It’s a tough time to be a buyer in the housing market.
The average price of a new home in 2020 was $389,400 U.S. dollars, and in 2021, it reached $408,800, according to data from Statista. Bidding wars are competitive, and younger buyers coming in with traditional mortgage products find they are losing those bidding wars time and again to cash buyers able to move more quickly to close the deal.
And the difficulty isn’t limited to a few super-hot primary markets like New York and Los Angeles. It’s also defines the market in secondary and even tertiary markets as urban residents migrate to the suburbs, bringing their big urban salaries along with them.
The problem has reached critical levels, Ribbon Co-founder and CEO Shaival Shah told PYMNTS. It has been pushed by the pandemic, but it is not a new problem. Rather it is the manifestation of old problems that have been creeping up for the last decade-and-half to create an overloaded real estate market.
Housing stock is down, and homebuilders aren’t keeping up with demand, he said. Their supply chain costs have gotten so high that many residential housing projects aimed at creating homes for individual buyers have been converted into projects for institutional buyers looking for rentals. And those institutional buyers, who’ve been growing in prominence in the market since the Great Recession, aren’t just buying up new supply — they’re jumping in and scooping properties out from consumers in bidding wars with big cash bids that not only win them the house, but successfully push more consumers out of the market.
“They increase prices, and when prices go up, consumers can’t afford to buy, so they go back into the rental market, which creates more investor demand,” Shah said. “That vicious flywheel has been going on for 15 to 20 years, especially triggered after the pandemic, but really kicking off with the housing crisis in 2008. Everyone is seeing a log jam today, but the precursors have been growing for the last 10-plus years, and now it’s kind of hit this perfect storm.”
That storm has created a new and perhaps hard to accept reality: The fundamental liquidity product on which the housing market is based, the mortgage, is broken. A buyer going into a bidding war with a conventional mortgage product goes in at a massive disadvantage because they simply aren’t competitive with a cash offer in the mix, Shah said.
So, Ribbon is making it easier for everyday buyers to compete, with faster underwriting that puts a cash offer in their hands, he said.
The Difference A Guaranteed Closing Makes
Ribbon as a tech firm can simply underwrite a mortgage faster than a traditional provider, he said. Instead of waiting weeks and exchanging a pile of paperwork, Ribbon can get the job done in about an hour. It’s a core competency in a world where houses are on the market for less than 24 hours on average in some places.
What Ribbon relies on is creating a win for buyers, sellers and agents, with a digital home ownership platform that exists to streamline the process for all involved. Ribbon does not underwrite the loan, but it determines whether buyers are “mortgage eligible.” If they are, Ribbon automatically converts them into an all-cash buyer, making a cash offer with what it calls a “closing guarantee.” That allows buyers to more competitively push through the buying process while setting up their mortgage in the background in parallel. If all goes well, Ribbon has nothing to do, the deal closes, and everyone toasts with champagne.
If, however, something goes wrong on the buyer’s end and financing ruffles up, Ribbon steps in and makes the purchase, and then allows the buyer to make their move while they resolve whatever issue that hobbled the process. The seller gets paid, the agents collect their commissions, and the buyer keeps the house they’ve already mentally moved into.
“What this does is creates a much more seamless transaction for all involved,” Shah said. “And the realtors then are able to deliver a more magical experience to their consumers and to secure their commissions at the closing.”
A Necessary Change
The tightness in the market today won’t last forever, but that doesn’t mean this is going to be a transient event, Shah said. The issues in the market took years to build to this point, and we could see this go on for a few years still. The largest share of the millennial generation is entering their prime home buying years and will be for a while. Until mortgage rates start to tick up, making buying a home a more expensive enterprise, the market could stay quite tight.
And unless we want to see a generation of homebuyers locked out, the market has to change, he said.
“People are getting priced out of the markets,” Shah said. “And there is a real concern of gentrification in the middle class with all of this capital flowing into the market. So, an adaptive solution is needed, and it really requires the entire ecosystem to come together. Making cash offers used to be an option; now, it’s a necessity.”
A necessity that Ribbon believes it can make clear to the ecosystem with effort and education, he said. Change never starts fast. Every big revolution is really a series of small evolutions coming together and picking up speed. The real estate market is evolving as we speak.
“It takes some time for the education, but once you have that tipping point, it happens really, really quickly,” Shah said.
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