Last week Zillow announced failure as a home flipper and there were no candle vigils. But there has been so much talk and I’ve heard everything from “This means the market is going to crash” to “The iBuyer model is dead.” Let’s talk about what this failure really means. Any thoughts?
Skim topics of interest or digest slowly.
Failure despite massive price increases: We are coming out of one of the most aggressive markets ever and Zillow was not able to succeed despite massive appreciation. Just think how much more difficult it would have been to flip in a declining market.
Zillow losing isn’t about the market: Lots of people have said things like, “Zillow must know the market is about to implode, so they got out before it was too late.” But here’s the thing. Zillow overpaid, so of course they are selling at a loss. Zillow losing money isn’t about what the housing market is doing right now. It’s the byproduct of a flawed strategy. As a side note, I have a friend who was the recipient of an offer nearly $100,000 over market value and I now joke with him that his transaction is what pushed Zillow over the edge into failure… Keep in mind Zillow’s own economists have been predicting price growth next year, so backing out due to a looming market collapse goes against what their brand has even been saying. Look, I’m not giving credibility to Zillow’s predictions, but keep in mind mostly every data company is predicting price growth next year.
Operation Catch-up: It’s almost like Zillow wanted to catch up to Opendoor rather than being sure their acquisitions made sense. It’s like Zillow was so zealous to be the number one iBuyer that they didn’t prioritize making the numbers work. In Sacramento Zillow caught up to Opendoor a few weeks ago, but then they announced their flipping exodus. So… congrats on being #1?
This is NOT enough to crash the market: Some YouTubers are making a mountain out of Zillow having seven thousand properties to sell, but these are a drop in the bucket for the housing market. As of this week there are 400,688 homes for sale in the United States according to Altos Research, so it’s absurd to talk about Zillow’s holdings being enough to turn the market. Remember, these units are spread through many locations too. In Sacramento Zillow owns 413 units and 185 of them are currently either active or pending. In other words, 44.7% of what Zillow owns is listed for sale right now. In contrast 54.2% of Opendoor units are on the market and 40% of what Redfin owns is listed. Ultimately Zillow’s ratio of what they own verses what is listed looks pretty normal compared to other iBuyers. And Zillow only has 55.3% of their units left to list locally, so it’s hard to imagine this amount could change the market.
The new doom flavor of the week: Zillow’s failure is the latest sensational headline used to predict the demise of the market. Over a year ago it was the pandemic, then it was forbearance, and then it was the end of the eviction and foreclosure moratoriums. A few weeks ago it was Evergrande in China. And now it’s Zillow. My advice? Be careful of sensational voices that use headlines to continually promote doom. Look, at some point the market will go down because that’s what markets do, but don’t get caught up in sensationalism until that happens. Instead, pay attention to stats and try to be objective about issues instead of getting swayed by the flavor of the week. I advise avoiding negative-only narratives as well as positive-only narratives. Both are problematic.
Offerpad is stepping up as in iBuyer: Zillow failing isn’t the deathblow to the iBuyer model. It’s easy to say that, but let’s remember Zillow failing was likely more about their strategy rather than the model. In other words, Opendoor and Redfin are still in business and Offerpad is another iBuyer with a huge presence in other states that will soon be expanding to California. Last week I saw a Sacramento position with Offerpad advertised on LinkedIn and I even know someone who interviewed for the job. I’ve been told they are hoping to be active by January, but we’ll see.
The school of hard knocks: The real estate community didn’t hold any candle vigils for Zillow’s failure and there was no sad violin music. The message is simple, “Welcome to what we already knew. Real estate is difficult.” There is certainly a place for different models in real estate, and I suspect over time some tech companies are going to make better inroads, but technology companies ought to exercise humility. In other words having brand recognition and millions of dollars doesn’t guarantee you success in real estate.
