How Zillow helped whip house prices higher and got caught with its pants down (AI = artificial idiocy?).
By Wolf Richter for WOLF STREET.
When real-estate-listing-site-turned-house-flipper Zillow announced on October 18 that it suddenly stopped buying houses, it blamed the labor and supply shortages “in the construction, renovation and closing spaces.” That turns out to have been a joke, it seems, as two things have emerged today:
One, Zillow is now trying to dump about 7,000 houses, but not to individual homebuyers as originally planned as house flipper, which is obviously too hard and painful. Instead, it’s pitching these houses to institutional investors, trying to get $2.8 billion in total, according to sources cited by Bloomberg. Zillow is likely to sell the houses to a multitude of investors, rather than selling all of them in a single transaction, the sources said.
I mean, how can a house flipper get stuck with 7,000 houses? I mean, buying houses is easy if price doesn’t matter. And the price didn’t matter for Zillow after it tweaked its pricing algo – the power of AI – to where it was the high bidder in red-hot markets that may have slowed down since then. That was easy. But selling them without losing your shirt is suddenly hard, it turns out.
Two, it overpaid for many houses and is trying to sell at a loss. KeyBanc Capital Markets came out with an analysis of 650 homes owned by Zillow that are currently listed on the market, and found that 66% of them were listed below what Zillow had paid for them, with the average listing price being 4.5% below the purchase price.
Even if it can sell those houses at 4.5% below the purchase price, there are still all kinds of costs involved in flipping a house, and so, even if it can sell at asking price, it would pocket some big losses.
“Zillow may have leaned into home acquisition at the wrong time, and we believe earnings may be at risk due to its current home inventory ($1.17 billion at 2Q21),” the analysts said, cited by MarketWatch.
Wait a minute. Zillow owned $1.17 billion in houses at the end of Q2, after having bought 3,805 houses during Q2, but now it’s suddenly trying to sell 7,000 houses for $2.8 billion?
Didn’t it sell houses in Q3? Did it just buy houses and overpay so much that it couldn’t sell them without losing a ton of money, and it didn’t want to show those losses on its upcoming Q3 earnings report?
Will it book a huge “one-time noncash charge” on those houses that it hopes Wall Street will ignore? With “one time” and “noncash” meaning that the noncash cash was blown weeks and months earlier, house by house, in thousands of one-time transactions?
I cannot wait to see the Q3 earnings report.
According to an analysis by YipitData last week, cited by Bloomberg, Zillow put a record number of homes on the market in September and cut prices on nearly half of them. In Phoenix, Zillow’s roughly 250 listings were priced on average 6% below the price it had paid for them.
By overpaying for thousands of houses each quarter, Zillow helped drive home prices higher. Each time Zillow overpaid, that whole neighborhood got a boost via comparative sales (comps) and housing algos, such as Zillow’s own algos.
If and when those Zillow houses are sold at a lower price, well, those lower prices will then enter into the comps….
Whatever the whole Zillow debacle may say about the broader housing market, it shows how Zillow’s AI (artificial idiocy?) was great at buying houses in that it just paid whatever, becoming the winning bidder on a lot of houses, because the goal was to buy a lot of houses – not to make money flipping them.
Any small-scale house flipper that survived the last housing bust will tell you that they make their money by buying at the right price. No one explained this apparently to Zillow. Or it just didn’t matter to Zillow because making money didn’t matter. Zillow had a net loss every year. And with this debacle playing out, 2021 could fall in line as well.
Class A shares of Zillow [ZG] fell 8.6% on Monday to $97.61 and are down 54% from the peak in February.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
I think I give the big companies too much credit. I didn’t think something like this could happen to Zillow… I mean if anyone knows the market they should. It will be interesting to see how this plays out.
Are you kidding? Although occasionally accurate, at least with recent sales data, Zillow will just make sh*t up if there is no recent data. I just checked their “Facts and Features” section on my parents’ house that I recently moved into; Zillow says–DEFINITIVELY–it’s a 1,488sqft house built in 1926. It’s actually a 2,500sqft house built in 1973 (my folks built it). I also own two identical townhouses in Vero Beach, FL; Zillow lists one for approx. $300K, while valuing the other, essentially a mirror image of the first, at approx. $200K.
