Five Innovations that Could Upend the Housing Market

Don’t overlook technology’s role in shaping housing demand–and supply. Here are five technologies that will make a difference.

Today’s guest post is by Brad Hargreaves. Brad is the author of Thesis Driven, a newsletter covering the real estate industry and the future of the built world.

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The housing market is largely a story of macroeconomics: interest rates, demographics, construction costs, and movement patterns. Unlike in other industries, technology has mostly taken a backseat, with construction productivity stagnating and houses being built as they were 50 years ago.

But there are a handful of trends in motion today that could break the status quo. This article discusses five of the biggest trends—from financial innovations to new technologies—that could transform the housing market.

1. Home Equity Agreements

Mortgage rates have now been stuck at a frustratingly high level for over two years. While elevated rates have made it hard for many renters to buy their first home, they’ve also meant many existing homeowners are “stuck,” unable to move or access the equity they’ve built in the homes they already own. 

A new wave of companies have emerged to help existing homeowners solve this problem through Home Equity Agreements, or HEAs. Under these agreements, a company (such as Point or Unison) offers homeowners up-front cash in exchange for a share of either home equity or future home price appreciation. Unlike traditional home equity loans or lines or credit, HEAs do not burden the homeowner with monthly payments or interest charges.

The HEA market has significant potential; a recent TransUnion report estimated that Americans have $22.1 trillion in tappable home equity. With the home loan market under tight regulatory scrutiny, the HEA market has expanded rapidly since 2009 and seen the emergence of a robust secondary market for securitized HEAs. Unison, for example, stood up its own REIT for HEAs, while several HEA originators have issued HEA securitizations in recent years. This summer, private equity firm Carlyle announced a partnership with Unison to purchase $300 million in HEAs.

Of course, HEAs are complex instruments, and many people are concerned that homeowners don’t totally understand what they’re signing up for. For example, some HEAs manage their risk by applying a discount to the initial home value. Others include a lockout period that restricts early payouts (via home sale) for a period of time. Given their surging popularity—partly as a replacement for highly-regulated home loans—it’s likely the HEA market will see more regulatory scrutiny in the coming years.

(Thesis Driven guest writer Hunter Hopcroft did a deep dive into HEAs in September; you can find that here.)

2. Autonomous Vehicles

After a premature hype cycle eight years ago, many people wrote off autonomous vehicle technology as perma-vaporware. After all, the main promoters of driverless technology at the time—Uber and Tesla—didn’t have the capabilities to back up their lofty promises of a driverless future. As a result, the technology entered the trough of disillusionment, with many in the real estate industry seeing functional autonomous vehicles as permanently 10-to-20 years in the future.

But other autonomous operators such as Alphabet’s Waymo took a more slow-and-steady approach, emphasizing safety and edge case handling over sweeping visions and ambitious promises. Consequently, many were surprised when Waymo published data earlier this year indicating that its driverless vehicles are likely already significantly safer than human-piloted automobiles, with 72% fewer injury-causing crashes across more than 40 million miles driven.

Since then, Waymo has embarked on an accelerating expansion, growing to cover much of Phoenix and its suburbs, the west side of LA, Austin, and major parts of the San Francisco Bay Area. And the service has proven remarkably sticky, with far better passenger retention than either Uber or Lyft.

Of course, full Level 5 autonomy—driverless anywhere and in any condition—is still far on the horizon. But full Level 5 isn’t necessary to completely transform patterns of living and working. Once autonomous vehicles can safely cover enough of the trips most people do—to work, to school, to the grocery store, to a show or restaurant downtown—they open up changes to the built environment from reduced needs for parking and gas stations to shifts in where we prefer to live.

Specifically, fully autonomous vehicles make longer commutes more tolerable. By no longer needing to pay attention to the road, passengers can read, answer emails, or even play video games or watch movies.

While this is possible with rideshare programs like Uber and Lyft today, it would be cost prohibitive for most people to have a private driver take them to and from work every day, particularly if they live far away from their jobs.

Without the need for a private driver, many analysts believe that autonomous vehicles will push the cost of this kind of commute way down over time. (Most Waymo passengers also note that autonomous vehicles offer a far smoother, less nauseating experience than human-powered automobiles.)

When combined with hybrid work pushing most work weeks to 2-3 days in the office, it’s likely that exurban locations will continue to boom as commuters choose affordability and space over short commute times.

3. AI Agents

This August, the National Association of Realtors reached a settlement with the Department of Justice by prohibiting requirements that commissions be posted in the MLS, effectively ending the practice of listing agents paying buyers’ agent commissions, and putting the commission burden on the backs of home buyers.

While the outcome of this settlement on the brokerage market is still unclear, many investors and entrepreneurs believe that buyers’ agent commissions are likely coming down and new tools will arise to help both agents operate more effectively and buyers operate without an agent.