Public perception: Zillow is a big brand and while their failure as a flipper has no power to sway the actual real estate market, we do have to wonder how the public will respond. Last week Bill McBride of Calculated Risk said, “It is possible this will have an impact on buyer psychology, and make some buyers more cautious, but that is impossible to measure.” I agree on all points. We need time to tell. For now it seems like the real estate community is much more fixated on the demise of Zillow than the public. I’ve yet to personally hear of buyers and sellers making real estate decisions because of Zillow’s failure. Let’s keep watching.
Not all iBuyers are the same: This visual comes from Mike Delprete. I recommend signing up for his email list. In short, Zillow has been losing big-time, but it looks like Opendoor is starting to figure out how to make a profit. I’m not sure anyone has really cracked the code, but these companies are trying.
Growth was rapid: In Sacramento Zillow owned fewer than 50 homes in June, but less than five months later they owned over 400 units. Not only did they overpay for many of these properties, but on a practical level I wonder how they were going to quickly repair these homes with a deep shortage of skilled laborers.
Integrity from agents: One thing that maybe hasn’t been covered much in media is honesty from real estate agents. Quite a few real estate agent contacts told their prospective sellers to sell to Zillow instead of list on MLS. The sentiment was, “There is no way I can get you that amount because they’re paying way above what the market will give you.” In short, props to these agents for integrity.
Not telling the truth: One of the things that bothered me about Zillow’s public narrative in recent months is they said they were paying market value for the homes they bought when in fact everyone in the trenches of real estate knew they were overpaying. This breaks down trust in my book.
Will institutional investors buy these units? There has been talk about institutional investors purchasing some of Zillow’s inventory. Maybe that will happen. Maybe it won’t. In Sacramento I wouldn’t be surprised to see Invitation Homes pick up some of Zillow’s inventory, but then again this investment fund is strategic about what they buy, so it’s not like all 413 units in Sacramento would even make sense for Invitation Homes. By the way, since May Invitation Homes has purchased 126 units in the region.
Will these homes be rented? I’ve heard some say Zillow’s units are going to be rented, but I’ve yet to hear any official source affirm that. In my mind becoming a property manager would be another new venture for Zillow and I suspect they need to convince shareholders they’re not going to do anything new after flopping so hard as a flipper. If you hear otherwise, let me know.
Dude, every listing is owned by iBuyers: Last week an agent friend emailed me to say it felt like almost every active listing she was showing her clients was owned by Zillow, Opendoor, or Redfin. I get it because technically right now these three companies have a 9.97% share of all active listings in the Sacramento region. That’s a whopping stat, but it’s also a bit sensational for a few reasons. First, we have about half as many listings as normal, so these companies having 213 active listings during a severe housing shortage sounds bigger. Secondly, when considering both pendings and actives (instead of just actives) these companies have a 7.7% share of the market. These days with properties moving so quickly it’s important to not just focus on active listings. Lastly, these companies are going against the seasonal trend, so it makes sense to see them gaining market share during the fall. Let me explain. It’s normal to see fewer listings around this time of year as people start to hibernate and think about the holidays. But iBuyers purchased hundreds of homes in recent months and they need to get them on the market, so they’re listing now despite the slower season. On one hand this is good for consumers because there are more listings, but it’s odd too because there is a rhythm to the market where we just see less activity at this time of year. In other words, even consumers aren’t as interested in real estate during the fall.
Quality issues with iBuyer flips: I’ve heard quite a few complaints about various iBuyer companies doing really low-quality work (and being difficult to reach). I’ve heard some prospective buyers say they would basically have to redo the so-called improvements iBuyers made. On a related note I shared some thoughts with CBS Sacramento last night about an Opendoor property with squatters.
Cannot smell the cats: I gave a quote to Money.com last week and I was especially excited they used my “Zillow cannot smell if 20 cats live there…” line.
Zillow isn’t finished: Zillow is said to be finished as an iBuyer, but be careful about calling them the new Purplebricks. They are still here. They just won’t be an iBuyer (presumably).
Thanks for being here.
Questions: What stands out to you most above? What do you think of Zillow failing and the iBuyer model? I’d love to hear your take.