So much for ‘big data.’
zillow always seemed to be way off on our home
by just mere $100,000 or more – laughed when I saw their ‘appraisal’
now I guess they were not so accurate on low end – due to what is likely NO WORK BEING DONE ON THESE PROPERTIES FOR YEARS
I found 1 house and saw that in June 2021 a DEATH CERTIFICATE was issued by estate for sale
hmmm, grandma never did any work for like 20 years
now maybe the LACK OF supply will loosen up a bit
unless blackrock swoops in and decides they are all rentals
and the heirs thank you zillow for nice price paid
“If anybody should know the mkt, they should.”
Agreed.
It takes a rare kind of stupidity/arrogance to be a leading info clearinghouse…and be so ignorant of mkt dynamics.
The only thing I can think of is that they were trying to cause/front-run a moronic buyers’ panic/stampede and couldn’t dump the boodle to bigger retail suckers fast enough.
It is amazing. This kind of stuff is why I am skeptical of all this AI hype. There have been computer-based business platforms for decades, and what has happened in that time? Several typical market cycles where people pay too much, sell at the bottom, etc.- including (especially?) the people with supposedly the “best knowledge/programs”.
Algorithms are trying to code human behavior- which is itself not “perfect”.
How about all those algos during the 2000-2008 time frame in the financial markets. We had two big bear stock markets. Somebody’s algo didn’t work too well.
It will not change that much in the near future, anyway. This is proof.
And for the last year, EVERY analyst kept saying, but this time it’s different. The lending standards are SO MUCH better. Well, that may be the case, but that doesn’t mean there aren’t several other factors creating a widely distorted housing market as Wolf et al have been pointing out like forever!
My gawd! Prices on homes have risen so fast in the past 24 months it’s insane. Prices are so high now, there’s now way there’s not a race to the bottom over the next 18-36 months. How can there not be a 10-15% healthy correction during this timeframe?
If all goes as we expect, 30-year mortgage rates could be at or above 4.5% by this time next year without any support from the FEDs MBS purchases. Then come the interest rate hikes. The FED is ready to begin tapering at least 9-12 months earlier than everyone expected. Who doesn’t think the FED won’t be forced into a 50 basis point increase by late spring next year?
Is it coincidence that Zillow is having problems at the same time as Evergrande, or is the tide going out?
The tide is going OUT, in a BIG way.
Much more to this than home prices. Run.
As my late Unce Charlie, who was an Aberdeenshire farmer, would have said, ‘You can run and buy, but you have to stand and sell!’
Die, filthy scvm.
yes. these despicable people were taking money from the fed and from yield starved “investors” and distorting the housing market. i don’t care if people want to gamble with bitcoin, dogecoin, or other crap, nor do i care if people want to buy nfts of someone’s fart, but taking needed housing off the market for their stupid degenerate gambling games is the height of evil.
Seems to be a bad business model as well. You are competing with your customers that use your site. Probably should have spun off a separate business and kept them separate.
“their stupid degenerate gambling games is the height of evil.”
They only do what is allowed and most profitable, just like shipping our manufacturing and mining for strategically critical items and minerals to an authoritarian Communist country. $$$$$$ inspired rationalization fantasy goggles allowed the bought and paid for legislator’s to allow this because they bought into the obviously foolish theory, if they’d actually bothered to study the history of China and its culture, that wealth would reform the country into a “democracy.”
So, want to gripe? Gripe at the pols, their regulators, and the financial system they allow to operate as it does.
it’s not an either/or. our politicians can be evil for setting up bad incentives, and companies can still be evil for taking advantage.
Housing is an issue for 90% of Americans at the moment, per “TheHill”:
More than 8 in 10 Americans said costs of housing and everyday expenses are rising faster than their income, and 4 in 10 are concerned about their ability to pay for basic goods.
The Public Religion Research Institute poll was conducted from Sept. 16 to 29 among 2,508 adults over the age of 18. It carried a margin of error of plus or minus 2.1 percentage points.
Many Americans live beyond their means. I have a friend who makes 120k a year in the midwest and just filed for bankruptcy. The 350k house and new Honda mini van and the new nissan parhfinder was probably too much debt to take on at one time.
There’s more to it than the house and cars….. $120K is a gross income of about $10K per month. Take out taxes, etc., there’s probably a net of $90K +/-. That’s $7,500 a month.
The mortgage and taxes are probably @ $2K ish, the cars maybe a grand between them….. leaves them $4K a month for “other” stuff.
