Assessing the State of Real Estate Innovation in a Rising Mortgage Rate Era

Alongside a panel of venture capital investors at Inman Connect Las Vegas in August, First American Chief Innovation Officer Paul Hurst discussed proptech funding and the state of innovation in the real estate economy. 

He shares his key takeaways from the discussion below, and how First American continues to push the innovation envelope during the current real estate market.

How do you view the current state of real estate innovation?

The frictions we are solving for in the real estate transaction remain paramount – how to make the process better, faster and cheaper by combining the best of people and technology. The most recent generation of business models operated in a decade-long bull market and were buoyed by a zero- or near-zero-interest rate environment.

The environment is much different today, particularly with interest rates rising and uncertainty regarding how long the Federal Reserve’s fight against inflation keep rates elevated. This context hurts some business models more pointedly, namely capital-intensive financing solutions, refinancing-centric businesses, and companies using capital as a competitive weapon to grow with limited underlying innovation. 

As the bullish excitement in these solutions wanes in the wake of the current macro-climate and the bursting of the SPAC and private investment bubbles, the jury is still out on long-term valuations of these business models.  

“When investment in real estate technology re-accelerates, we will have the benefit of our steadfast approach to innovation through the down cycle along with the foresight gained from more than 130 years of industry leadership.”

What can be learned from the last wave of venture activity in real estate?

Looking back, there are examples of areas that perhaps attracted too much capital too quickly, including refinance-centric mortgage and title businesses, cycle-specific solutions (e.g. cash offer companies), and certain brokerage business models. There was also an over-emphasis on technology that neglected the power of the agent and the people involved in the mechanics of a real estate transaction, including loan officers and escrow officers. However, that does not diminish the importance of solving for the frictions in real estate transactions and embracing the secular shift of the digitization of real estate. 

The whirlwind of real estate investment over the last couple of years highlights the need for a long-term perspective and breadth of historical knowledge in the market. Everyone has been reminded how real estate is cyclical in nature, so it takes time and committed resources to build technology that can handle the complexity of these transactions.

Where does real estate innovation go from here?

In tumultuous times like these, power tends to shift towards incumbent businesses – either startups with scale and liquidity or existing industry stalwarts who can continue innovating through the down cycle. In general, the current macro-climate sets us up for increasing industry consolidation, whether organic or inorganic.

Merger and acquisition activity is likely to accelerate in the next 12-24 months – driven by either those incumbent businesses or private equity, or both. So far, there has been a steady flow of smaller 'acqui-hire’ type M&A activity, but the longer the current macro-climate persists the more pressure there will be on companies to either become profitable or find a long-term capital source. This will help to narrow the bid-ask spread in the M&A market, which is currently a significant blocker to clearing transactions.

At First American, our leadership and culture of innovation continue to fuel new ideas and enhancements, while we wait for the market to turn, which it inevitably will, it’s just a question of when, not if. We’re continuing to invest in the build out of our digital platforms, including Endpoint® and IgniteRE™ in residential real estate and ClarityFirst® in commercial real estate – all of which are digitizing and automating key parts of the settlement process. We also continue to leverage our proprietary data extraction technologies to enhance our property data leadership and to power our instant title for purchase efforts, which will power greater efficiency in the process of buying and selling of real estate. One compelling example of our use of our data extraction technologies is CovenantGuard™, which has demonstrated real progress in helping California counties address the painful relics of discrimination found in public land records – and was the catalyst for First American being named one of the 100 Best Workplaces for Innovators by Fast Company. 

When investment in real estate technology re-accelerates, we will have the benefit of our steadfast approach to innovation through the down cycle along with the foresight gained from more than 130 years of industry leadership.

Nothing contained in this article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This article is intended for educational and informational purposes only. First American makes no express or implied warranty respecting the information presented in this communication and assumes no responsibility for errors or omissions this communication may contain. ©2023 First American Financial Corporation and/or its affiliates. All rights reserved.
Paul Hurst

August 31, 2023

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