Atmos: The new way to buy a home, Gen Z edition
Introduction:
For as long as I can remember, my parents have instilled in me the importance of homeownership. I know they weren’t alone in this. For generations, the wealth of U.S. households was built on home equity. However, most of the Millennials drew a losing hand, with many of them beginning their professional careers on the tail-end of the Great Recession. A popular narrative has been painted; most people remaining renters rather than gaining the ability to afford a home.
I strongly disagree with this claim. Older Millennials are certainly in a bind, however, I believe the younger Millennial/Gen Z cohort will revert to traditional long-term homeownership. This is corroborated in the realtors.com®’s fourth-quarter generational propensity report. Which states that:
The oldest members, still in their early 20s, don’t have a lot of money yet, so they’re choosing cheaper homes in smaller, less expensive neighborhoods, in more affordable parts of the country
Although Gen Z purchasers currently only generate two percent of mortgage loan originations, they have already caught up to the Silent Generation (1927- 1946) and will likely continue to do so as they grow older.
Furthermore, a survey of more than 100 economists conducted by Zillow and the research firm, Pulsenomics adds on to this sentiment among younger Millennials/Gen Z home buyers. They predict:
In fifteen years, a larger share of the housing stock will be owned by members of Gen Z than by Millenials
The inventory crisis that’s currently plaguing the housing market -- making it incredibly difficult to find a home to buy in the first place, let alone an affordable one -- is expected to resolve itself in the next decade
Gen Z members will be inclined to live in more affordable areas than their Millennial counterparts
Given that the popular narrative is overstated and that the younger Millennial/Gen Z population will be buying homes, I think the more pressing problem at hand is the current schism between how real estate buyers interact with the market in the status quo and how younger Millennials/Gen Z will look to interact with the market when they become buyers.
Before we dive into this divide in the market, I would posit as follows:
Incoming buying groups will choose to live in secondary hyper-growth metropolitan areas. This incoming buying group is biased toward living in or near metropolitan areas and there is an increasing trend in secondary hyper-growth cities like Denver, Austin, Atlanta, and Raleigh, making the traditional SF/NY narrative still true but less powerful
The cost of real estate is rising, so more than ever buyers will be looking to compromise as little as possible when spending this much money. Oftentimes, buying a house is one of the largest capital intensive decisions that people make in their lifetimes.
Gen Z has extra emphasis on individual identity and customization in things they purchase. They have a penchant for individual identity and customization. McKinsey reports that “The core of Gen Z is the idea of manifesting individual identity. Consumption, therefore, becomes a means of self-expression—as opposed, for example, to buying or wearing brands to fit in with the norms of groups. Led by Gen Z and millennials, consumers across generations are not only eager for more personalized products but also willing to pay a premium for products that highlight their individuality. Fifty-eight percent of A-class and 43 percent of C-class consumers say they are willing to pay more for personalized offerings”
Now that we’ve framed the problem, let’s accept that home buying experience is both arduous and tedious. Will young people have the patience necessary? Trulia highlights the current process as follows:
Figure 1: Home buying flow
As this flowchart shows, home buying is a drawn-out and time-consuming process. It’s also predicated on home buyers finding what they like. According to the National Association of Realtors, two-thirds of homebuyers reported compromising on some characteristics. This Is understandable, considering the turnover of homes on the market. Luck is a significant factor in one’s probability of finding a satisfactory home.
For these aforestated reasons I believe the traditional home buying process won’t work for the younger Millennials/Gen Z. They tend to be accustomed to technology simplifying their daily tasks. For example, Robinhood has brought stock trading to even the most parsimonious investor, and Amazon provides any imaginable good at the touch of a button. Some of the most popular startups gaining traction right now are doing so by abstracting processes and making things Fast.
As I see it, consumers will shift to simplified technology-driven solutions, as has been the case in other fields. I also foresee an emphasis on custom-home building given what we know about Gen Z principles. The startup that best serves the real estate buying market, early, will be positioned to be the go-to for the younger Millennials/Gen Z set. I predict that Atmos, an end-to-end custom-home building platform, is going to be that startup.
Custom-House Market Overview:
To understand Atmos and its impact, it’s important to first understand the real estate market, specifically custom residential real estate.