They have a spending problem…..
Housing and everyday expenses may be causing people pain, but not nearly enough to unite them for the common cause of working together to solve this.
There are a lot of low information single issue voters out there who in spite of the pain will continue to vote against their own best interests, all the wile blaming the other party, poor people, and immigrants.
or perhaps, people have a different view of “their own best interests” than you do?
I’m always curious, what’re these other views seemingly no one else but this sub set of society holds?
cem, how do you mean?
He’s speaking of people who vote in politicians based on how they’ll hurt their enemies or deal with a single issue but then enact policies which negatively impact that constituency, like a farmer voting for the Anti-Immigration candidate who then starts a trade war with a chief importer of that farmer’s goods.
“Best interest” is subjective, true, and people can be misguided fools who don’t understand the difference between best and immediate interests (speaking as one), but I don’t think it is a statement that was meant to hold up to close examination, only something to get a high-level point across.
Just one of the thousands of money losing startups and SPACs with ridiculous valuations and unsound business plans that eventually blow up.
Markets have a way of making stupid money disappear. 54% of the small time gamblers who listened to the Z hype and believed they could “beat the house” lost money in Zillow. Meanwhile Barton, Rascofff and their wall street casino mafia made off with billions in IPO money.
Zillow: We screwed up and bought 7000 houses at the peak. We will sell them to somebody who wants to buy an assett that is plunging in value.
😂
“who wants to buy an assett that is plunging in value.”
Fed on speed dial.
Always was.
Down 9% at opening today
Amazing information. Even small scale flippers distort the market as they hold on to sell for a greed price. There is a shack down the road from me they are trying to get 585K for. 1/2Km away on another street another junker is listed at over 700K, the rationale being, “If they can ask 585 we should get at least _________”. The 585 should fetch no more than 300, the other maybe 325. Neither one is selling and the property sniffers have left for the winter. My neighbour said, “If they can ask 585K my place is worth 1.5 million. And so it goes, all the way to a screeching halt.
Zillow can only go for institutional buyers as buying agents might be more careless with other people’s money. As the article implied, they won’t do well (recap losses) doing it one sale at a time.
House flipping is like being a used car dealer or a boat broker. There are three parts to making a profit.
Buy Low…. you HAVE to find good deals or you will lose money. Don’t pay too much thinking you can make it up further down the line
Relist Quickly… too often people spend too much time trying to fix the house/car/boat up and lose track not only of the time but the money that the time is costing them (it sounds like the flippers in your neighborhood are falling into this trap)
Sell High (and quickly)… you have to cover your costs to make a profit… But you cannot do that if you put too high a price on your asset so that it just sits. Do that and eventually you will take the first low ball offer you get.
$3B in houses means end of year property tax bill of $30M is looming.
Or more like 60 million if most are not in CA. Taxes & insurance will be an ongoing loss until these houses are finally dispossessed.
Here too. I am seeing people throwing out some huge sale prices on homes to see if anyone will bite.
I considered buying a distressed Mcmansion property three years ago. It sold for $87/sq ft. It’s back on the market after a refresh for 2 times what it sold for then.
Even AI has bias from the creators in terms of the neighborhood, average income and schools availability. AI is as good as the data samples available. In the case of Zillow, Did they used house price data from all the USA since1776? No, they used local and short time information from may be 2001? Probably, the AI was instructed that the prices will go up forever based on the training data but the real world is quite different. Or humans justified their voracious home purchases on the AI as a plausible deniability?
I am still worried about using AI for driving a car rather than driving the house prices.
Garbage in, garbage out.
Most likely the AI was allowed to price a new purchase at up to a certain markup over the last comp sale. The problem is it might have been pricing every new purchase over their own last purchase. Basically, they may have been bidding against themselves. A sign of really bad modelling.
Depending on how they renovated these homes, if without permits, they will have to do a bulk sale, because the homes won’t pass inspections. If the renovations were permitted the houses have passed inspection on big fixes and can be sold individually.
Who knows the actual condition of most of the properties they bought. I know if I was a buyer, bulk or otherwise, I would have each one go through an inspection and appraisal before committing.
A lot of modern companies are software companies. That’s about as far as you can get from fix and flip business.
I was very skeptical when I looked at the numbers. They were buying and flipping with about a 1 month turnaround time at a profit of 10% or often less. How do you fix up a house that fast and then flip it for 10%? Bring in an army of cleaners and spruce it up I guess.
