Industry veterans, degenerate gamblers & besties Chamath Palihapitiya, Jason Calacanis, David Sacks & David Friedberg cover all things economic, tech, political, social & poker.
Sun, 29 May 2022 19:25
This talk was recorded LIVE at the All-In Summit in Miami and included slides. To watch on YouTube, check out our All-In Summit playlist: https://bit.ly/aisytplaylist
0:00 Adena Hefets breaks down the state of the US housing market in 2022
16:56 Bestie Q&A with Adena: differences between 2008 and 2022, housing market reaction time, chances of a collapse, and more
30:08 Adena does a Bestie Intro for herself!
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Awesome. Hi everyone. My name is Adina. I'm the CEO of Debbie Holmes. It's a pleasure to meet y'all. Thank you for being here. Let your winners ride. Rain Man, David. We open sources to the fans and they've just gone crazy. Queen. Alright, so while they're pulling that up, I will just kick it off and get started because we're about 3 hours behind at this point. My passions are at the crossroads of finance, housing, and and inequality, and trying to solve all of these. I'll get into what my company does at the very end of the presentation. That's not what I really want to focus on, but I want to start off with a little story that I think explains why this is so important to me. When it was about the 1980s, my mom decided to go on a little road trip with her friends and she was in Israel and she was backpacking and she was hitchhiking and a man picked her up. She got into that car, fell in love, and got pregnant. That man is my my dad. My mom and dad quickly got married, immigrated back to the US and found themselves very young, 21 and 24, pregnant and trying to figure out what they were going to do with their life and they couldn't get a mortgage to buy a house and settle down. And be able to raise a family, but they were fortunate enough to find a woman who gave them seller financing on their house. And so this woman financed the purchase of the House. So let my parents pay an installment. And in that house they had three additional kids. I'm the third of four. And and then eventually we're able to get a mortgage, take cash out of that house and use the cash that they took out to pay for all four kids to go to college. And I tell you this because to me, this is the heart of the American dream, which is being. Able to provide a better life for your children than what you actually have. And so, so much of what we're going to be talking about here is why that American dream has disappeared for so many Americans and what we are doing to try to address that. So let's dive in. I have these bright blue slides. The goal is to just give you the take away so you don't have to figure it out. I try to stick to out one chart per slide to keep it super simple and I'll explain it, but this is the the take away that you should get from the next couple of data points I'm going to give you, which is wealth. Equality is rising across America. I think you all know this chart, which is that 99% of wealth is owned by the top 50% and the bottom 50% only own 1% of wealth here in the United States. So this this chart shows distribution of wealth by what your your household income is. So the top 10% of owners, sorry, the top 10% owned 76% of wealth. The next 40% owned 23% of wealth. You sum that up, 99% of wealth is owned by the top 50%. And what's even more interesting is that the rich are getting richer while the poor kind of stay at the same level of income. And So what this chart actually shows is income percentiles. So on the X axis, the zero is, if you're at the very bottom end of the income spectrum, at 100%, you're at the top end. And then the blue line is how much income or family household wealth you had in 1963, almost 50 years ago. And the yellow line shows how much wealth you have today. So if you were in the top 1%. Your household wealth was on average $2,000,000.50 years ago. Today it's about $10 million, or a 5X growth. And if you were in the bottom 50th percentile, you haven't seen your household income change almost at all. And so you might be asking, OK, why is this the case? Is it that wealthy people are making more in salary? I would say while there are some salary differentials, the main driver is asset appreciation, access to assets. And when I say assets, I'm going to use that pretty liberally. It can mean stocks, it can mean housing, it can mean small businesses, direct investments. But all of that, I'm a group together as investments in assets. And so you can see this is a a really simple chart where I took what were the 20 year returns by income as well as asset and you can see that. Household income has not appreciated much in the last 20 years, whereas the S&P 500 as well as if you owned equity in your home, you'd see an increase in your value of over 100%. You want to see something even crazier? You get leverage on your home equity, which is something that most of you, some of you might get get leverage against your equity that you missed in the stock market, but most of you aren't. You can actually lever up your home equity, right? And so you can take out debt that's cheap because it's backed and guaranteed. With the government's 80% leverage at what has been almost 3% cost of capital, no one else can get that sort of cost of capital at that sort of leverage, you're forced