How Zillow's homebuying scheme lost $881M
fullstackeconomics.com
fullstackeconomics.com
Tangentially related, I talked to a friend who works on geospatial data for one of the big vacation rental companies, and he was remarking how many homes in many desirable areas are now rentals. It's not that uncommon to see nearly entire neighborhoods converted to short term rentals now in some areas where they're still legal. Hearing that really depressed me.
We often talk about automation in terms of replacing various types of labor, but I've become really interested in automation creating adverse market incentives for smaller market participants because that's exactly what buying real estate right now feels like.
It's honestly quite scary how I'm in the top 2% of income earners in my generation and yet I could barely afford to buy a small place in a semi-desirable area. I can easily see myself not being able to compete in algorithmically dominated markets flush with venture cash in the future and I earn more than just about everybody I know today.
Building more houses is generally good too, but it's a bit of a cop-out to blame the whole situation on that. Totally independent of supply concerns, I would argue that it's not great that in so many areas the value of homes seems to be almost entirely divorced from the fact that people need homes to live in.
Imagine if a bunch of very wealthy people just decided to start collecting medicine, not to use as medicine, but to just collect and perhaps sell later at a higher price. Is that within their legal rights? Sure, it seems like it. Would producing more medicine be a good thing? Yeah, sure, more medicine is probably generally a good thing. But is it still really crappy that people's habits for collecting medicine are driving up the cost of medicine for people who want to take the darn medicine? Yeah, it's crappy.
The fact that this is very likely prevents most of the speculation in the first place.
The difference with real estate is that the owners get to determine production levels, via local zoning laws.
Sure, there is some natural scarcity: Land cannot be created, but in most cases artificial scarcity is the issue.
Additionally it kind of strains belief that people are buying homes, paying property tax, etc. just because they like collecting them the way a kid likes collecting pokemon cards. More likely they'd buy a home because they expect home prices to rise and they'll be able to sell the home for more in the future. It may be unintuitive, but if your market is not incredibly supply-constrained this is actually a good thing.
Here's why. Let's say there's an up-and-coming college town, and speculators think that in a few years the town will become trendy and many people will want to move there. If they're right, demand will go up and home prices will rise. That means you can buy a home now on the cheap and sell it in a couple years when houses are more expensive to make a profit. But of course, when you buy a house now, you're contributing to demand for houses, so you're making the price rise in the present in response to a change in demand you anticipate happening years from now. Since home prices are rising, it now becomes more profitable for people to build new homes. (Their costs haven't changed, but now they can sell the homes to speculators who are willing to pay a lot because they expect to sell the homes to the people who'll move in as the town becomes trendier.) So what you get is people building homes now in preparation for people wanting to move here years from now. Making homes available will cause home prices to go down, until the market is at equilibrium and homebuilders are no longer willing to build homes for the price that homebuyers are expected to be willing to pay.
So in theory it all works out quite nicely. In practice, people who own the homes hate this because they like that the home they bought for $200k in the 90s is worth $2M now, so the lobby to get local governments to ban people from building homes. If there were enough homes that everyone who wanted to live there could, the prices of housing would come crashing down and homeowners would lose the bag they worked so hard to get (not).
The problem in the market is that buying real estate is the economically rational thing to do, because you get great returns on that capital, just like owning some amount of stock.
The problem is primarily the structure of the market, and not the actions of individuals within it. We need a land value tax, and we need to make it easy to build new homes.
> the value of homes seems to be almost entirely divorced from the fact that people need homes to live in.
The value of homes is so high precisely because people need somewhere to live, desperately. The price is not disconnected from need, it's entirely because of need.
And it's not that wealthy people are buying and hoarding homes. There's not some magic supply of 20-30% vacant unoccupied housing, there's desperately low vacancies, absolutely criminally low amounts of vacancies.
But refusing to acknowledge the panacea of building new homes does serve the purpose of wealthy people who currently own home. Because they are not hoarding homes, they are hoarding land. They are hoarding access to the ability to build more homes, the homes that are desperately needed. And in high demand areas, every person that goes and opposes new homes, that opposes upzoning, is directly responsible for displacing however many people those new homes would have built.
There is only one solution to high home prices, and that's building more. (Well, we could also institute strict border controls and price controls and completely destroy freedom of movement and access to jobs.)
Downplaying the primacy and necessity of building enough homes for people that want to live in an area only fuels higher prices, more hoarding of land, and more exclusion. There's zero upside to saying "we don't need to build" except to enable further financialization of housing and concentration of wealth in homeowners.
You should also mention that this medicine rich people are collecting also has dozens of other alternative medicines with hundreds of thousands in volume because other cities exist.
Also you should mention that some of these rich people are not rich people at all, but working class people who's lived in a location for decades which has become a desirable location in recent years thanks to some other people who generated wealth in the area.
Also you forgot to bring up the local government ran by some of these rich people who are blocking any measure to increase the supply of the medicine in the area. This certainly can crash the entrenched medicine cartel in the city, but some of these cities are North Korean style de facto one party system where no other opposition may challenge the status quo.
