You’re reading Startup Cities, a newsletter about startups that build neighborhoods and cities.

This week: a guest post by my friend Jeff Fong. Keeping in the spirit of Startup Cities, Jeff looks at American housing as a technology stack shaped by regulation.

About the Author

Jeff Fong is a writer, technologist, and housing activist. He was an early stage employee at Lyft and later took on roles in both product and leadership at Postmates. A longtime contributor to Market Urbanism, his work has also been featured in publications like Caos Planejado. Jeff also serves as Board Chair at YIMBY Action, a policy advocacy organization dedicated to the controversial idea that houses are good and we should have more of them. Follow Jeff on Twitter.

When we talk about entrepreneurship, we often talk about disruption and replacement. New companies come in, old companies die out. And at the level of individual firms, that’s mostly true. But when we look at the housing industry as an ecosystem, we see something else.

Across areas as diverse as finance, property management, and regulatory compliance there’s a trend of abstraction and productization that’s changing the way we deliver housing. In particular, startups add new layers on top of old institutions and build bundles out of fragmented services.

To understand how policy constrains innovation in housing, we must first look at a few startups in the stack.

Millennials and Mortgages

In part, housing is expensive because we’re forced to over consume it. A minimum lot size regulation might stipulate that properties be no smaller than 5,000 square feet. This makes it illegal to divide a lot and sell two smaller, less expensive properties. In other words, if you can’t afford the 5,000 square foot property, you can't afford anything at all.

Millennials have also built less wealth than previous generations. That and higher home prices has meant lower rates of homeownership. Startups like Divvy, Landed, Unison, Haus, and ZeroDown stepped in with new forms of finance to serve less wealthy homebuyers.

*Apartment List 2021 Millennial Homeownership Report*

These new startups separate housing as a financial asset from housing as shelter. They let people buy part of the asset upfront while getting the immediate benefit of a roof over their heads. The companies take a co-equity stake in a property and make their money when the customer buys them out in the future. The customer gets a home at a lower upfront price and the company gets the spread on the equity at buyout.

This business model seems especially tailored to a world with high (and continually rising) real estate values paired with low cost capital. It remains to be seen how useful it will be if interest rates stay high and housing prices plateau.

Productized Property Management

Property management startups Belong, Mynd, Funnel, and RentRedi help homeowners become small-scale landlords. Making revenue from your property is an attractive option if you can figure out how to landlord.

A typical customer would be a homeowner who wants to rent out – instead of sell – the family home after a move. These companies provide payment processing, marketing, tenant screening, insurance, maintenance, and everything else. They tell you what you need to do, give you a way to do it, and make it all manageable via mobile app.

Landlording is not new. Neither is property management. These products provide a bundled service with a modern software wrapper for the customer. Productizing the experience should make everything easier and, if these startups succeed, be enough to encourage an increasing number of property owners to rent instead of sell.

Compliance-as-a-Service

California has a lot of great qualities. Its regulatory regime for housing is not one of them. It’s not easy to get permission to build a new home, especially at missing middle levels of density. Recent reforms opened new pathways for development, but accessing these regulatory HOV lanes isn’t user friendly (if you’re aware of them at all). Fortunately, that’s where the entrepreneurs at Homestead come in.

Homestead is a housing developer with a speciality. They use state level reforms to split existing lots and provide smaller, less costly housing. For owners, splitting their property in two and selling off a second lot with a duplex is a great way to partially cash out. For prospective buyers, acquiring a property to immediately split and redevelop may be the only way to get into housing at all.

Homestead makes it easy to tell if a property qualifies for redevelopment. And for prospective buyers, they even help with some of the financing (if customers could afford to buy an entire existing property upfront, there’d be less need for this kind of service).

Products Need Platforms

It’s misleading how we talk about disruption and reform. Reform sounds like we delete lines of code and disruption feels like replace old for new wholesale.

Usually, this isn’t the case. All the startups here are additive. They try to make legacy systems better or easier to use, but they’re not making these systems simpler. They're new products built on top of existing platforms. And they’re indicative of how reducing complexity for an end-user might mean increasing it for a system as a whole.

As platforms age, we see entrepreneurs solve for the failings of legacy systems. Our home finance startups fall into this category. They don’t create a replacement, they bolt on new features to keep old features running.

This differs from our examples in property management. These companies use new technology to improve a stable legacy industry. They don’t try to keep a failing system functional.

And Homestead, the property developer / regulatory guide, splits the difference. They extend a broken system, but were made possible by “refactoring lower level code” — California’s new SB 9 law.

It’s this last example that’s most instructive.

Changes to state law updated local regulations and created an alternate permitting process. Homestead plugs into this new permitting path. It makes the path more accessible for humans who aren’t experts in navigating regulation. By rewiring old functionality at the bottom of the stack, new opportunities for problem solving were created at the top.

Entrepreneurship doesn’t happen in a vacuum. The solutions we envision are molded by legacy institutions. Most of today’s housing startups tinker on top of deeply broken regulatory code. Cities will have to make big changes to this legacy code to enable more entrepreneurship in housing. Or entrepreneurs will need to find ways to bypass these limits, perhaps by building Startup Cities away from existing municipalities.

Thanks for reading and don’t forget: Startups Should Build Cities!

Next week: a deep dive into the history of a little-known American startup city.

Startup Cities

The Startups Fixing The Housing Stack