I tried to join the flipping game just to see how it worked. Unfortunately I didn’t get very far because I live in a gated community and that disqualified me.
I knew something was up when homes were going for 100K over asking. What idiot would do that? One spending other people’s pension money.
i can see paying a small amount, like $5k over asking if the house is worth asking and you love it so much that you want to be assured that you beat other people who offer asking.
but 100k is just lunacy.
It’s a pricing strategy…. you list it below market to toss chum in the water and spark a feeding frenzy (bidding war). People lose discipline once they enter a bidding war.
There’s a single woman who bought a house in our community from a friend of ours. The seller priced it a bit below market so they didn’t have to fight over nickel dime “repairs” and they wanted out (moved closer to family and their new house was ready). She (buyer) ended up paying $100K over asking because she wanted a pool. There were several offers, the sellers asked for a “best and final”, so she threw the baby out with the bathwater. She sure “showed them”.
She now laments over what she bought… a pool with issues, a house with the ugliest porcelain fake wood tile (the Nehru jacket of interior decorating), cheap paint (sun bleached after a year), a leaky sprinkler system, wheezing heat pumps….. and is constantly badgering people for recommendations for repairmen that won’t rip her off. I finally told her that, if the repairman/contractor is immediately available, he’s probably not any good. The good ones are overbooked.
“ Will it book a huge “one-time noncash charge” on those houses that it hopes Wall Street will ignore? ”
Didn’t you mean a huge “not our cash”charge?
Open door and offerpad, and all the other dummies are next. How’s flipping is for local investors not tech boys, who sit behind a computer all day.
A techie can’t model a business strategy they don’t understand or hasn’t been properly explained. Leading one to suppose the management didn’t have a clue as well.
“A techie can’t model a business strategy they don’t understand or hasn’t been properly explained. Leading one to suppose the management didn’t have a clue as well.”
As I understand the algos that were written/behind the fiasco in 2007-2008, the techies got input from the business people, and the algos/models “worked” for several years : ~5-10 years? But when the market started going into strange domains- typically some kind of strange inter-market price spreads- the algos stopped working. That’s what happened at LTCM- (along with LTCM’s positions were actually big enough to move the markets- and their algo didn’t understand that).
There are some modelers (which run investment funds) that modeled very well “post-war” markets. When the stuff in the .com and 2008 markets happened, there were dynamics more like 1900-1940 happening. The models bombed.
My opinion: if you are going to model markets, you need about 100 years of data. That’s more work than most of these people want to do. (I do it, with VERY simple models/systems- they are boring, but they work in a plodding fashion.)
See my comment below to Monkey about AI pre GFC.
I disagree you need 100 years of data to model housing. You need a deep understanding of the recent past and current market. The decision tree from this tends to be flatter and wider, like a Merkel Tree.
I vote with P on this question after 60+ years in the RE mkt, including building many types of construction from digging the footings with a shovel to final paint and stain touch ups.
The only consideration I would add to any serious contemplation of purchasing is to know the VERY LOCAL market as thoroughly as possible.
Still some small houses going for single digit thousands in some areas, having doubled in the last few years, while millions might be needed for a small place elsewhere within an hour’s drive.
“Statistics” are fine for telling the macro picture, not worth a minute for the individual situation, eh
that’s true about landlording too. tech boys writing code aren’t going to be collecting rents from deadbeats, fixing problems with the plumbing, and so on. i can’t wait for all these investors who destroyed the housing market to get their just deserts.
I believe by extension that many talking heads are placing way too much confidence in Crypto Smart contracts ‘thinking’ AI will interface and all will be good. Laughable. Still takes competent human interaction/intervention — otherwise the next Monster will be created.
Flip and flop Zillow has to stop ! It cornered the real estate market demanding Realtors pay for ad space when they ( Zillow ) is buying realtors data! Why can’t each MLS become PRIVATE ? Providing equal and better leverage for the buyers and sellers .
They have distorted the comps consistently and this is a karmic continuation !
MLS used to be private. It was a tool for Realtors… not the general public.
> MLS used to be private. It was a tool for Realtors… not the general public.
Yeah, and then somebody reminded the realtors about a law called the “Sherman Antitrust Act” and they realized that keeping it private wasn’t going to fly.