What? Where is that? It sounds insane and extreme overreach. How can somebody regulate with whom consenting adults choose to live?
It sounds like you're annoyed that you can't turn a profit on your 3 bedrooms and the housing problem is really a tangential concern.
I’ve seen houses where every room (including the living room) is occupied by a foreign student and the ‘landlord’ is running a slum rooming house. Thats what you’re not supposed to be able to do without getting approval. It impacts you negatively to avoid impacting your neighbours without consulting with them.
Not at all! Look into what it would take to lease them out to a self-storage facility. :-P
It's often bemoaned that personal cars are a waste of money and space: they sit idle most of the time, we have to build parking lots to accommodate them and that takes space. It would be so much better if we could just hire cars on demand! But this doesn't scale because the demand is not spread out during the day -- absent carpooling, you still need one car per person twice a day, meaning the supposed savings don't exist.
The same could be said for housing. If I'm at work all day, then my house is sitting idle (it's not housing anyone) and it takes up space. Why not let someone live in my house while I'm at work? This also doesn't scale but for a different reason: we all work during the day (excluding night-shift workers) so at night we still need one house per person (ignoring families, stretching the metaphor a bit).
Now add "vacation homes" into the mix, now you're looking at ~20% of housing (calculated from empirical analysis) in any vacation hot-spots being rental properties. This means that 20% of the existing housing that could be available for permanent residents is missing.
Saying "just build more housing" is just not realistic. 20% more housing is a ludicrous amount of housing!
Hotels, on the whole, are much more economical in space utilization because people who are going on vacation do not vacation to _visit a home_. They go to do things in the place they are visiting and are thus _not at home_.
For the second category usually it is the beach, but sometimes in the mountains or other area. We tend to get 10-15 members of our extended family and friends and the activities often include making food communally, playing games, moving between the house and walking distance activity like the shore, even napping. The house very much gets used and isn't just a place to sleep.
Very rare for my neighbour to be using her car at the same time I use my car. Not every car driver commutes 5 days a week 9-5.
I work from home, have done for years, my neighbour is retired.
I guarantee in my village there will be at least 10 unused cars at any point during the year, probably nearer 50. There certainly aren't that many empty houses
We can't have housing be both affordable and a good long-term investment. We need to pick. And given increasing prices and how 65% of Americans are howmeowners, I think we already did.
In vacation towns, the issue is that tourists are flooding out of hotels, and into livable dwellings.
Our hotel vacancy rates are rising just as fast as our home prices.
Perhaps the solution is tearing down hotels and building high-rise apartments in their stead, but it seems a bit wasteful compared to the alternative (regulating and taxing Airbnbs to nudge tourists back into the hotels designed for them).
Given the same nightly price, who would choose a minimal pared-down hotel room over an entire furnished condominium?
I'm really trying to think of reasons why a PE market maker that just bought a sub-division would want to build more and depress their future rents (unless the area has massive population growth).
Jesus, man, slow down. It's a little early to start suggesting cannibalism as a solution to the housing crisis.
So the undersupply story is a myth. There has been a recent pull forward in demand that ate through all active listings though.
Now what we have is listings that are easily found via google and a much broader set of visitors whose faces change every week. Our limited brains interpret that as a much bigger shift than it may actually be.
Eh, in the US, it was limited by the Glass-Steagal protections enacted after the speculators ruined the world economy almost 100 years ago. We can thank the 'Modernisation Acts' of 1999/2000 and QE for the economic rollercoaster in the US(so goes the world?) for the last 20 years in housing, energy & metals.
https://en.wikipedia.org/wiki/Glass_Steagal
https://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bl...
https://en.wikipedia.org/wiki/Commodity_Futures_Modernizatio...
https://hostagenews.com/report-10-of-san-franciscos-housing-...
Could not agree more, just so we're all on the same page it is:
https://en.wikipedia.org/wiki/Human_population_planning
Oh, sorry, were you referring to something else? :-)
Mix in low interest rates and you get a major property bubble. Population growth and low interest rates are the two major predictors of housing price increases.
The reason why lots of boomers are sitting on large amounts of housing equity is that they bought before the transition to low rates. The reverse will also hold - anyone buying now before the transition to higher rates will get clobbered (in terms of loan to equity - probably they'll be ok repayment wise so long as they have a fixed mortgage)
But iBuyers are always low-balling. They are bidding under the asking price with an all-cash offer that they hope will make up in speed and ease what it lacks in price.
> It's not that uncommon to see nearly entire neighborhoods converted to short term rentals now in some areas where they're still legal. Hearing that really depressed me.
I lived in Lake Tahoe for ten years before AirBnB was a thing and three out of four homes there were absentee owners that only used them a few weeks a year. It made it a very hard place for small businesses to stay afloat. Most visitors stayed at big hotels or paid huge premiums for ad hoc "cabin rentals" through local realtors. The most depressing part was Halloween - kids hiking up and down steep hills to mostly empty houses. :)
Low-balling according to their own estimate (Zestimate) with imperfect knowledge. If this Zestimate overvalues a house, but the iBuyers assume “we are low-balling anyways,” they may find themselves in an iBidding war ending in the winner’s curse: whoever pays the most for the overvalued house wins.
