The economy is stalling the adoption of the smart home

This story was originally published on Friday, May 26 in my weekly newsletter. You can sign up for it here. 

Concerns about the economy and anemic home sales are a potential problem for the smart home, according to conversations I had with attendees at the Parks Associates Connections smart home event in Dallas this week. Adding to the mix of concerns are slow housing starts, layoffs, and less spending on connected devices.

Even if this year isn’t a great one for selling new devices or for adding new customers for smart home services, the mix of challenges may give companies that are selling smart home gear and services time to focus on the Matter smart home interoperability standard.

The challenges are readily apparent. Buying a new home is one of the big life moments that trigger investment in smart home services, security, and spending on smart energy upgrades (another big topic at the event). But according to data from the National Association of Realtors, sales of existing homes are down 3.4% from April 2023 and down 23.2% year over year.

One of the reasons is rising mortgage rates. Sellers who want to buy a new home face higher mortgage rates, making them reluctant to leave their current mortgage (higher borrowing rates raise total mortgage payments, meaning someone might pay more per month for a home that costs the same as, or even less than, their old one). Roughly 86% of U.S. homeowners with mortgages have an interest rate of 5% or lower, while half of all mortgages have an interest rate of 3.5% or lower, according to data from Black Knight. The current 30-year mortgage rate is between 6.5 and 7.2% according to Bankrate.

Those individuals may decide to renovate. Paul Williams, the chief operating officer at Nice North America, said that in the luxury market, renovations are happening, which keeps systems integrators busy. However, the ADTs, Alarm.coms, and Vivints, which provide security services and more affordable smart home systems, switching between professional security services dropped from 5% of people switching in Q4 of 2020 to only 2% switching in Q4 of 2022, according to data from Parks Associates. This means those service providers are losing the chance to take new market share.

It’s not all bad news, though. Retention levels are higher. And for companies that provide bundles of devices that consumers pay off over a few years, keeping customers around longer on that initial hardware investment is good.

On the individual device side, it’s harder to know what’s going on. But Best Buy, which reported financial results on Thursday, saw a 10% reduction in comparable sales from the prior quarter that it blamed on higher prices for necessary goods such as food. “We’ve been seeing a consumer who is — whether or not you call it a recession — exhibiting some recessionary behaviors,” CEO Corie Barry said during the company’s earnings call.

However, Barry also said she expects the end of this year to be “the bottom for the decline in tech demand,” which would be welcome news for device purveyors. It may even give them time to get their Matter deployments in order. Mark Benson, head of Samsung SmartThings, said that could be a “silver lining” of the current economic uncertainty, although he clearly wasn’t happy about the situation.

The overall economy may have another effect on the smart home, albeit an indirect one. Many of the big tech firms that are investing in connected homes have laid off workers and are trying to focus on their core business. And Jennifer Kent, the vice president of research at Parks Associates, thinks that focusing on core competencies could lead to cutbacks in other areas like research and development.

“With strategic initiatives on hold,” she said, “I think it will slow innovation a bit.”