“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 that the real estate data geeks turned house traders famously failed at flipping.
The Trend
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.
The Dissection
More than a few market-moving questions come to mind. For now, we’ll ignore the “how” behind Zillow’s stupidity.
Q. Is it just Zillow?
A. Zillow 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 they 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.
Q. Let’s assume Zillow’s an outlier, so why should I care?
A. Do you wonder why have homes 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.
Q. Let’s assume Zillow isn’t alone. Where are iBuyers big … where should I be worried?
A. Zillow produced a study earlier this year suggesting these quick-buy-sell investors in 2021’s second quarter were focusing on mid-range 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.
Q. Isn’t this just high-volume flipping?
A. Well, 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.
Inland Empire: 1,081 flips, 4.6% of sales ranking No. 27. Median price of $ 455,000 was 29% above purchase, No. 32 margin.
San Jose-Sunnyvale: 128 flips, 1.8% of deals — lowest share. Median price of $1.3 million was 23% //above?// of purchase, No. 39 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.
Jonathan Lansner is business columnist for the Southern California News Group. He can be reached at jlansner@scng.com