to amortize. So you build up savings in the property and a house has dual utility. You cannot live in the S&P 500. You can live in a home. And so if we click on and so the take away has to be those who own assets are more likely to have a higher net worth. And so this is a chart that I stole from the New York Times. So credit goes to them. But if you look on the left hand side, the blue bars, all of the bars kind of sum up to 100% going across. So the blue bars is the percent of families, so bottom 50 percentile of income earners, 50%, fifty to 80th percentile, 30%, so on. And what this is saying is that the bottom 50% of of families and household. Own 1% of overall equities in the market and when you look at directly held stocks, so stocks in the stock market, they own 0%, right. And if you look at the top 1% of of of income earners, they own 38% of overall equities, which includes like retirement accounts and everything remembers that that big asset cost. And they own 51% of all directly held stocks. So if you ask why are the rich getting richer, it is because they own assets. Assets compound over time. There's also a ton of tax benefits around owning assets, long term capital gains, which I'm sure you all know. And another way to look at this, which I think is really interesting, is your net worth by renter versus homeowner. Homeowners on average have 75 times. The net worth of a renter. This is all census data. It's all publicly available. I'm happy to share it. And and I think what is is so interesting here is that I'm not saying the answer is home ownership. You want to invest in crypto? Great. You want to put your money into the SP 500? Even better. However, the majority of Americans, as you just saw on this slide, don't invest in equities as much, right? It's just hard to conceptualize, whereas a house is actually pretty easy to conceptualize. And because the debt. Amortizes, you're forced to save overtime. It's highly illiquid. It's hard to take your money out of it. It is what makes a great investment. And so when you look at why this chart is so high, it's not because homeowners are saving a tremendous amount more, right? It's they're saving. They're putting money into the equity of the home they're being forced to in their payments. So despite the benefits of home ownership, it is starting to become fundamentally inaccessible. So this is a chart, really simple of of average home prices. There's a bunch of different ways you different sources you can measure home prices, but you can see that at the bottom of the recession, which was actually 2012 for home prices, the average home price in America was $163,000 and that today is closer to $338,000. That's a 200% increase in 10 years. At the same time, real median income has only increased from about $57,000 to $67,000. So what has caused prices for homes to increase so dramatically? If I have to, I'm pretty sure that none of this is new news. You all have been seeing how much home prices have risen. For those of you who have bought while interest rates were still 3%, good on you because that is probably the lowest they're going to be a really, really long time. But here's the quick history, which is from 2000 to 2008 we were building on average 1 1/2 billion homes. Sorry, million homes a year, not billion. Cash, 1 1/2 million. Once a year, and that equated to roughly four to five months of inventory. Months of inventory mean that if if there were no more homes that were put on the market, how long would it take to sell all those homes? Four to five months and that's generally considered a balanced real estate market. Then what happened? The global financial crisis. There was a mass number of foreclosures, the market was completely flooded, and all of a sudden you could buy an existing home that was going into foreclosure for $163,000. And so builders who had to pay for labor, for lumber, right, to actually build a house couldn't build a house for that cheap. The the cheapest that home builder can build a home is roughly $200,000 all in costs, right? And so if you can sit there and like, I can only build a house for $200,000, which means I have to sell it for more than $200,000 while I can't compete with existing foreclosure inventory. So home builders stopped building. They went from building 1.5 million a year down to about 750,000 homes a year after that. And it stayed like that until about 2015 and at that point. A lot of the inventory that came from foreclosures were absorbed and they started actually rebuilding again, but they didn't rebuild at the same rate that they had prior. We're rebuilding right now. We're building probably new inventories. One point I'd say 1.2 million annually. And so then this massive thing happened, which is, which is COVID, and all of a sudden everyone went from living in their studio apartment to saying I need a backyard and I need an extra room for childcare and I need an office. And there was this mass spike in demand after years of not building enough inventory. And So what happens when demand starts to spike and there's not a lot of supply while home prices took off, which you can kind of see right over here, is that little spiky part at the very end? And what's amazing is that it's actually just gotten incredibly harder, not just because home prices are getting more expensive, but because of the impact that that has in terms of