#AIS: Divvy Homes CEO Adena Hefets breaks down the state of the US housing market

awesome hi everyone my name is adina i'm the ceo of divi homes it's a pleasure to meet y'all thank you for being here [Music] all right so while they're pulling that up i will just kick it off and get started because we're about three hours behind at this point um my passions are at the 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

um 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 u.s and found themselves very young 21 and 24 pregnant and trying to figure out what they were going to do with their life 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 so this woman financed the purchase of

the house to let my parents pay an installment and in that house they had three additional kids i'm the third of four 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 at dibby 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 takeaway so you don't have to figure it out i try to stick to uh one chart per slide to keep it super simple and i'll explain it but this is the the takeaway that you should get from the next couple of data points i'm going to give you which is wealth inequality 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 percent only owned one percent of wealth here in the united states so this this chart shows distribution of wealth by what your your

um household income is so the top 10 percent of owners uh sorry the top 10 percent own 76 percent of wealth the next 40 on 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 one percent

your household wealth was on average two million dollars 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 okay why is this the case is it that wealthy people are making more in salary i i would say while there are some salary differentials the main driver is asset appreciation access to assets 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 going to group together as investments in assets

and so you can see this is 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 a hundred percent 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 uh leverage against your equity that you mess in the stock market but most of you aren't um 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 by the government eighty percent leverage at what has been almost three percent cost of capital no one else can get that sort of cost of capital at that sort of leverage um 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 um and so the takeaway has to be those who own assets are more likely to have a higher net worth and so this is a chart that i sold 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 family so

bottom 50 percentile of income earners 50 50 to 80th percentile 30 so on and what this is saying is that the bottom 50 percent of families and households own one percent of overall equities in the market and when you look at directly held stocks so stocks in the stock market they own zero percent right and if you look at the top one percent of of of income earners they own 38 of overall equities which includes like retirement accounts and everything remember i said that big asset class 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 um another way to look at this which i think is really interesting is your net worth um 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 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 s p 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 over time 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 um and that today it's closer to 338 thousand dollars that's a 200 percent increase in ten years at the same time real median income has only increased from about fifty seven thousand dollars to sixty seven thousand dollars um so what has caused prices for homes to increase so dramatically if i do i'm

pretty sure that none of this is new news you all have been seeing how much home prices have have risen for those of you who have bought uh while interest rates are three were still three percent good on you because that is probably the lowest they're going to be in a really really long time but here's the quick history which is um from 2000 to 2008 we were building on average one and a half billion homes that's our million homes a year not billion gosh one and a half million homes 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 a home builder can build the home is roughly 200 000 all in cost right and so if you can sit

there and you're like i can only build a house for two hundred thousand dollars which means i have to sell it for more than two hundred thousand dollars well i can't compete with existing foreclosure inventory so homebuilders stopped building they went from building 1.5 uh 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 i need extra room for child care 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 one it's 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 they're like i no longer need a home right and so if you take a look at this the average fico for home buyers is well above what the average fico is for the general population and anyone who's under 45 years is even lower because fico cures over time and so what does this all come together and say is that um 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 look at and understand so i'll walk you through it so what this chart shows is is mortgage rates three percent six percent nine percent we were at three percent call it a year ago we're at i think five and a half percent right now is roughly where the 30-year fixed is and then nine percent 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 u.s 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 u.s they're 126 million households in the us and you can see that historically almost 40 percent uh sorry 30 percent of households actually could afford a mortgage where we were

before and that number today has gone down to now 22 and will go down to about less than 15 percent 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 ten thousand dollar increase in home prices means one million fewer families can own a home or a one percent increase in mortgage rates mean five million families can actually own a home so we're in a little bit of a tough situation here um so when i started divi 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 um which is that access to assets and compounding uh 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 um so the way divi works is very similar to a mortgage except it's not a mortgage uh 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 quick close 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 head to closing and you commit either one to two percent down which is about a tenth of a usual down payment down payments are ten to twenty percent we say one to two percent and that's your initial equity in the home you own that that is yours and then you move in you make one monthly payment part rent part 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 percent 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 tens 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's a big one up in tampa the average income of our customers is about a 50 000 to 150 000 household income uh 50 of our customers are people of color and 80 of our transactions are

female female-led and so i think the most important thing is are we successful in our mission and what we're trying to do um so 51 of divi 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 just let them build more equity over time and about 30 percent of people turn over which is completely fine sometimes you have an extra kid or two and you need a bigger home and that's that's okay we actually love that people can cash out their money uh and continue moving on um 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 divi 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 um over here just to show we're growing quickly and we're doing it profitably actually i think this is super important is you can sit here and say that you're building a mission oriented company you have to show scale you have to show growth and you have to show the 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 costs less interest so it's like a true profit all-in margin um where we're almost probably going to be at about 25 all in profit margin um and now i think we have yeah thank you um uh 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 okay cool thank you i know that friberg's going to talk to you about consumer credit but let me just tee up something before um 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 a 2007 peak they just said that today yeah um his name is joe ziddle who's a i guess a senior partner there um but he believes a crash is unlikely due to a major difference which is that most owners aren't using their homes like an atm like they did back then yeah um can you explain um sort of the broader state of housing actually and sure uh why some people feel like we're actually okay right at the brink of a crisis again and some people don't okay 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 to 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 when you're 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 built that are