Not a problem though right? They overvalue some, undervalue others, it evens out. But, as the article points out, the nature of this algorithmic buying is that the iBuyers will only - or at least predominantly - end up with the houses they overpaid for or got only a slightly good deal on because many sellers will be willing to take longer for a better deal. The end result is very thin margins or, as seen with Zillow, substantial losses as they hold a lot of lemons.
Because they want to make money. Which they can’t by buying for X and then selling for X.
But is asking price "market" price. As in does the seller price a 10-20% premium calculating this. Always easier to negotiate down than up.
A thought exercise: suppose that no new houses are ever built and that housing turnover is nearly zero. What happens to the price of housing in that limit? Market forces do not necessarily entitle the top n% of the income distribution to housing.
I was a bit cynical about this too: I live in Los Angeles, where a "small place in semi-desirable area" gets listed for 1.5M and goes for nearly 2M. I'm somewhere in the top 5% of earners in California, but that $2M 1950s tract housing would be >50% of my post-tax income.
I don't think it's disturbing because "clearly the top 2% of income earners should be entitled to housing," but because clearly everyone needs housing, and if the top 2% of earners can't even afford it, that means it's even worse for everyone else.
We know that any given habitat, like the Earth, has finite resources and has some upper bound to supporting life. This is how those pressures manifest. We can’t just keep growing the population and have everything be affordable. Surging food, energy and housing prices are the first feedback mechanism in this process.
If everybody can afford everything forever, we get infinite population growth.
> I live in Los Angeles, where a "small place in semi-desirable area" gets listed for 1.5M and goes for nearly 2M. I'm somewhere in the top 5% of earners in California, but that $2M 1950s tract housing would be >50% of my post-tax income.
I think the obvious answer here is that people in the top 2% or top 5% are not buying houses... It's the people in the top 0.1%. Last time I was home shopping, we were regularly outbid by all-cash offers of 50%-100% over asking price, no contingencies. These competing bidders are not teachers and nurses. They're not even high-paid tech employees. Do you really think a Senior Software Engineer at Microsoft has $2.5M in cash sitting in his checking account to buy a home? No way. These are all businesses, investors, serial landlords buying their 60th house, hedge funds, 0.1% wealthy people--that's who's buying all these houses. Not us.
Income data always lags reality by a couple of years: in my experience, a lot of people have a lot more money than you'd think. The winners of the eight purchases I've attempted have been young dual income professional families.
It's not common, but definitely possible. E.g. if you were part of an acquihire. Or just got lucky somehow. I know a senior with a crypto portfolio worth more than that because he dropped a few thousand into bitcoin in the very early days.
The price continues to reflect the supply and demand of the houses. You’re either lucky to inherit the land, or you earn enough to outbid others for it. It might even be impossible to outbid those who are bringing inherited wealth to the table.
It might become a transient community, where you work and save and then leave to settle somewhere else.
Why would you suppose that? I don't really see what you're getting at, that's a very unintuitive assumption; it shouldn't happen if market forces are allowed to run their course.
My supposition was intentionally exaggerated to clarify what happens when you don't build enough housing: not to be pedantic, but understanding what happens in "extreme cases" is a common technique in math and physics to understand what happens in more common ones.
Apparently you haven't met my neighbors.
Japan's zoning is national and doesn't have this problem. Thus Tokyo is far more affordable than San Francisco, Mountain View, etc.
Yet there's a ring around London where it's hard to see any family homes that are under £1M.
I mean sure maybe they're sitting on equity or mom and dad are contributing, but by my estimation there are a huge number of people who have thrown absolutely everything into owning a home. We'll see how they fare if rates rise.
I don't know what the situation is like in the UK, but here in Austria banks are really really eager to give people as much money as they'll take.
Getting a mortage that runs 30 years? Sure thing! Why not make it 35 years? 60% of your paycheck goes into mortage? Why not? You have less than 10% of the required amount in cash? Who cares!
The people who are buying homes right now are getting into massive debt, with variable interest rates. If interest rates rise, a lot of home owners won't be able to pay their mortages anymore, and they won't be able to sell because the only reason people can afford these crazy mortages is because the interest rates are so low. It looks like a bubble to me, and the only thing that's redeeming to me is that everyone has an interest in keeping the bubble going.
It doesn't seem surprising.
Large 5 bed detached house in a quiet cul-de-sac, good sized garden, ample parking on the driveway for 4 cars if needed, and well under £1m.
Train to London Euston takes 49 minutes and whilst the season ticket isn't cheap (nearly £10k) you're still coming out ahead with the lower cost of living.
If you mean the Stockbroker Belt [1], well, yes.
They'll be fine. If asset prices go down, rates will go down.
