Real Estate as an NFT

By Datta Khalsa, Broker

The phenomenon of nonfungible tokens, or NFT’s, gained national attention earlier this year when a digital piece of art that you could copy a JPEG of for free, sold at auction for $69 Million. This was particularly surprising, given that works by the artist who made it hadn’t previously sold for over $100.

This sale signaled a rapidly growing trend of buyers basing value purely on a blockchain-based distinction between having something and owning it, using “smart contracts” in a marketplace that has so far surpassed $2 Billion. And much like the bitcoin phenomenon, it has many people shaking their heads, questioning the very nature of value in the first place.

In an odd way this trend bears similarity to our current real estate market, and begs the question of what creates such a dramatic perception in the minds of the consumer to pay such seemingly ridiculous prices. Not surprisingly, researchers at IBM’s Visual AI Lab have recently done a study on the rise of NFTs, and the results of their research boiled down to 3 factors:

1. The Visual characteristics of the work,

2. Previous Sales of Related NFT’s, and

3. the Popularity of Buyers and Sellers in the market’s Social Network.

Using these factors, their AI was able to predict the market value of an NFT within 70%, which bears some similarity to the AI of the automated engines at Redfin and Zillow, and I can’t help but wonder if the whole market hasn’t gone mad in its reliance on statistical justification of a premise that at its core could be questionable at best.

The parallel factors that are used in real estate to determine the value of a property are:

1. Its relative location, size and quality

2. Previous sales of related properties, and

3. The Supply versus Demand in the property’s neighborhood and segment.

When you compare these sets of factors, the similarities between these two seemingly disparate markets are apparent, however the future trajectory of both markets is hard to project since they are both largely arbitrary in their reliance on comparison to other sales, which becomes in a way a self-fulfilling prophesy until some outside factor breaks the cycle.

Put against the perspective of our national timeline, my career in local real estate has spanned all the way from the days of NAFTA to the present days of NFT, and during this timeframe we have seen our county Median home price grow from the mid-$200K’s in 1993 to the current mark which has been at around $1.2 Million for the past few months.

Where it goes from here is anybody’s guess, and in the meantime the best we can hope for is a little more inventory around here, but that’s a lot to ask in a coastal paradise located so close to arguably the strongest economic engine in the world, which also happens to be the birthplace of blockchain.