Realtors compete with each other and nobody else. You don’t get to collude with your competitors. That includes private databases.
Another result of insanely cheap money and the loosest aggregate lending standards in the history of civilization.
In a sane world, no company could lose money every year of its existence as Zillow has and still get funded to remain in business.
So, they bought 7000 houses from individual homeowners which will now be sold to corporate buyers.
Either way, potential homeowners and renters lose. Another big buyer who can use cheap funding to squeeze individuals for every cent as renters.
It is hard to see how they can get funded in the future. This was pretty obviously a move to make a profit and prove to their investors that their business model works. Now…
If AI didn’t work during 2008, why would it work now? If AI worked during the period leading up to 2008, then it certainly worked from 2010 to 2020.
“But they didn’t use AI before!!” No they did, the terms are different but AI is just a fancy name for statistical models. That’s all. Google and many other Valley companies were clamoring to hire “talent” from the big investment banks for the longest time.
AI or not, no one and/or nothing can predict the future 100% of the time. If that were possible, the consequences will be horrifying.
Actually, the AI used before subprime was very basic and worked well. They basically only bought prime mortgages in white and hispanic zip codes. The AI was discarded when they started buying subprime loans, which included many black areas.
Don’t shoot the messenger, it’s the truth.
You’re probably right about the AI. But it’s even simpler than that. Lenders based their lending on expected future loan default rates. Those default rates turned out to be identical for blacks/hispanics/whites. Then the liberal politicians accused lenders of redlining so the lenders turned to basing their decisions on application rates. Shortly thereafter the subprime crisis occurred.
P.S.
I think we’re saying the same thing 🙂
What I read, after digging into it, was that the highest default rates were with investors, not with primary home owners.
I don’t believe you, and you don’t sound like you know what you are talking about.
Considering redlining as a practice has been around since, what, post-WWII? And AI of the kind mentioned at best within two decades.
LK,
Redlining was already illegal when AI entered the mortgage derivatives market in the 1980s, so they used demographics instead. It was easy to determine the ethnicity of people using graduation rates, looking for markers like the names of streets and schools(hint: MLK).
Great info Wolf,
The cliche of musical chairs – hot potato comes to fruition every business cycle.
The internet has many “classic” stories of how people go from “rags to riches”. And the occasional riches to rags. Gotta read the rich guy story…gonna emulate that guy no matter what happened afterwards.
Sad that Zillow did not consider that a feverish marketplace heats up and eventually cools down. Sometimes colder than an angry spouse.
Once bitten – twice shy.
I am the only investor in this Bull market who has lost money…congrats to Zillow for outperforming Gary Inc. Gary Inc. however is liquid with no downside unless cash is trash or oxygen becomes rare.
Twice bitten – fource shy.
Paranoid much Gary? Umm, yes.
The inventory of Zillow is only one concern. Car lots, the congested ports, silly make believe currencies, stock market equities, NF whatever crap, pandemic vaccines, commodities, forex, etc.
AI is a computer program. Programmed by excitable humans. Some are selfish and greedy.
The only thing that is infinite is human greed and ignorance.
☮️
“The only thing that is infinite is human greed and ignorance.”
don’t forget belief. people believe all sort of crazy $#!t.
The bubbles are so extreme that they defy all logic, and Zillow still managed to crap the bed and lose money in this environment. IDIOTS.
Shocking headline today:
“Want an RV? Prices Are 40% More Than a Year Ago!”
A 40% yearly increase in the price of what have historically been some of the worst depreciating assets in history? Yeah, stick a fork in this thing. Weimar Boy Powell should be doing a perp walk.
It is Time To Sell
“AI = artificial idiocy”
ROFL!!!
smart: surveillance marketed as revolutionary technology.
not laughing. 🤦♂️
Zillow maybe should have stuck to what they do well. I used their platform to sell seller-financed homes in the Midwest with no realtor. Also used their rental owner tools (free) for rent collection and tenant background checks.
Investor buyers found my homes and had to drag their agent into transactions with me because realtors hated (or refused to deal with) a FSBO Seller, even though I agreed to pay their commission.
Zillow F***d up on this Flip Flam journey, no doubt. However, I have a feeling they will come out OK in a couple years after they lick their wounds.
The problem is that Zillow wasn’t making a profit doing what they do best.
Exactly. They’re a zombie company kept afloat by junk bonds – another Weimar Boy Special thanks to the artificially low rates.