That would have fixed much of this, it's point blank illegal to run a bed and breakfast out of your home. Now if you're my buddy, and you want to slide me $200 to crash at my house for a week that's fine, but if you add technology to it, it ends up destroying entire neighborhoods.
Ride-sharing is a bit different, since I'd argue the reduction in drunk driving deaths more than outweigh any negative side effects. It's amazingly easy to just call an Uber when you've had one too many. Countless lives have been saved already.
This isn't how the legal system works.
If something is illegal, and you do it, it doesn't mean you always go to jail.
If something is illegal, and you finance other people doing it, it almost always mean you get a fine.
Why? It's your home, you can do anything in it. Why should you need a license to rent out your own home for a few days? Does it physically destroy neighborhoods or just your perception of it? If so, why should anyone care?
However, there are actual rules, the rules exist for a mixture of good and bad reasons, and it has never been true to say "It's your home, you can do anything in it.".
No, you aren't free to do "anything" in your home, including provide commercial services if not properly zoned and insured.
>Why should you need a license to rent out your own home for a few days?
This is not what's happening in many places. AirBnB went from "a place to crash" to an amateur hotelier platform.
In my area we have a legal agreement between all apartment owners that things like this are not accepted.
Don't you see an issue of every single person decides to do this in your neighborhood, traffic being the first thing.
The other issue too, is most people are renting out apartments, and then Airbnbing them. Like, at that point it's not your property, you're just granted temporary permission to use it. Likewise, most condo boards don't want you to use your property as an Airbnb.
You kinda can, but you don't get the type of legal protections a hotel or B&B that plays by the rules has.
Also like it's your home, but it's not your roads, cops, firemen, sewage system, power grid, courts... you wanna use all those services you have to play by their rules and there's a lot of rules and they don't exactly make a lot of sense.
Do you think it would impact the value of you property? Do you think that would be fair?
People care because it is a matter of justice, which is one of the fundamental precepts of society.
Yes, it does. People buy homes for more than financial reasons. Living in a community of homeowners with neighbors you've known for years is a completely different experience than living in a revolving door community of renters. There's been a whole decade of news reports about Airbnb ruining neighborhoods and condo buildings, to the point that it's not even worth citing a particular incident.
It's not about 'why' care, it's about the fact that they already do care enough to have caused regulation.
It would take a lot more than a billion dollars to make a dent in the national housing market. Total housing sales in Feb22 amounted to $161 billion.
That's enough to make a temporary splash in a rural market, but Zillow would need to spend 100x more than what they lost to even move the needle. And spend 10000x as much to really drive a boom/bust cycle nationally.
There's zero evidence to believe that this will be the case. I will never trust large multi-family property management companies driven by software to consider keeping rental rates reasonable. That's antithetical to our capitalist system, profit is the one and only goal.
> Maybe property is like golden handcuffs, nice but locks you down...
In terms of utilizing the space, sure. However, buying property has been the primary method of wealth accumulation for most of the country going back the last several decades. Property ownership is also one of the best ways to protect yourself against inflation, which we're all getting serious exposure to. And with the speed at which houses are moving in this market (listings stay up 2-3 days in my area for the most part), property owners aren't very locked down either.
i too, want to only pay less money than the highest bidder for the mona lisa.
There's no such thing as 105%. By definition, iBuyer paying "120%" is the true 100%. If they overpay, they lose when there's no buyer after them to sell to, and their debt will not be serviceable. At that time, the "105%" buyer could buy at a lower price.
Top 5% puts you at over $300K/year. Top 2% is much higher.
Even a top 5% person can easily afford a house in any semi-desirable city. LA, Bay Area are not semi-desirable. They are highly desirable.
Adding to your data points: this is happening in some CA beach communities. Many beachfront homes in Huntington Beach and Newport Beach have been turned into AirBnBs that seem to cater to social media influencers desperate for instagram-able pics.
Some more anecdotal data: I know a couple of people who are professional AirBnB hosts and they're constantly in the market buying real estate to turn them into rentals. They buy cash in the cities I mentioned above, as well as San Diego, Las Vegas, Los Angeles, NYC, Brooklyn, Nashville, Austin, and others. This is a lucrative business, at least for the time being.
The opposite really. Speculators do their best to buy low which pushes the price back up toward the mean in the aggregate, and sell high, which pushes it back down toward the mean.
Speculation is a stabilizing force overall.
The boom and bust cycle in real estate is very real, but driven by other things.
a sophisticated speculator is.
an unsophisticated speculator is actually destabilizing, because they might incorrectly speculate capital (that they cannot really afford), causing a loss in market efficiency in allocating capital to where it's needed.
The 2008 GFC is in part caused by unsophisticated speculators (home buyers) to speculate on property. Initially they saw some good profits, which lead to even more unsophisticated people to try get in on the game (and the banks happily obliged).
What happens when that unsophisticatded speculator purchases a bunch of properties at prices above what they're worth? If he can't make the payments on them, eventually he'll be forced to sell, or perhaps even declare bankruptcy.