how much you actually need to save to buy a home. So the left hand chart shows the yellow bar is your average down payment, and you can see that that's grown roughly 2X. At the same time, median income in the last 20 years hasn't gone up. So on an absolute dollar basis, you now need to save 2X the amount that you would have had to save back in 2000, so. On its down, payment is an issue. The second issue is that post global financial crisis, rightly so, the government tightened underwriting requirements. They said, you know what turns out when you cause a global worldwide recession, we should maybe change how we're doing things. And so they pulled back and said we're going to make you have a higher FICO in order to be able to purchase a home, which is probably the right answer, but also pretty painful because people don't wake up one day and they're like, I no longer need a home. Right. And so if you take a look at this, the average FICO for home. Tires is well above what the average FICO is for the general population and anyone who's under 45 years is even lower cause Figo cures overtime. And So what does this all come together and say is that unless you, you know, have the ability to save 2X the amount, unless you are above average in terms of FICO, when you're starting off your life in a starter home, you're going to struggle to actually be able to buy a home. Now this chart seems a little confusing, but I think it's really important to to look at and understand, so I'll walk you through it. So what this chart shows is, is mortgage rates 3%, six percent, 9%, we were at 3%, call it a year ago, we're at I think 5 1/2% right now is roughly where the 30 year fixed is. And then 9%, who knows maybe, hopefully not in the future. And that says what is your mortgage, tax and insurance payments, what you have to include for a $400,000 home, which is roughly. Average home price, and I know a little different in Miami, but this is kind of across the US and then I said how much income do you need in order to get that mortgage? And you can see that your income that you need goes from about $94,000 of household income up to about 160,000 of household income. And then I said how many households could qualify for that because there's data on, on how much income households make across the US they're 126 million households in the US and you can see that historically almost 40%. Sorry, 30% of households actually could afford a mortgage where we were before and that number today is gotten down to now 22% and will go down to about less than 15% of people who can actually get a mortgage on a home. This is insane. So over here I kind of, I like to just overly simplify things. So I kind of put it here, which is a $10,000 increase in home prices means 1,000,000 fewer families can own a home or a 1% increase in mortgage rates mean 5,000,000 families can actually own a home. So we're in a little bit of a tough situation here. So when I started divie, the goal was to help solve wealth inequality by giving Americans access to assets. This is the sole goal, the purpose what I really believe in, which is that access to assets and compounding wealth in something that you cannot easily pull your money out of and you just leave it there, is the way that we can help people generate wealth for their families, for their children, for their next generation. And so the way Debbie works is very similar to a mortgage, except it's not a mortgage. You come to our website, you apply, we give you a budget. So we might say, hey, you're approved for $500,000 home in Miami, go out shopping, you shop with your realtor the same way you would with a mortgage. And when you're ready to buy a home, you just let us know what home you choose. We say, great, we put out an all cash, quick clothes offer for you so you can compete with every other investor offer that's out there. We'll take care of it for you because we know how to bid on these. Homes, we then take care of the inspections. We cover all closing costs, all fees, everything we had to closing and you commit either 1 to 2% down, which is about 1/10 of a usual down payment. Down payments are 10 to 20%. We say 1 to 2% and that your initial equity in the home you own that, that is yours and then you move in. You make one monthly payment per gram per equity the same way a mortgage is principal and interest and the equity piece builds up your percent ownership. We let you build up to 10%. Over the course of three years, at any point in time you can get a mortgage or refinance and take us out or you can cash out your equity and walk away hopefully with 10s of thousands of dollars saved up. So that is how we work. We operate in 16 metros. Our biggest ones are Georgia, Texas and Florida. Florida is a big one. Up in Tampa, the average income of our customers is about a 50,000 to $150,000 household income. 