. It's been like 10, 20 points of price depreciation, which is not the norm in the rest of the country. But in these little places, it's been really hard on the people who live there.

17:00They saw prices get crazy, and then they saw prices fall, and they're just trying to plan their lives. Let's talk about the second home phenomenon. A lot of people like to get a second home. We get the lake house, the dream ski house, whatever it happens to be. Mazel tov, if you can swing it and have something for your kids, maybe their kids eventually, it's a beautiful thing to do. And what kind of impact does that have on the market? Because you talked about Airbnb. That was constraining housing. People were building Airbnb empires. And then, you know, the second home thing, and then there was this Picasso, Picasso, whatever, was trying to split up a home into eight pieces.

17:36Seemed like a clever idea. I had one or two friends who tried it who actually did like it. They bought it. One friend had a place in Palm Springs. And I guess he was at, he had an eighth, and maybe he had two of the eighth share. So he had a quarter share. So, you know, of the 365 days a year, you know, maybe he had 90 of them or something in that range. What do you think of those kind of ideas or just generally speaking, second homes that don't get put into the Airbnb market or just people use them for 50 to 100 days a year? What do you think about those? Are you asking for my moral judgment on those people?

18:09Not necessarily moral judgment, just the impact it's having on the markets. Hawaii would be another incredible example. It's hard to have workers in Hawaii because there's no housing. Any ski town is going through the same thing. People buy second homes in ski towns. Okay, fair enough. Airbnb speculators buy up the rest of the inventory. And you know who gets squeezed out is the person who runs a restaurant at that ski mountain or a ski rental store. In Hawaii, there's a lot of tension because if you work in Hawaii and you're a native to the land, you're getting pushed 45 minutes, an hour, an hour and a half from the city center, and you're going to have some resentment.

18:49So let's talk about that phenomenon. if there's easy solutions, common sense solutions? Well, there aren't any solutions without trade-offs, but what Canada has done is draconian and I think exciting for many affordable housing advocates where they put this massive tax on foreign-owned investment properties and on unoccupied vacation housing. And as a result, almost no one can afford to have a second house and say Whistler or something like that. You're paying an extra$100 ,000 or$200 ,000 a year just in taxes if you're not living in the property at least 28 days and it greater the Canadian real estate market.

19:27And you know what Canadians said about that? Good, good. We want housing to become more affordable. We want prices to crash. And as an American, I was so interested in that because here the politics are quite divided. Homeowners form a cartel. I'm a homeowner myself. So of course, All of us want prices to be high, but we forget what that does to younger people who are trying to catch that break. So I think there are different countries who have really different attitudes about affordable housing. And when Americans say we wish we had affordable housing, we just don't know how to get it. This is the easiest problem to solve.

20:04Climate change, hard. Income inequality, hard. Building houses and making them affordable is so easy. And the real reason we don't have it is because not all of us want it. Even people who think they want it don't really want it. They don't want that condo next to their house casting shade or blocking their view. They don't want taxes that would lower property values. They don't even want more supply because that, again, would lower property values. And so, you know, you read in your history classes about primogeniture, where the oldest male son gets all the property and it created conditions for colonialism, revolution, and the second son going to Australia or America.

20:47What we have isn't primogeniture. It's like dinogeniture, like we're dinosaurs like me, own all the houses and young people don't own any of them. And I think we're not going to have like a revolution where French people are storing the best deal over the price of bread. But we do have a lot of social unrest because kids can't afford houses. And it's a problem we can solve. It's so easy to solve. Yeah. Make more supply. Get rid of red tape. There's some creative things like changing tax structures for unused land. I love that. Foreign ownership maybe pays a different tax rate. That's a really interesting idea.

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23:00We have a trend in the Bay Area. It's called developer houses, but it's also called startup houses. You may have seen it on the show Silicon Valley. Somebody will find a mansion with eight bedrooms. They rent it for, you know, 15 ,000 a month, 20 ,000 a month, or even 30 ,000 a month. But since it has eight bedrooms divided by 30 ,000, you know, it's not that bad. It's 3 ,000 a room or something, right? but it's usually two to three thousand a room versus getting a one bedroom for 4K in the Bay Area. And you get a backyard, a pool, and a giant kitchen, a living room, everything like that. So people, and it's more fun.

23:32So, and then there's also people buying ADUs, mini homes in lots in Texas, et cetera, Nashville, other places, this trend of, hey, we bought an acre or two or three, and then we just started putting Airstreams on them. Rest in peace, my friend, Tony Hsieh, he lived like this, he's a billionaire and he, because he liked the socialization. So are those creative ideas where people try to break the system or hack the system? Have any of those tipped over into being viable yet? And are there other examples of hacking the system like those? Well, I think ADUs, accessory dwelling units, have tipped over.

24:04There's a promising startup, Abodue, that is really pushing this and they've made it easy and affordable where you go to a website and you just click a button and one plops down in your backyard for 200 grand a month later. And what's interesting to me about that is that people who build big apartment buildings, who big build housing projects suddenly see an opportunity wherever they have unused land just to get a better cap rate where they can get more tenants into the same physical footprint. And so they're the ones who are advancing it as fast as the consumers are. So I think there's something to that.