Those properties will eventually be sold at the market equilibrium price, possibly even lower than that because he will likely need to sell in a hurry to meet his obligations, or because a bank forclosed on him and wants the money now and will also accept a below market price to liquidate them quickly.
Which is exactly what happened to Zillow. They realized they paid too much and couldn't make money with them and are now unwinding their position at a loss.
The 2008 crash was caused by fraud on the part of consumers on their loan applications. It was not caused by speculation. Income was not properly documented on a lot of those loans. Many lenders actually did verify income and required a significant down payment from buyers, and weathered the crisis well.
The fraud coupled with low down payment requirements turned these loans into very risky assets, but the banks securitized them and sold them to third parties, who percieved them as nearly risk free assets. The real scandal was that those assets were rated as very low risk by Moody's and S&P but turned out to be basically junk quality.
And then lots of investors used leverage to buy them and, lo and behold, they were not risk free assets, and the use of leverage when investing in those securities destroyed a lot of investors and institutions when those securities stopped performing. The fact that the ratings agencies stamped the assets as very low risk is the real scandal: banks thought they were almost as good as treasury bonds and they clearly were not.
After the crash, a lot of those securities got picked up at basment bargain prices, and most of them actually did peform fairly well, with 90%+ of individual loans performing. I invested in a company that picked up a lot of those securities at fire sale prices after the crash and did pretty well.
Which gets back to my original point: speculation is only a destabilizing force if the speculators are not well capitalized against losses, and things move against them.
The 2008 crash would have turned out differently if the purchasers of those loans used less leverage or were better capitalized, or did their own due dilligence when investing.
That’s not how market making works. Market makers don’t consume other peoples’ orders, which is required to push up the asked price or down the bid price.
Market making is effectively (1) observing that the market is currently willing to buy some asset at the price A and sell it at the price B (where A < B) and then (2) simultaneously submitting a buy order at price A1 (where A1 > A) and a sell order at price B1 (where B1 < B). Thus the market maker reduces the difference between the buy price and sell price (the “spread”).
The truth is that there is much much much more money in the middle class globally (almost 3x that of 2000) and on top of that the normal inflation, and freezing of supply.
As long as “desirable location” stay the same, and the amount of people affording it growing so significantly. The expectation of being able to afford one is a strange one.
See https://www.nasdaq.com/articles/world-reimagined%3A-the-rise...
Global middle class is meaningless in this discussion
This happens to all assets all the time. When it rains, umbrellas go up in price. Companies competing with this and failing is only a transfer of wealth between VC's and homeowners. You don't need to ascribe a moral sentiment to that transfer, its just what it is.
If the prices then bust afterward, then homeowners that sold won, the ones that stayed didnt take advantage of the opportunity, and home buyers lost at the high and will win at the bottom. Like in any other price fluctuation!
iBuyers don't buy from each other or hold the house for long. As soon as they sell then everyone sees what a market price looks like without them.
> automation creating adverse market incentives
You seem interested in how markets drive outcomes so I'd suggest looking into the effects of residential zoning and other barriers to construction. The US has spent the last 50 years coming up with creative excuses to prohibit new housing and it gets more expensive every year. Probably related!
Not the best example, but one I have handy: https://twitter.com/DurhamFella/status/1441808710066577410?s...
If you’re in the top 2% of earners and can’t buy a home, you either live in a ridiculously expensive city (outlier) or have a money management issue.
Of course, it means prices are going insane. A complete wreck of a house we were interested in buying and turning into an actual home which I thought would be worth max 200k went for 450, cash, from a buyer who never even saw it.
They'll tear it down, stick a new house on it, and make their investment back in 5 years.
Meanwhile, all the locals kids, go away and don't come back. What is there for them there anymore? Not a lot.
That's like saying we need a bilge pump for our basement to fix that leaky pipe. You've properly diagnosed the problem, but your solution is idiotic.
Why are people piling into hosuing right now? Answer that question and the solution becomes exceedingly obvious. It's the same reason Bill Gates and his ultra-rich friends are buying up farmland in the Midwest and the same reason people are buying into the stock market so heavily. They're trying to avoid inflation.
Inflation was 8% year over year last month. The last thing any investor wants to hold right now is dollars. If inflation stays steady for the next 12 months, you are guaranteed a value loss of 8% if you just leave it in the bank. Almost anything, baseball cards, used cars, copper pipes, etc. is a better investment than that.
And on top of that, people are realizing they can borrow $400k from the bank at 4% when inflation is raging at 8%. It's literally free money, with leverage to boot. There is no easier and faster way to use leverage to short the dollar right now than investing in real estate. It's no wonder housing prices are going nuts. Everyone and their dog is trying to avoid inflation, and the rush to buy housing exacerbates the price increases even further.
The solution to the issue is one no one will ever get behind: raise interest rates such that the real rate of inflation (nominal interest rate minus the inflation rate) is positive. That means that if inflation is 8%, interest rates need to be at least 8%.
