The New Products Facebook & Google Are Building With Massive Market Potential
Hint: It’s bigger than self-driving cars
I. Tech Companies Enter Housing
Facebook is beginning to build apartments near it’s headquarters in Menlo Park, CA. It’s a requirement if they want to hire those 6,500 people who likely can’t afford the sky-high $3,500 per month rent for a one-bedroom apartment.
Meanwhile, Google is building a smart city of the future and hiring folks to help. One job that sticks out? A Product Manager for parking. Ya get that? Your entire job is to figure out a more efficient solution for parking. Sounds crazy, but it’s really not. Civil engineers have been designing cities for decades. Ever passed a traffic jam on a city street and scratched your head at why there was a back-up when you can’t spot a single reason for it as you drive by? That’s bad city planning.
Tony Hsieh of Zappos fame also tried his hand at a city of the future in downtown Las Vegas. He targeted it towards entrepreneurs in the startup scene, but it just wasn’t the right location, or maybe the right timing. Even WeWork is trying to get communal apartments off the ground.
The answer to the question posed above, as you might have guessed by now, is housing. Smart Houses, to be specific.
Wall Street needs growth. Apple, Facebook, and Google are all public companies. The easy growth provided by the smart phone market is over. So they’ve moved onto cars. Because the market size is even bigger. But doesn’t it then beg the question, “What market is bigger than cars?”
Homes.
Every single person in the world needs food, water, and oxygen to survive. But right after that, they need shelter. That’s why the biggest purchase any person makes in their life is for a home, whether they realize it or not. You’re either renting or buying.
Your biggest monthly cost is likely for the place you live, not the thing you eat, the thing you drive, or the thing you use to access the internet.
II. Recent Housing Market Data
About a month ago, the Wall Street Journal published an article with a series of charts showing the state of the US housing market. I’ve included a few below to help prove the point I’m making from a market size standpoint.
The charts below show that as of May 2016, there are about 5.5 million existing homes sold over the last year, plus about another 0.5 million of new homes sold. That’s 6 million houses sold in one year. The average sale price is about $250,000. Do the simple math:
6M houses sold in the US * $250K price per house = $1.5 trillion US annual housing market size
That’s just for the United States and that’s just for the last year. The population of the US is about 320M people. And these are just homes, not rentals. So you could do some back-of-the-envelope math: $1.5 trillion market size / 320M people = $4700 market size per person per year.
Use that rate to estimate a market size for China’s 1 billion people and you’re looking at: $4,700 per person * 1 billion people = $4.7 trillion. Obviously all 1 billion people are not at the same level of wealth as the US but the wealthy Chinese are building entire cities that lay empty as investment property for when the population explodes. So, maybe these two factors wash each other out and we’re comfortable using the same rate. You’ll see at the end of this post why the rounding matters not.
India has a similar size of 1 billion people, though they are fundamentally a poorer economy than the US so you have to apply a haircut to that $4700 market size per person.
Add the US, China, India to the rest of the world, including major economies like Japan, and you’re looking at a total market size of at least $10 trillion globally just for housing.
That’s a lot of coin in Scrooge McDuck’s vault. He’s gonna need some floaties.
III. Compare Housing Market to Car Market
You may have come across the following slide that Benedict Evans from Andreessen Horowitz publishes when comparing the smart phone market to the car market:
It argues that the annual market size for cars is about $1.2 trillion. That’s globally. Remember the size we developed above? $1.5 trillion just for the US market.
So, the US housing market is already bigger than the global car market.
Bill Gates has been living in his own smart home for decades. The upcoming iOS 10 has an app called simply, “Home” on it for connecting the Internet of Things inside your house.
Just like Apple’s CarPlay is a get-your-feet-wet play into the Project Titan electric, self-driving car market, so is Home a sharp wedge into the housing market.
Even a former Apple big shot, Tony Fadell, who went to work for Google after selling his Nest smart thermostat to the company believes in the size of the market.
Apple’s smart car might help them reach the $1 trillion market cap goal, but Wall Street will immediately ask, “What’s next?”. And Apple better have an answer for growth. Wal-Mart’s got food. Exxon Mobile’s got oil. Elon’s got sun and space.
The question you have to ask yourself is in 10 years, could we be talking about Apple capturing the housing market?
IV. Human Population Growth
After all, the world’s population growth isn’t slowing at 7.4 billion. It’s going to keep going, and going, and going, and going. Not even Energizer’s bunny would be able to keep up with us. We’re are the bunnies.
The chart above from the UN assumes our population will eventually decrease due to conflict, famine, lack of resources. But it fails to recognize on the high side that exponential growth could continue. They are predicting only straight-line growth based on the rate we’re experiencing today.
That rate is: 220,000 people born every day minus the 90,000 who die. That’s an increase in people of 130,000 people. Every. Single. Day. What are we going to feed them? How are they going to get power? And what happens if that straight line is wrong and it actually ends up being exponential. Money compounds, but so too do the people.
Where are they going to live?
V. Maybe Texas?
Interest rates are falling to all-time lows to below 4%, and we already have a lack of supply for new housing starts to meet the demand in the US. That’s today.
We’re spending about $20 billion less than we did at our peak in the US for new housing starts.
I was in Dallas, TX this weekend visiting my parents and there’s such an ample supply of space, no state income tax, and the cost of living is at the national average, that people are moving in by the droves. The home builders literally can’t build houses fast enough. I witnessed with my own eyes people working on the weekend to catch up, but they just can’t.
This is different than the last housing bubble.
People aren’t buying these for speculative purposes. They’re buying them to live in. They’re moving out of the crazy insane prices of the Bay Area and Manhattan to a place they can get a mansion for a smaller price, and get a raise in the process (no state income tax).
If I was a betting man, and I was investing for the future of technology, I would be looking at smart homes in the state of Texas. Heck, they may even give you a tax break for building your headquarters, and your homes, there.
— Sean