50% of our customers are people of color and 80% of our transactions are female. The lead. And so I think the most important thing is are we successful in our mission and what we're trying to do. So 51% of customers who have come to the end of their three-year lease have been able to buy back their home, probably another 20% on top of it aren't yet ready for mortgage. And so we're just let them build more equity over time and about 30% of people turnover, which is completely fine. Sometimes you have an extra kid or two and you need a bigger home and that's that's OK. We actually love that people can cash out their money and continue moving on. And over here we have what I think is one of the more powerful thing, which is the average renter savings versus the average savings that a Divvy customer has in their home. We're almost 25 times the savings that the average renter has. And this is because they are building up equity in their property over time. And. Over here, just to show we're growing quickly and we're doing it profitably. Actually think this is super important is you can sit here and say that you are building a mission oriented company. You have to show scale, you have to show growth and you have to show that people there is adoption and you're actually having an impact. And so this year alone will deploy over a billion dollars of capital. We measure a margin as the rent that we collect, less home cost, less interest. So it's like a true profit all in margin where we're almost probably going to be at about 25% all in profit margin. And now I think we have. Yeah. Thank you. I think that there is a video, but I don't know if they're showing it. So we can we can maybe go to Q&A for running close on time. OK, cool. Thank you. Nothing. I know that freeberg's going to talk to you about consumer credit, but let me just tee up something before there's a tweet. I just want to read it to you and maybe we can use this as a jumping off point. Blackstone calls homes almost as unaffordable as the 2007 peak. They they just said that today. His name is Joe Zittle, who's a I guess a senior partner there. But he believes the crash is unlikely due to a major difference, which is at most. Owners aren't using their homes like an ATM like they did back then. Yeah. Can you just explain sort of the broader state of housing actually, and sure, why some people feel like we're actually OK right at the brink of a crisis again and some people don't. OK, yeah. Interesting. So the global financial crisis is very different than this because it was obviously a housing LED crisis where we had people overextend and they didn't have enough equity that was built up in their house. Cushion a decline in home prices, I'd say that this is a very different situation today. And I'd say that because, one, we don't have a lot of supply. And so fundamentally we were thinking about pricing supply and demand dynamics. Number one, we don't have a lot of supply now. What you can probably argue is there is an equilibrium point, meaning interest rates are increasing, which is starting to stifle some demand. Don't get me wrong, we're actually seeing that a bit in the market. And then there's new home builds that are coming online and at some point there's going to be. Inventory coming online that there's going to be enough supply and a decrease enough in demand that it will impact home prices. Now I don't know that that's going to be in the next six months. I actually think it's gonna be more like 12 to 18 months. And I don't think that it means that there's going to be a mass fall off like it was in the global financial crisis. But it will slow down the price of which ones are growing up. How much of this is just the like. Miss cast housing policy that a lot of States and cities have. I'll give you an example of where I live. I just got an, you know, an e-mail from our mayor and basically what it said is, like in the state of California now, they've basically said you need to have a certain amount of housing density. They're trying to figure out how to do it. They're not going to build high rises because those aren't allowed. Then they, you know, you allow these AD us to get built that qualify and it's all gamesmanship because as far as I can read it, the Nimbyism of not wanting to have high density homes. And that seems to be a very just American phenomenon. Well, I actually think that it's a little bit that the markets just react slower. Like this isn't the houses aren't equity markets. They don't just, you can't just buy and sell rapidly. It's like, oh, I want to build an entire community of homes five years, I'm going to have to now plan in order to get the government licensing, the regulation and the permits to actually build. And so you see a problem, you're like, oh, home prices are increasing and then it's like five years later, you can actually do something to actually impact. And by then, the entire market has like completely changed. I mean, Russia invaded Ukraine and COVID took over, and there was a global pandemic. And so I think the bigger issue is that the housing market can't react as quick to keep up with public equity markets. And a lot of that is because the government highly regulates the building of homes, which takes a tremendous amount of time. And especially right now where builders are like, I think that most builders miss their cue on numbers, how many houses they were actually going to build by almost 60%. Which was mostly supply chain. So even when they rush it, a lot of other factors are impacting it. And then what do you think about the because I've talked about this a little bit on the pod because it's something that's really I think poorly understood but important in my opinion where Fannie Mae and Freddie changed the upper bounds of mortgage, of mortgages where you know you can, they can be conforming now at like $1,000,000 whereas before they used to be considered