And that's why the problem will persist for many years into the future: there is no way anyone at any level of our society will tolerate 8%+ interest rates. The housing market would collapse in such a way that 2008 would look like child's play. The bond markets would get destroyed. The stock market will absolutely crater 50%, easily. The interest due on the federal debt would go to astronomical levels, resulting in ridiculous tax increases to pay for it.
That's the solution. Or, the government can just let inflation run rampant for a few years, and default on the debt without having to not pay anyone, and without having to have a big old nasty recession. We'll just have the 1970's style stagflation for the next decade.
For those reasons inflation is here to stay. If you can find a better way to short the dollar over the next 10 years and use leverage to do it, by god, that's the best investment you can make right now.
But the saddest part of this whole ordeal is that at some point in the future, the only way to solve this inflation crisis is to do exactly what I described: make interest rates positive again. That is the lesson of the 1970's.
They tried to raise rates several times, but they never raised them enough such that the real interest rate was positive, and as you'd expect, any time the Fed got close to getting there, the economy teetered on the brink of a recession, and there was an election coming up, and well, they chickened out and lowered rates again.
Regan's election was very much a result of the economic devestation of the 1970's. Another moral of the story is that if you don't want fiscally conservative reupblican's like Regan to get elected, the guy in the White House had better deal with this shit soon.
But my money is on Desantis in 2028 after we see year over year inflation rates of 15%+ for most of the 2020's. You heard it here first.
This is just my personal anecdote but... I'm pretty sure when I was rushing to show up to "new listings" on the weekends and waiting in line for 10-40 families to get a walkthrough "open house" wise, I feel like the sellers were going to pick a family that showed up over a Zillow website. What % of closed houses were being bought by families instead of "iBuyers" as you said it?
But, I agree on the SFH part. The expectation that a 3000sqft house on 1/4 acre is the norm is completely unsustainable. Yet that seems to be what many people want. Even in high COL areas where demand and cost should be driving density.
I WFH so I could probably buy one of those houses, but most of my friends in my age bracket are expected to show up to an office 5 days a week, so those suitable houses are no good for them.
People are living longer and tolerating less construction. We're only building or freeing up enough homes in desirable areas to skim the very top of our generation.
Why? It makes me happy that more people get to enjoy a desirable area rather than using the law to keep them out.
COVID threw a wrench in the scheme temporarily and caused a lot of that money to start trickling down, which is why we're seeing wages rise rapidly and high consumer-level inflation.
By the way, bitcoin fixes this.
Also, I wonder if you're conceding that the Fed steals from the economy in general and gives to the super wealthy, and simply think that that's a necessary side effect of having a well-functioning economy. It seems like it.
It is going to get interesting when the millennial generation suddenly starts mass inheriting baby boomer houses - not sure how that is going to play out honestly.
We were able to pull up to the driveway, book a tour for that minute, and walk in the front door. It was almost a magical experience compared to the process of finding and going to showings. The listings were clear and thorough. The experience was extremely compelling.
The downside: the homes were absurdly overpriced. I bought a home for about 10% less than the last Zillow listing. For less, I got three times the land, 40% more square footage, a better location, updated appliances, new carpets, landscaped back yard, horseshoe driveway, two car garage. Almost zero effort had been put into modernizing the Zillow home and it showed.
I suspect if I had come in with a very low offer, they'd have accepted it. But for what?
If I was Zillow, I'd have licensed the tech to realtors. I'd definitely be inclined to buy a home through them if they weren't the ones selling the property directly.
This ends up pricing the house too expensive to flippers, and not nice enough to sell compared to other houses because it doesn't have the farmhouse sink and looks exactly like a grandma took out a home equity line and renovated (which is what happened).
If this wasn’t another house in the same neighborhood then the differentiator most certainly wasn’t Zillow or their pricing.
OP got a bigger, more modern house, with a larger yard for less, but it's meaningless until we understand the market circumstances of both homes for sale.
It could be that Zillow is overpriced here, or it could be that Zillow is properly priced, we have no idea from the information provided here.
That’s saying a lot for a red hot real estate market.
I still get updates from Zillow every month saying my home increased 5% in value in the last 30 days and up 30% over the last 12 months. Something is wildly off with their algorithm.
Open RedFin, check the houses for sale, go to the open house when there is one? That’s at least how it works in the Bay Area. We never had to schedule or book anything, and only after seeing a house we liked, we asked our agent to check it out and submit an offer.
This has nothing directly to do with their market failure but they probably are driven by the same leadership problems.
Zillow lowballed us 10% under their zestimate, and still tacked on an 8% fee - we ended up going with a realtor instead, and ended up getting 15% over the Zestimate, with a 6.5% fee.
* the pricing algorithm was good, but the business leadership got hungry and kept overriding it with higher offers in the hunger to do more business.
* they were trying to do so much business that they couldn't source the labor need to flip - painting, landscaping etc. They were so backlogged they were just sitting on houses they overpaid for (due to overriding the algorithm), and the constant cashflow aspect that makes flipping work at scale was destroyed
Matt Levine's take was something like:
if the pricing algorithm is good but it tells you that the flip strategy is only profitable on relatively small number of properties, then it's not profitable at scale cuz you're paying a big engineering team to create, tune and maintain it.