As a result, a number of entrepreneurs have launched “AI agents”, or artificial intelligence-powered tools designed to assist with the home-buying journey from discovery to booking tours and negotiation and close. In general, these tools fall into three camps: (1) tools that help existing agents and brokerages be more effective like Sidekick, (2) new, AI-first brokerages that limit the role of the human agent like Modern Realty, and (3) tools that help buyers DIY it and complete their home purchase without any agent representation like RealTransact.

On the surface, this kind of “copilot” tool is an appropriate use of AI. Computers are great at things like pulling comps, doing basic research, analyzing listings, and even booking tours. But they’re not quite as good at counseling humans through one of the most important decisions in their lives: buying a home. And the legal aspects of the home buying process can get hairy and require human involvement when not everything goes according to plan, as often happens.

Regardless of whether the tools stand alone or sit in the hands of existing agents, LLMs are likely to have a tremendous impact on the home buying process, giving buyers and sellers alike greater visibility into the market as well as analytical ability. And they couldn’t come a moment too soon, as the coming (likely) end of Clear Cooperation threatens to end the MLS as we know it.

4. Accessory Dwelling Units

Accessory Dwelling Units (ADUs) aren’t exactly new or groundbreaking technology. But they are hitting an inflection point on the adoption curve and having a meaningful impact on the housing market–at least where they’re allowed.

Also known as tiny homes, granny flats, and in-law units, ADUs are simply a second residential unit sharing a lot with a primary single-family home. While some ADUs are converted garages or basements, they’re increasingly built as standalone structures in a primary home’s backyard. And while they have a reputation for being the place Grandma lives before she heads off to the nursing home—ergo the name “granny flats”—urban policymakers increasingly see ADUs as a powerful tool in the fight against the housing crisis.

California is currently leading the charge on ADUs. In 2023, over 20% of all new homes built in California were ADUs. (The real number is likely much higher, as many ADUs are built without permits.)

Several legal reforms passed in California over the past five years are responsible for this surge in ADU development, but two in particular stand out.

First, California legalized ADUs at the state level on any single-family lot, pre-empting hundreds of local restrictions.

Second, California waived the owner occupancy requirement for ADU development. In most places where ADUs are allowed, the law requires that the primary home be physically occupied by the homeowner. By waiving the owner occupancy requirement, California opened the ADU market to investor capital. In many cases, investors buy single-family homes, add an ADU to the backyard, and rent out both structures to separate renters, producing higher yields than they’d be able to generate without the ADU.

And while ADUs have a reputation for being “tiny homes” only suitable for a single person, new ADU designs have multiple bedrooms and bathrooms, rendering them indistinguishable from traditional houses.

With ADUs helping California make inroads against its housing crisis, some believe it’s only a matter of time before other states follow suit. Colorado, for example, copied California’s ADU approach in a law passed earlier this year, legalizing them statewide and waiving owner occupancy requirements.

Of course, many unanswered questions about ADUs remain. While some believe that ADUs will eventually come manufactured and pre-packaged, no manufactured ADU concept has yet achieved scale, and the vast majority of ADUs are still built using traditional methods by general contractors.

(We did a deep dive on ADUs in Thesis Driven a few weeks ago, you can check it out here.)

5. Better Batteries and Microgrids

For decades, off-grid living has been the domain of survivalists, doomsday preppers, and YouTube influencers. But the combination of dramatic improvements in solar and battery technology–as well as growing challenges to the electric grid–may make it more common in the coming years.

The average price of solar panels fell from $1.54 to $0.20 per watt from 2011 to 2020, driving a dramatic increase in installed capacity–both in traditional solar plants as well as rooftop and backyard residential solar.

But unlocking genuine independence from the electric grid requires not just power generation, but storage. And that requires vastly better batteries.  Fortunately, battery technologies have also seen dramatic advances in the past several years largely off the back of the growing electric vehicle market. In the near-term, advances in solid state battery technology are likely to improve efficiency and cost, whereas in the longer (10+ year) term totally new battery models like lithium-sulfur could dramatically change the landscape.

These advances are coming just as the American electric grid faces unprecedented challenges. The simultaneous growth of the EV market alongside the power-hungry artificial intelligence sector has led to power demand surging far above forecasts, forcing utilities to prioritize between customers and bring new capacity online. In some markets, wait times for a new power grid connection are stretching for years, forcing developers to get creative with potential solutions. The infamous Three Mile Island nuclear power plant, for example, just announced its intent to reopen to serve a single Microsoft data center.

Microgrids are another solution we’ll likely hear more about in the coming years. Facing rising energy costs, some developers are creating their own private energy grids with co-located power generators and batteries. The combination of improved battery technologies, lower solar and battery costs, and long utility connection wait times will make these private grids far more common over the next decade. While this gives developers some independence from slow and bureaucratic utilities, it also means real estate owners can’t benefit from the economies of scale of larger utility networks, potentially raising costs long-term.

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Technological change happens slowly, then all at once.  While the housing market has been largely insulated from major tech-driven disruption over the past few decades, it’s unlikely to be quite so undisturbed over the next ten years. 

–Brad Hargreaves