Real estate has long been the go-to investment for those looking to build long-term wealth for generations. Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide.
Real estate is an industry that in many ways hasn't changed too much over the past several decades. Sure, it's much easier to research homes online, but the general fee structure and other characteristics of the industry are ripe for disruption.
With that in mind, although nobody can see the future, it's fun to think about where the real estate industry could go from here.
6% sales commissions will seem ridiculous
If you sold a home anytime within the past few decades, you probably paid somewhere in the neighborhood of 6% of the selling price to real estate agents. While there are some exceptions (like if you sold your house without an agent or worked out a special deal), the industry standard has been 3% each to the buyer's agent and seller's agent. And for the most part, these are still the norm today.
This is a highly antiquated payment structure. Before the internet, real estate agents had to do far more work to sell or search for a home on behalf of their clients than they do today. For example, driving around and taking pictures of a dozen homes to gauge a buyer's interest has been replaced by a simple multiple listing service (MLS) search, which can mostly be replicated by the buyer for free on Zillow (NASDAQ: Z)(NASDAQ: ZG). And sellers' agent activities, such as analyzing comps to determine how to price a home, have become far less time-consuming.
We're already seeing some disruption. For example, Redfin (NASDAQ: RDFN) offers to sell homes using its advanced, efficient platform for a commission of just 1.5% -- half of the traditional amount. And Zillow and several other so-called iBuyer platforms make offers to directly buy and sell homes, cutting out sales commissions altogether.
I expect this wave of disruption to continue for the foreseeable future. Looking a decade into the future, it's tough to visualize a market where anyone knowingly pays close to 6% in commissions to sell their home.
Real estate agents could become (nearly) extinct
On a similar note, the iBuyer idea is gaining serious traction. It's not inconceivable that in a decade or so, Zillow, Opendoor, Offerpad, and Redfin -- plus whatever new companies join the party over the next few years -- could build up a serious share of the real estate market.
Not only does this concept get rid of commissions, allowing buyers and sellers to purchase or sell their home directly, but it's also fast and convenient. There's no need to wait for an iBuyer to get mortgage approval, and closing is typically quick and easy.
To be clear, there will always be some need for real estate agents. Many buyers and sellers value the guidance of an experienced professional or simply don't have the time or desire to do any legwork themselves. However, if iBuyers end up gaining serious traction over the next few years, there could be far fewer real estate agents than there are today.
Houses will get smaller
Over the past century or so, there has been a clear trend toward bigger and bigger homes. The average new home in 1920 was 1,048 square feet.
In 1975, the median home had 1,535 square feet of living space. And in 2018, the median was 2,386 square feet -- 128% larger than in 1920. So, it may seem ridiculous to expect this trend to reverse.
However, the "bigger is better" trend could start to taper off for two main reasons:
- Resource conservation
- Home affordability
The clear trend toward conserving resources could make buyers consider smaller homes. Smaller houses use less energy and need less "stuff" to fill them. This is why the "tiny house" trend has gained so much momentum.
Home affordability is also an issue. The average home price in the U.S. has risen by 44% over the past decade, and affordability is the top reason why homeownership rates are still historically low. In order to entice new buyers to come into the market, builders may start to think smaller.
Alexa, buy that house
As a final thought, although I don't think it will necessarily happen within the next decade, I can see the entire homebuying process becoming far more automated and efficient than it is right now. For example, I don't think getting approved for a mortgage will ever be the instantaneous process that getting approved for a credit card is, but I can see technological advances eventually driving the process down to a matter of hours, not weeks.
And to be fair, these are all just my best educated guesses. Nobody has a crystal ball that tells them exactly what the real estate world will look like. One thing is for sure, however. There's a tremendous amount of disruption taking place in the real estate industry right now and consumer tastes are changing, so it's fair to assume that the real estate world of tomorrow will look very different than it does today.
Got $1,000? The 10 Top Investments We’d Make Right Now
Our team of analysts agrees. These 10 real estate plays are the best ways to invest in real estate right now. By signing up to be a member of Real Estate Winners, you’ll get access to our 10 best ideas and new investment ideas every month.
Find out how you can get started with Real Estate Winners by clicking here.