Figure 2: Number of houses sold in US 1995 - 2019
As shown in the graph above, home building in the US has been on a steady incline since the financial crisis settled.
The above graph only shows until 2019, but 2020 is an anomalous year with the impacts of the pandemic. The overall industry is down, but given the data, it's interesting to note that the custom-home building portion is performing better than the broader real estate market.
Before Covid wreaked havoc, The National Association of Home Builders did their quarterly survey for Q1 of 2020 and found the following:
There were 32,000 total custom building starts during Q1 of 2020, this marks a 10% gain over Q1 of 2019
Over the last four quarters, custom housing starts totaled 180,000 which was a 3% increase over the prior four-quarter total of 170,000
As measured on a one-year moving average, the market share of custom home building in terms of total single-family starts is now 20%
Now after Covid had very much impacted the market this is what the Q2 results looked like:
There were 45,000 total custom building starts during the second quarter of 2020, while this is a 6% decline relative to Q2 of 2019, this decline was smaller than the overall decline for single-family housing starts of almost 11%
Over the last four quarters, custom housing starts totaled 177,000, which was a 5% increase over the prior four-quarter total of 168,000 starts
As measured on a one-year moving average, the market share of custom home building in terms of total single-family starts is now 21%, this is an increase from the Q1 results listed above
It’s clear that Covid has impacted the market as a whole, but I strongly believe that given the data the custom-home building market will continue to increase and eat into the overall home building market share.
Part of the reason there's such an increase in custom-home building is that finding the right home is so difficult. Everyone wants their home to be just right. Once they’ve found it, they’re on a race to secure financing and to compete in a bidding war, driving prices ever higher. Oftentimes the home that buyers want is off the market faster then they can react. Additionally, there’s an ever-growing case for secondary hyper-growth cities, where real estate prices are far lower than here in the Bay Area. In this light, and taking into account the aforementioned data on Gen Z buying habits, I would submit that a strong case exists for Atmos, a company concentrating on a soon-to-be-burgeoning market in custom homes.
What is Atmos?
Atmos is an end-to-end custom-home building solution that helps customers as early as possible in the custom home building process. It begins with aiding the user in their search for a buildable lot, finishing when the house is built and the customers are ready to move in.
Atmos is a promising concept for a couple of reasons:
Convenience
The functionality that Atmos offers is currently not consolidated anywhere on the market. The traditional path to building a custom home proceeds through roughly ten steps which when transposed on top of the buyer's actual life can prove to be intimidating. The process would look something like this:
Figure 3: Traditional home buying process
Conversely, through Atmos, these steps are built into an easy to use user interface and the overall flow looks something like this:
Figure 4: Atmos custom-home buying process
A distinguishing feature of the Atmos process is the buyer’s dedicated “Concierge”, working with them through the entire process. At the Building Flow stage, this “Concierge” becomes a Project Manager who keeps the buyer updated on progress in their construction project. Atmos describes the relationship as follows:
Figure 5: Atmos Concierge relationship
Buying a home is a major life decision
It is not to be rushed. It’s also one of the most costly decisions that a family will make. Of course, one needs the “right” home. Finding it among what may be on the market at a given time may lead to frustration and underwhelming results.
Zillow reports, “On average, it takes 4 ½ months to shop for a home, plus an additional 30-45 days to close on a home once you are under contract. But of course, the timeline can vary widely based on factors like the time of year, your financing needs, the type of home you’re looking for, and the inventory in your local market.”
According to stats from the National Association of Realtors (NAR), as of June 2020, the typical U.S. home was on the market for an average of 24 days, with Ellie May estimating an average of 46 days to close on a purchase loan. That’s 70 days — or a little over two months — from listing to closing.
The timelines of buying a home and the time a home stays on the market are incongruent so buyers generally need to have impeccable timing or end up lowering their standards. Atmos lets buyers go at their own pace while maintaining their own high standards for their new home.
Product Deep Dive:
The easiest way to do a deep dive into Atmos is to build a home:
If I was in the market to build a home and I went to Atmos, this is what it would look like:
Finding a Lot
I would start by selecting a location where I want to build my custom home. Let’s say I pick Chapel Hill, NC. Atmos would bring me to a page that shows me all the possible Lot options that exist in Chapel Hill (figure 6).
