Neal's Deals (Vol. 74) - Mortgage rate decline: What it means for buyers and the startups trying to improve home affordability 📉🏡📈
Hey everyone - Good news for consumers amid this tumultuous week in the equity markets: mortgage rates have fallen to their lowest level in over a year, offering hope for relief in the battered U.S. housing market. The average rate on a 30-year fixed mortgage dropped about a quarter percentage point to 6.47% marking a low not seen since May 2023 and the sharpest weekly decline in nine months.
Mortgage rates have nearly doubled since the Federal Reserve began its campaign to slow inflation in early 2022, significantly increasing the monthly cost of borrowing for a home. If this decline in rates is sustained, it could bring some Americans back into a market they have been priced out of in recent years as even a difference of a few percentage points can mean paying hundreds of thousands of dollars less in interest over the life of a 30-year loan. However, with every winner, there's often a losing side. In this case, the reduction in mortgage rates could present challenges for property technology (PropTech) startups dedicated to addressing the home affordability crisis.
In this edition of Neal’s Deals, let's dive into why housing prices have been so high over the past few years, what is driving this recent decline in rates, and how it affects PropTech startups and the homebuyers they aim to serve.
Why have housing prices been so high?
Housing prices have remained high due to a combination of elevated mortgage rates and a lack of new construction. According to ICE Mortgage Technology, over 90% of homeowners with existing mortgages currently benefit from rates of 6% or lower. This favorable interest rate scenario discourages homeowners from selling, as it would mean borrowing at higher current rates, leading to inventory levels dropping to about half of the pre-pandemic norm.
Additionally, a new generation of millennials is looking to purchase homes for the first time, but the shortage of new construction and the reluctance of current homeowners to sell exacerbate the situation. A recent Zillow report indicates that the U.S. is short by 4.5 million homes to meet the current demand.
What is pushing rates down?
Mortgage rates tend to loosely follow the yield on the benchmark 10-year Treasury note and the Federal Reserve’s interest rate decisions. The treasury note yield rises and falls based on expectations for the economy. Recently, yields have fallen amid fears of a slowdown in the U.S. economy. When investors are concerned about economic growth, they move their money into safer investments like U.S. Treasury notes, increasing demand and driving yields down. Additionally, if the Fed cuts rates as they are signaling, it generally indicates that borrowing costs will decrease across the board, including for mortgages.
What does this have to do with PropTech startups?
Many PropTech startups have emerged in response to the housing affordability crisis, with many predicated on a high mortgage rate environment. For example:
Should the Fed continue to cut rates, bringing mortgage rates and housing prices back down, the value proposition of many of these startups could be significantly impacted.
When investing in startups, it’s essential to think long-term and consider how the market could evolve. If mortgage rates revert to historical norms, placing big bets on some of these well-meaning startups might get a bit trickier. We could see some pivots or new services emerging as they adapt. But hey, if it means the middle class can finally afford homes again, that’s a silver lining worth banking on.
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Let’s get to it:
FranShares , a Chicago based startup that allows people to invest in franchise businesses aiming to provide passive income and portfolio diversification, raised a $4.1 million seed round led by Chicago Ventures.
Why this is interesting: Unlike traditional franchise models requiring significant upfront investment, FranShares connects investors with franchise operators, enabling fractional ownership without the associated headaches. Founded in 2020, FranShares has attracted a diverse community of investors, including millennials, Gen Z, and family offices, investing in various industries like food, kids' fitness, and waste management. The platform is regulated by the FTC and SEC, ensuring investor protection. I support the democratization of financial markets, but many fractional investing platforms face significant challenges. Key issues include customer education on the benefits and risks of investing in this asset class and understanding return profiles. For example, the S&P 500 has averaged over 10% annual growth over the past 100 years, raising the question of why investors should consider an alternative like franchise investing. Regardless, FranShares is targeting a massive whitespace opportunity with few direct competitors. If they can develop an efficient acquisition funnel, they may be able to create a winning platform.
Terrantic , a Seattle based data analytics platform for the food supply chain industry, raised $3.5 million in seed round led by Supply Change Capital.
Why this is interesting: Food waste poses a significant challenge for food manufacturers, leading to substantial time and financial losses. However, advancements in data collection and machine learning models offer a significant opportunity for the traditionally manual fresh food industry and its partners. By integrating disparate data sources and providing comprehensive context across siloed operations and organizations, Terrantic learns an organization's operations, optimizes planning and scheduling, and enables peak efficiency. The goal is for food processing companies to eliminate the need for business intelligence reports or paid data professional services. Although the founder of Terrantic lacks direct food manufacturing experience, he has successfully built, scaled, and exited a similar process automation solution for the mining industry, which helps alleviate concerns about built feasibility and execution. I am interested in understanding what an efficient go-to-market strategy looks like in this space, as the food industry likely receives limited attention from startups and may require a creative sales approach.
Chaiz , an Austin-based marketplace for extended car warranties, raised $3.7 million in seed funding led by ResilienceVC.
Why this is interesting: With the average age of vehicles on U.S. roads reaching a record 12.6 years and the most common check engine light repair costing over $1,300, the demand for high-quality, affordable, and reliable extended car warranties is at an all-time high. Chaiz empowers consumers to make informed decisions and potentially save significantly on repair costs. Positioned to revolutionize the $40 billion vehicle service contract industry, which has been plagued by spam, the startup offers a user-centric approach by allowing customers to get quotes in minutes without needing to submit a phone number or email address. By leveraging an online approach, Chaiz eliminates the middlemen typically involved in purchasing warranties through car dealerships and call centers, ultimately saving customers 40% on costs. Chaiz is bringing trust back to a market ravaged by those annoying "We've been trying to reach you about your car's extended warranty..." robocalls. They're making extended warranties cool again.
Deals in the Works: If you want to learn more - feel free to reach out
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Quote of the week:
"If opportunity doesn't knock, build a door"
— Milton Berle
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Have a great weekend everyone!
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3moThe dip in mortgage rates has certainly stirred up the housing market dynamics. It's intriguing to see how PropTech startups will adapt to this shifting landscape