Sometimes it's better to sit on your hands.
Zillow does not have any fundamental control over the market. They do not have any obligation to show true prices. They are a private entity who happens to offer price estimates a service. Nobody is ever forced to buy or sell at that price.
They can “lie” all they want, it makes no difference to what price a house sells for.
If the right answer is a blend of two business models, then both companies becoming more like the other make sense.
https://www.reddit.com/r/urbanplanning/comments/rgkne9/how_a...
Or they could have an internal team of appraisers doing that type of work, but the business might not like it when the appraisers don’t validate their pricing structure because real data does not support it.
I guess this is pretty obvious but just to be explicit, what's happening I guess is that players that are "correctly" valued by the algorithm are getting taken by others, and only the overvalued ones are left for the algorithm to choose.
However, I always took that to be intentional, sort of a "see how valuable your home is / how high the values are where you're looking at"; hype that cost them nothing but made everyone feel better. Did the person that set that "glamor bonus" fudge factor get fired or just wasn't allowed to talk to the team deciding offer prices?
If you follow the Zestimate through time, it climbs rapidly until there is a sale, then it goes "oh shit" and plummets down to the sale price, which is barely different from the last time it was sold. This cycle repeats each time the property is sold.
Zillow is absolutely certain that this property should be rapidly increasing in value, no matter how many times it sells at about the same price it sold for last time.
When we sold the property, the agent told us it was in an awkward spot: too expensive for single people, not quite big enough for high-earning families. So it's stuck in price limbo as all the neighboring condos skyrocket.
Based on this experience, I remain convinced that there are micro-structural factors the fancy data science pricing models just can't seem to capture yet.
FWIW, we have had a high frequency of home sales in the past year, so that might help. I just looked up my previous house (sold 5 years ago), and Zillow is saying $740K, which I am pretty sure is massively overvalued, however the street it is on, and general area, have a fairly low turnover, so less recent data.
Don't have to deal with showings, or fix anything, or hope a buyer's financing doesn't fall through at the last minute. To me that's worth whatever percent they're getting.
Sadly, no iBuyer operates in my fly-over state.
No matter what terminology you use, buyers without cash-in-hand are getting screwed.
"Cash is king" is a common phrase in real estate for good reason. In pretty much all instances, a cash buyer has a leg up over everyone else. In a liquidity crunch, cash buyers get discounts because people can't get loans; in hot markets, they get discounts because they can wave contingencies; in cool markets, they get discounts because they can move faster; etc.
> A less competitive market is less dynamic and worse for sellers, but it is better for the iBuyers that remain.
If they can avoid taking on the bad deals that Zillow was previously shielding them from. I've seen how in some markets the disappearance of a provider that falls victim to this kind of adverse customer selection merely moves the problem to other providers in a cascading fashion. It's not clear that there are that many profitable deals to be made on the iBuying model
Yes, that's why they have to account for the probability that whoever hits their bid is an informed trader (vs. uninformed/noise trader). And it's part of the reason they can provide price improvement when they source order flow from retail brokers, whose customers are mainly uninformed/noise traders.
From what I've read it seems Zillow never had the actual expertise to do this, they were always a house price checking site. On the other hand opendoor started out doing this from the start.
Each house needs to be inspected by multiple experts as there are many toxic properties with huge liabilities.
Does Opendoor just have better algorithms/models? What factors allow them to have different outcomes from Zillow?
They tried to paper over this during their iBuying push with humans, and then in an effort to outgrow Opendoor, they incentivized growing at any cost without the proper controls to prevent adverse selection. And due to some unfortunate timing with the market cooling, they got wrecked for it.
Hopefully Opendoor can figure it out. They're probably going to need a lot of cash, homes, and software to really put it together into something that can be automated and scale.
If you make lowball offers you won’t have many accepted but you will make money on the ones they accept. If you make higher offers you’ll be killed if anything goes wrong at all.
The other thing they have which compares to what Zillow were doing is webuyanycar.com. It is literally what it says, you get a quote from their site to value it, go to their location and they buy your car. When I did it I was there for just 7 minutes, easiest car sale ever! And they payed be nearly 1k more than anyone else.
They are truly the market makers with this system, ensuring a steady stream of cars into their auctions. Have full visibility in real time of the pricing on both sides and are only holding the cars for about one week.
Some argue that they were a major contributing factor to the used car price inflation last year (on top of the issues with new car availability).
And they would be wrong. Market makers do not get to set prices, supply and demand does.
in one breath it is overtly and explicitly illegal, second breath same sentence.. "wellplayed" .. any red flags here?
I have heard "contemporaneously, during the Fall of Rome, there was a precipitous rise in the number of lawyers"...
In return people would be able t book a viewing to your house without a buyers agent nor would a sellers agent be involved. Cut both parties out, pass some savings to the buyer and seller and take a large cut.