coming online and at some point there's going to be enough 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 going to 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 homes are growing out how much of this is just the like miscast 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 email 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 adus 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 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 it and by then the entire market has like completely changed and we've rush invaded ukraine and covid took over and there's 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 q1 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 pot because it's something that's really i think poorly understood

but important in my opinion where fannie mae and freddie change the upper bounds of mortgage of mortgages where you know you can you they can be conforming now at like a million dollars whereas before they used to be considered jumbos and yeah anyways the reason i'm asking this question is i feel like there's a lot of financialization in engineering here 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 uh her name is kimberly johnson's as actually her first independent she was the ceo of fannie mae and i brought her on to like fully understand as much of this as possible um 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 um 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 um 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 percent the what actually qualifies as a conventional mortgage needs to go up by 30 percent um 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 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

just felt like they still like i they felt like that was just a natural change that had to happen raising the the upper bound 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 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's requirements but fannie mae

because they actually put so when the global financial crisis happened there were such uh 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 and they'd have to do it in such a way that they don't

penalize yesterday we had uh bill gurley and brad gershner on if you saw that panel didn't hear about it now okay yeah so you did see it or not okay okay um we looked at all of assets being inflated yeah uh from used cars to nfts and everything in between uh and we've now seen compression and we talked about this on the pod in every single sector yeah except housing yep and so we're all sitting here wondering what are the chances that housing collapses i was talking to um my pal uh palmer backstage remember new bestie interestingly we went backstage and no no no don't ruin it every week no we

just sat there we had a great conversation about ten different things it was pretty interesting um so what are the chances and we were talking about the chances of a collapse he said oh maybe it's 30 chance this real estate collapse 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 look there's there's no question that housing growth is going to slow down if you look down but i'm asking you guys price prices pricing new homes prices 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 um but i actually think that what we will definitively see which we have seen i'd say in the last two weeks we've seen a slow down um in the in the rate of growth for homes um now the global financial crisis was very different than than what we're seeing today and if you anybody bottom of the the stock market for the global financial crisis 3909 bottom of housing prices 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 people live there for a while they can afford their mortgages then their income drops and they can't afford their mortgages then they get foreclosed then it's six months later the stock market drop and you're like i should sell my home that's going to take 30 days then i have to find someone oh that's going to take another 30 days oh 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 you can't log on to your robin hood account and be like yeah i know the market's thinking let's get rid of our house can i can i

shift the conversation for a second um you're a founder of a unicorn yeah raised the big round yeah uh congratulations thank you uh time to write so well this is what i was just gonna 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 um i'd say so we raised um a 200 million round from tiger uh it was preempted um back about six months ago or maybe even nine months ago at this point

um and i think that it's actually interesting because i listen to you guys on the pod um 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 founders fault that the market got overheated you guys gave us the terms you did the rational thing [Music] by the way don't point it yet 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 divvy we make i don't know we haven't probably put out there but hundreds of millions of dollars in revenue i burn less than i don't know five to ten million a month to less than five million a month um we have 300 employees and do i think you have to be conservative yes do i think you had to be conservative along the entire way of

building a company yes every second i thought my company can die at any moment right a hundred percent and i run my company like that my cup they my employees joke they're like you're the most frugal person ever like every single time it's awesome we need to spend it i'm like thank you yeah that's awesome do you um do you rely on your late stage investors in moments like this to like help you navigate or how do you do it do 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 um it is on you to make sure you can have a path to casual profitability if you can actually raise another round of capital um 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 um 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 cashflow break even um 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 cash flow positive and every week my cfo ceo and i get 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 our sentiment and we continue on on monday morning as planned we're all in sentiment index i

like it it's it's great to um 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 uh you are uh thank you i don't know if that's a complimentary tell us how you really feel yeah you know it was like a boring topic and and uh you you actually do it again please tell us like a really boring topic but a great guest and you made it really really um both really educational i think the audience they're still fully until right now wow wait uh day one i do have as we're heading

towards ending i do have an intro oh because i thought we were all getting i tried this it didn't work well i thought we were all gonna get interest anyone [Applause] which i feel like i should give which is um are y'all ready for it i'm in miami chilling with the besties on this stage in a minefield of testes j cal kindly invited me to share my passion so here goes in true all in fashion i play 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

[Applause] [Applause] [Music] and they've just gone crazy with them [Music] we should all just get a room and just have one big huge orgy because they're all just useless it's like this like sexual tension but they just need to release [Music] your feet [Music] we need to get [Music]