Figure 6: Finding a Lot - Atmos website
Lots are pictured in-app and also provide information about roughly how much they cost, how big they are, and the address where they are located. Users can select multiple Lots if they aren’t exactly sure what they want and add them to their cart.
Finding a Floor Plan
After selecting a Lot(s) the next stage of the home building process is selecting the proper floor plan. Atmos pulls from thousands of floor plans to help customers visualize all sorts of possibilities for their new home. On top of that, Atmos also helps users drill down on the floor plans with a variety of filters to help customers find exactly what they want.
Figure 7: Find a Floor Plan - Atmos website
Package
The last step in designing a custom home ends with picking an interior design package. This interior design package will include appliances, roofing, flooring, and an estimated price for this package based on the Floor Plan(s) that the customer saved.
Figure 8: Choose your Package - Atmos website
Review
This last section takes all the parts the customer has chosen up to this point and combines everything and spits out an estimate of what everything is going to cost end to end. The neat thing about Atmos is that users can go on their website and build out their custom home with as many potential lots and as many different floor plans as their heart desires because, after the initial selection process on the webpage, customers schedule time with a “Concierge” to review their selections and narrow down the specific details of their home. This means that whether you had 1 Lot and 1 Floor Plan or 2 Lots and 15 Floor Plans there is a dedicated “Concierge” that helps you think through the design of your home. After the chat with the “Concierge”, Atmos gets customers pre-approved online for loans for their entire build (Lots + Home).
Figure 9: Concierge Review - Atmos website
After the Review and Loan Approval, Atmos pairs you with a realtor, or customers can come in with their realtors to help customers place bids for the Lot of interest. After the bid is made and the Lot is secured, Atmos works with local builders to build out the custom home and keeps customers in a tight loop every step of the way.
Something to note though this entire flow was that building a home through Atmos was very unique, there were elements of eCommerce baked into it that are extremely appealing to the customer at hand. The end-to-end flow is very similar to what Tesla offers when customers are looking to purchase a car. Although different industries and vastly different outputs (cars v. homes) I think the customer stickiness that is developed through this is invaluable (More on this in the Competition > Homebound section).
Competition:
The competition in the real estate market aimed at buyers splits into a few parts:
Online Real Estate Databases
When customers think of buying a home they generally think to go to Zillow, Redfin, Trulia, Opendoor, and many other lesser-known listing sites. All of these sites serve as databases where customers can browse homes and lots based on a variety of different parameters that they have. Buying homes through this method is probably the most well-known for most buyers. During this process, they are either scouring the websites on their own or maybe working with a realtor. This type of service is not a direct competitor to Atmos but could compete for top-of-funnel customer attention.
Cover
Cover is a company that builds ADUs - accessory dwelling units. ADUs are smaller, independent units located on the same lot as a stand-alone single-family home. They will not have all the same amenities that a typical home might.
Figure 10: ADUs explained
Cover is also not a direct competitor for Atmos. They both produce customizable outputs but a person looking to build a full home would not be fully taken care of under Cover. I would argue that Cover and Atmos could be mutually beneficial to each other. I think Cover could become a partnership that Atmos creates, where buyers who went through the Atmos platform and want to add ADUs to their lots at a later date could work with Cover.
Homebound
Homebound is the closest competitor to Atmos. The first difference between the Homebound website and the Atmos website is how self-serve Atmos makes the process. Atmos gives customers a product where they can go in and design their own homes. It has an eCommerce feeling to it where you can add “Lots” and “Home Designs” to your “cart” and then review it at the end. At the end of the process, Atmos sits you down with a “Concierge” to talk through your design and scope out the project. The Homebound process is the exact opposite. From my experience on the website, if you want to build a home, there's no self-service process. The first step is Homebound grabbing your contact details so that you can set up a time with someone on the Homebound team. There are arguments for both methods, but I think Homebound ultimately still has a lot of friction to starting the process and there's easier customer lock-in on the Atmos side. Having an eCommerce flow for most of the things we rely on nowadays is vastly underestimated. Atmos positioning its website as an eCommerce play is smart.