Weimar Boy Powell is up to around $75 million in his private “piggy-bank”.
Oink Oink Oink say the rich ….. laughing at the “little people”.
The bottom line is WS investors just don’t care about the blocking and tackling of business. If I recall correctly, Zillow has been a net burner of capital. So has Uber, Lyft, etc. WeWork just went public at a billion dollar valuation. Nothing makes sense until the XXit hits the fan. I’m not sure when, but we will see a blow off top, then a rip cord down.
uber and lyft took what was a good idea and ruined it. since they had investor money to burn and lose for so many years, now people associate those artificially low prices with what they’re supposed to be. to make money, they’d have to drastically raise their fares and people aren’t willing to pay them.
it’s one thing to run introductory “teaser” fares for a few months. You can’t let that go on for a whole decade.
No, but you can let it go on long enough to run all your competitors out of business. Then you raise the prices.
This is exactly what silicon valley VC does, all day long, dawn to dusk. It’s been like this since the early 2000s. The kind of useful VCs that funded Apple and HP and Sun are long gone.
to a point, yes. but a lot of uber/lyft rides are optional. for example, if you are going out to eat and want to have a bottle of wine with your spouse, you might take the uber if it’s $12 in each direction, figuring that with gas, parking, it’s worth it. If it goes to $24/each direction, you might decide you’d just drink less.
it’s not quite the same situation as walmart running its small store competitors out of business.
Somebody said Garbage in Garbage out…….what these words should refer to is management.
No cost controls, no responsibility or accountability….drunken sailors being bailed out by one government program after another…..and low rates.
Yep…..we need to defend capitalism…….but does capitalism exist.
How do the CEO and the board of directors even look themselves in the mirror? What must it be like to be such failures? All of them should be axed.
If I can award myself a million dollar pay-raise, options and golden parachute, I am not a failure! Same goes for the board members. They got huge buyback program and got rich by several hundred thousands of borrowed money this quarter alone. Companies are just another printed document in file for them to get rich.
Yes!
Pure unregulated capitalism for the *individual*!
Hahaha – a friend sold his house to Zillow on Oct 6 for $575k – which was $50k over asking (in CA).
At the time, we all had a good laugh.
It’s currently listed for sale at $485.
HAHAHAHA!
Zillow will recoup this loss through volume.
Maybe they’re playing 3D chess and are unloading at a loss to crash the market, then buy it all back at a discount – a la WS banks in 2009.
:)
Forgot to add – they bought it sight unseen and haven’t even vacuumed the dirty carpet.
That’s what I have been thinking. They intentionally inflated the markets to initiate the inevitable crash. They should have more than enough cash on the back end if the dip is deep enough.
Hoping to catch the falling knife before big $ locks me out. I’ll buy when we hit sub 2019 levels.
If Lacy Hunt is correct I might even get a return on my savings soon.
ROFL. No one could have seen this coming.
Don’t ROFL, MonkeyBusiness! BenX just told you they did not even vacuumed the carpet!
Classic !
You have an address on that house? If the loss is that great, it really says something.
Sacramento County – “Owned by Zillow”
https://www.zillow.com/homes/11512-Gold-Country-Blvd,-Gold-River,-CA-95670_rb/25870698_zpid/
Wow! That’s a quick drop!
For the last several months people have been consistently posting addresses on r/realestate showing 50k-100k losses on Zillow flips. There will probably be a lot more interest in compiling data now that the program is imploding.
good for your friend for knowing when he had a whale! nothing would make me happier than selling my house for a ridiculous price to some corporate entity.
This is disturbing: When Zillow bought the houses, they competed with and outbid ordinary people who saved up money to buy houses–which in turn make the overall market price up. But now, they intend to fire sell them off (7000), they sell it to investors at “the close door price” to avoid the dramatic drop in market price….. Are they allowed to do this?
Yes, they are allowed to bundle all the homes together and bid one price. Regardless of where the homes are or their original prices. The pool can be considered one asset.
surely this will all turn out for the better. the best and brightest are on the job!
More like the cunning and desperate….
If that is not a pop of a bubble at the top, then what is it?
We all need to send “Nothing GOES to HECK in a straight Line” beer mugs (glass willing) to everyone on our Christmas list. Wolf is amazing.
“If and when those Zillow houses are sold at a lower price, well, those lower prices will then enter into the comps…”.