jumbos. And anyways the reason I'm asking this question is I feel like there's a lot of financialization and engineering. You're in the housing market? That is poorly understood. That in some ways tricks consumers to getting in a little bit over their ski tips. And then in a moment like this, where rates rise, their jobs a little bit more insecure. This is when all of the parade of Terribles happened. Yeah, so we just added a wonderful woman. Her name is Kimberly Johnson says actually, our first independent, she was the CEO of Fannie Mae, and I brought her on to, like, fully understand as much of this as possible. So the last time the government changed the underwriting criteria, it led to the global financial crisis. So if you ask them if they're like, really excited to do it another time, they're like, no, no, we we learned our lesson once. So I'd say that they're actually because they've been under conservatorship. So most of Fannie Mae's operations have been very dictated by the government and they're not actually taking probably the level of risk that they should in this current market. And what I mean by that is if home prices go up by 30%. The what actually qualifies as a conventional mortgage needs to go up by 30%. But that is such a massive change for government to make because they're so shell shocked I think from having made a change before and it having such a negative ripple effect. So when I, you know, spoke to Kimberly her her response was no, no, no, no. We're not here to start making these changes to make it easier for consumers to get a home. That's your job. You disrupt us, you do that. I'm not here to take risk, but you. But they felt the government. Felt like they still like I. They felt like that was just a natural change that had to happen, raising the the the upper bound cap. Yeah, I mean, of course everyone is. What's actually even crazier is I'm waiting for them to actually raise the debt to income ratio because of what I showed you earlier, which is if your income is not increasing. And mortgage rates are going up and home values are going up. You now need to spend a larger percentage of your income on housing that's it's a map that's that's a lending change, right. But isn't that up to the individual banks they could change, they put overlays on top of Fannie Mae requirements, but Fannie Mae because they actually put. So when the global financial crisis happened, they were such very high fees and penalties that went for banks that didn't have really strict overlays that actually had a ton of defaults. And so now banks are super nervous to lend to people and actually take risk. That they actually follow Fannie Mae's guidelines very strictly and actually put overlays on top of it. So they actually are more conservative a lot of times than what the underwriting requirements are. And so in order for them to actually start to take risk, I think Fannie Mae would have to encourage him. They'd have to do it in such a way that they don't penalize. Yesterday, we had Bill Gurley and Brad Kirschner on. If you saw that panel, didn't hear about it now. OK, yeah. So you did see it or not. OK. OK. We looked at all of assets being inflated, yeah, from used cars to NFT and everything in between, and we've now seen compression, and we talked about this in the pot in every single sector except housing. And so we're all sitting here wondering, what are the chances that housing collapses? I was talking to my pal Palmer backstage, my new bestie. Interestingly, we went backstage and no, no, no, don't ruin it, don't every, we, no, we just sat there. We had a great conversation about 10 different things. It's pretty interesting. So what are the chances and we're talking about the chances of a collapse, he said maybe it's 30% chance. This real estate, we're watching your talk, 30% chance, maybe the the real estate market collapse. What are the chances in your mind being so close to it that we will see housing collapse and this be a bubble? There's there's no question that housing growth is going to slow down. If you look at down, but I'm asking you answering your call home price, price pricing, new home price pricing, the growth will slow. Now whether it goes negative or not I think is more a matter of what the economy does over the next 24 months. But I actually think that what we will definitely see which we have seen I'd say in the last two weeks we've seen a slowdown in the in the rate of growth for homes. And now the global financial crisis was very different than than what we're seeing today and if you. Any bottom of the the stock market for the global financial crisis, 3909, bottom of housing crisis, June of 2012, three years later. Why? Because the housing market moves so slowly compared to the equities market. And so it is not surprising that housing is going to be the last thing that's going to actually start to to compress in terms of people live there for a while they can afford their mortgages, than their income dropped and they can't afford their mortgages, then they get foreclosed. Then it's six months later, but also like this long this stock market. Like, I should sell my home. That's gonna take 30 days. Then I have to find someone. Oh, that's gonna take another 30 days. Then I have to wait till they move in. That's another 30 days. And so it's three months before you can, like, make a trade. I think I can't