The second difference between Homebound and Atmos is the “fun” aspect. This is a follow-up to the eCommerce play but I think making the home building process a fun experience for younger Millennials/Gen Z is a vastly understated value. You see this idea of “fun in tech” more often, if you look at companies like Robinhood, they made trading stocks fun. If you look at Superhuman, they made email fun. Being “fun” is especially important for the Gen Z audience, according to research done by Businesswire, a Berkshire Hathaway Company, they state, “far more than other generations, 75% of Gen Z is more likely to buy a product if they can customize it”. Later in that survey, when asked the question, “What does Gen Z expect from brands?” they answered, “Be fun. Be authentic. Be good, following on by saying 65% of Gen Z goes to the internet for access to entertainment”. Adding a “fun” component is a proxy metric that would be hard to measure but in the long-term, it's going to heavily influence customer stickiness for Atmos because it’s making a traditional boring and logistics heavy process more fun.
The third difference between Homebound and Atmos is that Homebound performs most of the building in-house as opposed to a partnership model. Owning the entire stack in the home building business can prove to be costly. I think the Atmos business model where they act as a platform in a home building project and partner with relevant local builders is going to be more reliable long-term and will result in a healthier business.
Team:
Atmos was founded in 2018 and is currently sitting at 10 people and they are based in San Francisco. They were a part of the YC S20 batch. The CEO, Nicholas Donahue, has deep empathy for the real estate and construction industry and this isn’t his first time building a company. He was also actively a part of the Pioneer community before starting Atmos. The rest of the co-founders all have entrepreneurial backgrounds before coming together to build Atmos.
Pricing:
Atmos is a platform so they make money by taking cuts from different players connected to the platform. When a home gets built Atmos will take a cut from the builder as well as the buyer. There are additional revenue flows for Atmos that are not discussed in this section because at the moment they are undisclosed.
Not knowing the undisclosed revenue streams, I see many more areas where Atmos can derive revenue. In the same way, Shopify offers apps that optimize seller/buyer experiences, Atmos could effectively create a “store” where they offer apps that augment the home-building experience. Many companies that have built almost exclusively on the Shopify app store have faced immense growth and the success is mutually beneficial for the app as well as Shopify. Atmos possesses a similar opportunity where they can generate a chunk of revenue from this “store” that aggregates demand for different real estate tech startups in the market.
If I was Atmos, I would look for startups in the following areas as partners for a hypothetical “Atmos Store”:
ADUs (Cover, United Dwelling)
Title management (Spruce, States Title, JetClosing, Qualia, Modus, Endpoint)
Interior Design (Havenly, DecorMatters)
It’s still too early to tell where this can go, but I do think there is a lot of room to grow for Atmos in this department.
Concerns:
My concerns for Atmos break into a few pieces:
Locations
Atmos did their first launch in cities across North Carolina, where the CEO grew up and where some of its other founders went to school. This seems to have been a location where they were comfortable sourcing local partnerships and starting off their initial customer launch. Their next chosen location will be a crucial consideration for the growth of the company. They need to be able to establish solid partnerships with local builders as well as accurately gauge where consumers want to be living.
Economy
Unfortunately, real estate is very much an industry highly dependent on the macro environment. Given Covid, it's been harder than usual to have confidence about what the future may hold at a macro scale. Recently, the housing market has been doing very well with low-interest rates for home loans. Should this trend continue it would be advantageous for real estate. Given that we don’t have a good understanding of how the market will react in the future, there's a world where the economy becomes hostile and customer sentiment turns sour towards home buying. This would be problematic Atmos as well as the broader real estate industry.
Conclusion:
Overall, Atmos is a very promising company and is enabling more and more people to have the home of their dreams. Currently, they have 10-15 customers who have signed on to customize and to buy a home through Atmos’ platform. I believe this number is going to continue to grow as the younger Millennial and Gen Z buyer group becomes interested in home buying. I think this will coincide with Atmos’ expansion to popular secondary hyper-growth cities. I strongly believe that the popular narrative of shifting to remaining renters rather than buyers is false. I think we are on the precipice of a new generation of homebuyers who will flood the market, and Atmos will capture this opportunity.
If you enjoyed this piece and would like to chat more, please reach out through Twitter at @bchandras3karan or Email at bala.m.chandrasekaran@gmail.com.
Thank you to John Luttig, Sid Vashist, and Sid Venkateswaran for multiple rounds of edits and recommendations.
very interesting and insightful article
Your budget establishes the majority of what you can do with your custom home. The size of the home, location, and design features are all impacted by your budget.