Google, Amazon, and Tesla are hurtling into a struggling industry — and it's a sign the bloodbath is just getting started

construction workers

Homebuilder stocks are on pace for their worst year since 2008.
Amid the bloodbath, industry analysts are warning that tech giants are growing their ambitions and investments in the housing market.
Amazon, Google, and Tesla have already made some inroads, and could innovate in ways that traditional homebuilders have been unable to.

In the course of Margaret Whelan's conversations with homebuilders in Europe and Japan, she has noticed a difference between them and their American counterparts.

"Everyone delivers houses in days, except here," Whelan, CEO of Whelan Advisory, a boutique advisory that raises capital for housing companies, said at a recent conference in New York. The former JPMorgan managing director lamented that it often takes months, sometimes years, to build a house in the US.

"The bigger homes, they'll take 14, 15 months to build — who's got time for that?" she asked the crowd.

Building speed is just one area that desperately needs innovation amid the worst year for US housing since the financial crisis. The iShares Dow Jones US Home Construction exchange-traded fund, for example, has plunged 28% in 2018, and is on pace for its worst year since 2008. Shortages of land and labor, coupled with rising interest rates and affordability constraints, have slowed the housing market.

And according to investors and industry experts, the players most likely to transform the housing industry are companies well known for disruption elsewhere: tech juggernauts like Amazon, Alphabet, and Tesla.

Here are some examples of their meddling:

Last December, local lawmakers approved a bid by Google to build nearly 10,000 housing units close to its future campus in Mountain View, California, amid a shortage of affordable housing.
The homebuilder Lennar announced in May that it was working with Amazon to build model homes fitted with Alexa-enabled devices including lights and thermostats.
Tesla installed 450% more power-storage batteries in the first half of 2018 compared to the same period in 2017.

There's a pattern here: these companies have a financial incentive to get into building.

Mark Boud, the chief economist of housing consultancy Metrostudy, is already advising them.

"It used to be that my clients were builders and land developers, period," Boud said at the conference. "Now, it's about 70/30, 30% being these non-traditional players ... that share is going to increase dramatically over time."

Tech companies are poised to embrace more efficient methods of building — including modular and factory-built houses — faster than the traditional players, Boud said.

Their meddling in homebuilding comes at an opportune time: the US housing market is facing a shortage of inventory — especially affordable houses — and is projected to remain under-built through at least 2022.

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Builders don't innovate well

"When it comes to change and doing things differently, builders are not great at that," said Paige Shipp, the Dallas-Fort Worth regional director at Metrostudy.

The example she always tells clients about is the US Postal Service, which operated like a monopoly in its heyday. Then UPS and FedEx came on the scene and shook things up. Now, even Amazon is building out its own logistics service to deliver packages faster.

The fear of change, Shipp said, is greatest for public companies who will see their stocks sink if new methods eat into their profits. But even if they wanted to try, she says they don't have the ideal decision makers.

"We have an industry that's pale, male, and stale," Whelan said, referring to racial, gender, and generational sameness on company boards.

The HGTV generation

Shipp agreed that it would be wise for builders to lean into the needs of younger clients, including millennials, who are buying roughly one out of every two new homes — more than any generation before them.

new home sales millennials boomers silent gen

"Yes, they do remodel, but we’ve kind of learned that they really like to watch Chip and Joanna, but they don’t want to necessarily be Chip and Joanna," Shipp said, referring to the hosts of the HGTV show "Fixer Upper."

"They would like to have these homes that are ready for them to move in," she added.

In addition, tech companies know well what the digital generation would want in their homes — perhaps even better than traditional homebuilders. Shipp named some traditional builders at the forefront of technological innovation including Tri Pointe Group, The New Home Company, and Taylor Morrison.

Beyond the supply issue, builders also need to address the crisis of affordability. According to Carl Reichardt, a homebuilding analyst at BTIG, the traditional builders best positioned to address the crisis include Lennar and D.R. Horton — his only buy-rated picks amid the bloodbath in housing stocks this year.

"These companies have an increased focus on changing their mix to more affordable product," he told Business Insider by phone.

Still, big tech companies are flush with the cash, the flexibility and most importantly, the financial incentive to upend yet another industry.

"The traditional builders need to be a little bit nervous about this," Boud said. "If we don't do it, someone else will, which is why we're seeing the Amazons and the Googles come into the market."

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