Everyone wins.
- https://www.mikedp.com/articles/2021/12/16/opendoor-vs-zillo...
- https://www.mikedp.com/articles/2021/11/3/zillow-exits-ibuyi...
Can we admit that this is a major problem with the "AI" search algorithms operated by Google, Amazon, and others?
They are assigning "value" to content, or books, or whatever based on an incomplete understanding of the market. It's made even worse because so many owners are able to game the system.
I don't think there's enough benefit to sellers to make buying options feasible.
Personally, I think the physical cost of holding inventory and the lack of commodity status (commoditization?) for houses is manageable, if not outright surmountable. I think the condition that simply must change for this business model to work is the velocity of buying and selling residential real estate. Until you can go from “I want this” to “I bought this” or “I want to sell this” to “I sold this” in a scale of days if not hours, any market maker in residential real estate is going to end up a market risk taker implicitly betting on the future price of the property. Even if Zillow could move directly from closing on the house from the seller to initiating a sell to another buyer in less than 24 hours, there’s still several weeks involved. If the market is volatile, that’s a substantial risk exposure.
Simply put, it needs to be possible to move the title twice in 24 hours along with some way to finance a buyer on a very accelerated timescale. Both of these things will need reforms at all levels of government: municipal, state, and federal. I just don’t see that happening for a very long time, to be honest.
https://nypost.com/2022/03/18/firebird-grove-scoops-up-entir...
Unfortunately most homeowners are debt-leveraged out the wazoo as a result of the artificially low interest rates we've had for the past decade. Once you filter out people who aren't looking to move the remaining cohort is homedebtors. Although something like 1/3rd of homeowners own their house outright those tend not to be the ones looking to move or flip.
<Quickly searches to answer question for myself>
Oh, ~5,000/month.
Lets no argue the truthiness of that statement but look at it as stated. They buy one house within a 10-20 mile radius away from you and they do so aggressively paying 20-30%+ over the pre-bubble price (think early pandemic times when prices were more realistic then they are now)
Well now thats the anchor price on comps for the next guy just looking to sell his house. Rinse and repeat a few times with anchored expectations on an inflated value and we have runaway prices.
But given this country's history of regulating giant corporations... more likely we'll just do nothing until homelessness balloons even more and the vast majority of homes are corporate owned. Then we'll have to wait for a VC bubble burst before they start selling all of the homes and tank the market.
Edit: Added seemed-obvious final sentence.
But also there's the cost of inspection, property insurance, title insurance, escrow fees, labour costs of making the sale etc. As the article says, trading houses is not like trading stocks.
In appraisal after appraisal after appraisal within the last 6-7 months, I have watched Zillow, Opendoor, and OfferUp getting cleaned out to the tune of losing $30,000 - $60,000 on home after home in some neighborhoods. And in AZ, Zillow and Opendoor have been buying and selling in this market pretty healthily the past few years, and we’re it not for themselves and the buying frenzy of last Spring and Summer, they probably would not have gotten as hurt here in the Valley. They got suckered into paying top dollar in a market that was at its peak, and their algos were not trained to deal with the human factors causing this.
When I was working as a developer for a real estate tech company, it was made very clear that this company, along with any other iBuyer are able to show homes and come up with estimates is because they have local access just like realtors, appraisers, and developers to a Multiple Listing Service (MLS). In fact, the company I worked for had access to every MLS in the US; They would use the data from any of these MLSs to populate their front end product, which would then be influenced by their data science team to give the “estimate” based on whatever factors they deemed appropriate.
As someone whose job is predicated on objectively using primarily historical (for the past year) MLS/County data to asses what the market will allow a home to be valued at, it pains me to see people being taken advantage of by companies like Zillow who want to be “market makers” while not thinking through the implications of their strategies past making money on “easy” flips.
All this at the cost of local communities home values losing touch with the realities of the people who are living in an area to live, not invest. And here in Phoenix, it’s only gotten worse for anyone who doesn’t already have generational or attained wealth to find affordable housing.
The median price as of the past few months has cooled down to $350,000 - $400,000 for what would be considered normal for a less-than 2,000 square foot home. But, in some areas of the valley, it’s gotten so ridiculous that a sub 2,000 sf house is able to sell for $610,000.
On the one hand, I can appreciate these types of companies and business practices because they will keep me in a job making sense of the messes they make in the micro. On the other hand in a macro view, I hope this shakes some sense into the C-suite and product teams of these platforms that they need to approach this less as a “move fast, break things” type enterprise, for themselves and the communities they impact with their choices.
I'm done and tired of vulture capitalists and all sorts trying to make bank on where to live. I'm sick of landlords looking for shitty almost-passive income while I build them equity.
Fuck'em all. I want this "industry" to die in a pit of firey death.
Also, 'flipping.'
In my local Multiple Listing Service, it can show you all deed history for a given property, it is most certainly labeled as a flip if anyone – iBuyer or no – buys and then sells within a short period of time, even if they don’t make profit. The intention is understood by all market participants.