Is Zillow’s home-flip fiasco a warning?
The company’s stock value is down by a third — or $9 billion
“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.
BUZZ >> What in the world was Zillow thinking? SOURCE >> News broke last week that the real estate data firm’s house-flipping endeavor had failed.
The company says it’s stuck with roughly 7,000 homes it must sell below cost — a loss that might total a half-billion bucks. So Zillow will quit the buy-quick, sell-quick business, sell off its homes and cut a quarter of its staff.
Wall Street wasn’t happy. It slashed Zillow’s stock value by roughly one-third — around a $9 billion markdown.
More than a few marketmoving questions come to mind. For now, we’ll ignore the “how” behind Zillow’s stupidity.
Qis it just Zillow?
AZillow made a massive bet its fancy-pants computers could help it buy high and sell higher as an “iBuyer” — making thousands of quick cash offers on homes in hopes of profiting from fast resales.
Since Zillow’s a publicly owned company, the buying mistakes it made throughout 2021 had to be disclosed to its stockholders. Not every real estate investor — iBuyer or not — has similar obligations to admit to such transgressions, if committed.
Thankfully, nobody else in this quick-buck game has fessed up to any major mistakes. Yet.
QLet’s assume Zillow’s an outlier, so why should I care?
ADo you wonder why home prices have soared in the pandemic era?
Zillow’s debacle offers another clue. Investors trying to make a swift buck may be badly overpaying for homes.
And while your favorite real estate agent may be chuckling at a competitor’s demise, please don’t celebrate with them.
At a minimum, Zillow — arguably the most aggressive homebuyer — has left the game. It’s a good bet other investors will learn from Zillow’s missteps and be more cautious.
That means fewer highly motivated buyers, which could cool housing’s feeding frenzy — both in how many bids are made for homes and how much money is in those bids.
QLet’s assume Zillow isn’t alone. Where are iBuyers big … where should I be worried?
AZillow produced a study earlier this year suggesting these quick-buy-sell investors in 2021’s second quarter were focusing on midrange homes in more “affordable” Southern and Southwestern markets.
So good news, California, they haven’t been huge players in the state.
The report, tracking big four iBuyers — Zillow Offers, Opendoor, Redfin and Offerpad— showed Sacramento was their favorite Golden State market, grabbing 3.3% of all purchases. That’s the 11th biggest share among 33 markets tracked. iBuyers paid a median sales price of $513,000, 5% below the overall market median.
In the Inland Empire, iBuyers were 2% of all deals — No. 21 share of the 33 — paying $496,500 or 3% above median.
San Diego had 1.7% of all deals from iBuyers — No. 23 share — paying $691,500 or 7% below median.
And in Los Angeles-Orange County, iBuyers were 1.2% of all deals — No. 27 share — paying $769,500 or 6% below median.
I’d be worried in towns where iBuyers were busiest.
Start with Phoenix, where they snared 5.7% of all deals, paying $391,650, which was even with the overall local median). Then Atlanta: 5.3% share, paying $275,700 or 16% below the median. Charlotte: 5.3% share; paying $290,650 or 12% below median. And Raleigh: 5% share; paying $317,000 or 12% below median.
QIsn’t this just highvolume flipping?
AWell, iBuyers provide a relatively new
transactions option for owners who want simpler, quicker execution of a house sale.
You get an all-cash offer. If accepted, the sale can conclude quickly, without the hassle of repairs, stagings or open houses.
But otherwise, yes, it’s more or less large-scale flipping.
My trusty spreadsheet, filled with quick-sale trends from deal tracker Attom, found flipping of all sorts was relatively meek in California, where the market is often ahead of the risk-taking curve.
Statewide, 6,159 sales in the second quarter came less than one year from the purchase date. So flips represented 4.1% of all deals. That’s the 33rd largest share among the states and below the 4.9% national level.
And the typical California flipper didn’t do well when comparing results to a national scale. The median sales price of $594,200 was just 24% above the purchase price, only the 36th-best raw profit margin among the states and below the 33% national gain.
In key Golden State areas:
LOS ANGELES-ORANGE COUNTY >> 1,574 flips were 4.1% of all deals — 28th biggest share of 50 largest real estate markets. The median sales price of $777,500 was up just 18% from purchase, the seventh-smallest raw margin. SAN FRANCISCO-OAKLAND
>> 603 flips, 3.4% of sales and the eighth-lowest
share. The median sales price of $920,000 was up 25% from purchase, No. 35 margin.
SAN JOSE-SUNNYVALE >> 128 flips, 1.8% of deals — lowest share. Median price of $1.3 million was 23% above purchase, No. 39 margin.
INLAND EMPIRE >> 1,081 flips, 4.6% of sales ranking No. 27. Median price of $455,000 was 29% above purchase, No. 32 margin.
How bubbly?
On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FOUR BUBBLES!
Remember, we’ve been constantly reminded “It’s different this time!”
Zillow is a prime example. I don’t recall in any previous cycle seeing such a level of overzealousness by a homebuying speculator.
The liquidation will involve Zillow’s entire 18,000-home inventory. Buyers will likely be large investors scooping up homes in bulk and converting them to rentals. So listing-starved house hunters won’t likely see any wave of “for sale” signs anywhere soon.
But Zillow’s fall is a clear warning sign that some things don’t change. “Buy high, sell higher” is a dicey concept.