log on to your Robin Hood account and be like, yeah, I know the markets, thinking, let's get rid of our house. Can I can I shift the conversation for a second? You're a founder of a Unicorn. Yeah. Raised the big round. Yeah. Congratulations. Thank you. Timed it right so well. This is what I was just going to ask you. Can you talk to us about your mindset in this moment now? In terms of your valuation, in terms of your cash, in terms of your burn, in terms of your employees, what's what's sort of front of mind, what are you doing same, different? Yeah, I'd say so. We raised a $200 million round from Tiger. It was pre empted back about six months ago or maybe even nine months ago at this point. And I think that it's actually interesting to listen to you guys on the pod, the besties, and I think that, you know, for me as a founder, when I was going through that moment, I was like, well, **** man, it's a Black Friday sale. Like, I can raise a ton of cash. I'm getting preempted left and right. And so I actually think. That founders, like, obviously I should have played the game that I played, which is like, why wouldn't I raise a ton of capital and take less dilution? There was nothing that was the right chess move at that point in time and now kind of to your point. And by the way, it's not founder's fault that the market got overheated. You guys gave us the term, you did the rational thing. By the way, you did the right. No, no, you did the rational thing. Rational, yeah, completely. And so, but now, but now, now you have to just now I'd say, look, Debbie, we make, I don't know, we haven't probably put about hundreds of millions of dollars in revenue. I burn less than, I don't know, 5 to 10 million of a month, so less than 5,000,000 a month. We have 300 employees. And do I think you have to be conservative? Yes. Do I think you have to be conservative along the entire way of building a company? Yes, every second I thought my company can die at any moment, right? 100%. And I run my company like that. My, they, my employees show they're like, you're the most frugal person ever. Like every single time we need to spend more time like, yeah. Don't want to invest some to take around her. Thank you. Yeah. Yeah, that's awesome. Do you, do you rely on your late stage investors in moments like this to, like help you navigate or how do you do it? You rely on your early stage. First of all, I don't think you rely on investors ever. Yeah, no, I don't mean that offensively. I think that some investors are great, but no one's building this company with you. I am building this company with my employees, but ain't nobody else there with me. And so when times get tough, it is on you to make sure you can have a path to cash flow. Profitability, if you can actually raise another round of capital, but you try to support your employees and work together to kind of weather through this. But I don't expect any of my investors to show up with a Hail Mary. And I think that it's on me to run a really strong profitable business. And so any changes from June to now or not really just kind of stay the course, get to the cash flow break even like meaning nothing to accelerate it or so I think we plan out a bunch of different cases. So we always have. The base case, target case and then what I call the off ramp which is go cash flow positive and every week my CFO, COO and I again on a call and we just say how's the market doing? How do we feel? Do we want to switch from our base to our target case? Do we want to go down the off ramp path? Nope. This week feels the same. The All in podcast didn't change your sentiment and we continue on, on Monday morning as planned and sentiment index, I like it. It's it's it's great to to have you. Here and I had had you on my podcast earlier and I had told you like, God I thought this was gonna be the most boring podcast and it was one of the best of the year. You are being kind of. I don't know if that's a complimentary that's how you really feel. You know it was like a boring topic and and you you and you know it again. Please tell us how you feel. OK, like a really boring topic but a great guest and you made it really really. Really educational. I think they're still fully until right now. Wow. Wait. From day one I do have as we're heading towards ending. I do have an intro. Ohh because I thought we were all getting tried this. It didn't work so well for well I thought we were all in my interest. Anyone? OK, free birth mom everybody. So I made my go ahead give your intro, which I feel like I should give, which is alright y'all ready for it. I'm in Miami, chilling with the besties on this stage. In a minefield of testes shake out. They have kindly invited me to share my passion. So here goes in true, all in fashion, I played the housing long game as the stock market will jitter, but solving inequality is less flashy than almost buying Twitter. I'm the rent to own leader in the prop tech arena. I'd like to reintroduce myself. My name is Adina. Nice, Dina. That's awesome. We'll let your winners ride. Rain Man David sack. We open sources to the fans and they've just gone crazy with it. Besties? That is my dog. Oh man. We should all just get a room and just have one big huge order because they're all useless. It's like this, like sexual tension that they just need to release somehow. Beep. Beep. See what? Where did you get merch?