“Once it starts down, you can’t lower your price fast enough” Harry Houndstooth
That’s the sound of a housing bubble popping, everyone.
If the corpos have data that’s making them panic sell at a 5% loss now, imagine how low that data predicts prices will fall before hitting bottom.
Ding ding ding! Somebody award this man ten thousand Internets.
Zillow might be incompetent at flipping houses, but they aren’t having a fire sale because they suddenly became self-aware of their incompetence.
They started the fire sale because they are big enough to have inside information on macroeconomic events (government policy shifts, central bank actions). They just got notified of a major one.
“they aren’t having a fire sale because they suddenly became self-aware of their incompetence.”
none of these people will ever fess up to their incompetence. as far as i can tell, zillow might be the next apple or the next theranos, or maybe something in between.
They teach this BS at Harvard Business School.Name of the course is “Rational Choice Theory”
Apparently rational students keep bidding up the price of regular dollar bill.Last record, if I remember correctly, was $450 for $1 bill.
Dollar Auction-Wiki:
https://en.m.wikipedia.org/wiki/Dollar_auction
Not everything is so bleak for Zillow though.
Soon median family income will start skyrocketing and when it goes from $60K to $181K – median income family will be able to afford median-priced $400K home sweet home,considering historical house price of 2.2×median family income.
Patience,folks,everything’s gonna be fine…
Prices continue to march higher. In the zips I watch, the number of listings has reached an all time low and they continue to decline. All zillow needs to do is wait about 8 months and they will turn a decent profit. This is a no brainer.
is your real name lawrence yun by any chance?
Jake,
We are living in an inflationary environment. Everything is going up in price. Every last thing.
“Hey, Kool-Aid!”
I dunno…. Jim might be right…
What would the carry be for a couple of years?
Stiff the taxes, wait and see?
Agree. 7000 homes… out of 700,000. 1% of the homes in the market are being sold for a loss. Zillow is basically getting a margin call, but inventory remains low, prices going up.
Prices be set on the margin Dawg.
the idea of “inventory remaining low” is a red herring. all it means is that inventory is low at the prices people are willing to sell for. if people are convinced that prices will keep going up, they’ll hold on and not sell. once they see cracks in the bubble, those people will rush to get their houses on the market. now inventory isn’t so low and the number of buyers hasn’t increased materially. we’ve seen this time and time again.
Or inventory is low as a result of “what are you going to replace it with?”. Unless you’re selling a vacation home, an investment property, or rolling into assisted living, you have to have somewhere to go. Don’t have a place to go? Stay put.
This has always been my issue with the current housing run up.
Housing is a big messy expense that is normally hard to move. Only when it is lifting off like a helicopter gaining 5% a month is it possible to really flip money.
I doubt this is the catalyst and I’m cheering for a collapse but it definitely is a good sign for those sitting on the sidelines like me. I’m seeing the weight of itself starting to crumple the foundation.
Imagine when Zillow can’t unload these houses and stuff like property crime, frozen pipes, maintenance costs, etc start piling up. I keep saying housing isn’t like a stock you buy and it sits with only tax obligations when you sale. A house that’s an investment sits for a couple weeks with a new roof leak and nobody is home to notice and suddenly the house is worthless and a cost and failed investment. So many issues. Housing and real estate sucks as an investment unless you are on the ground level and in the area or riding and correctly timing a real estate bubble.
The slightest dip in “to the moon!” Prices and suddenly Zillow is panicking. Housing sucks as an investment. Period. I’m still skeptical we’re in a new paradigm where wall street owns America’s living quarters. Tenants are a pain for renting and there are so many rules, laws, and obligations it’s not for the faint of heart nor some guys to watch numbers on a screen in an office building. Flipping on works when there is an inventory shortage and massive rise in prices.
Zillow was what making 10% in a bubble on the sales margins? When the regular stock market typically turns 7% on average. When it’s turned 15-25% in the same bubble with no effort other than buy an index fund? Single family housing is a turd.
Those 3M dollar Manhattan Beach cottages were 300K 25 years ago. So, 25 years ago, 10% down on a 300K home returns 20% on your investment. The SP500 returned less than half that.
The dream of the 90s is alive in Cali
Damn! If my wife didn’t divorce me in Thousand Oaks, California in 1990 and leave me for the pool boy, I’d be a millionaire right now.
99% of the country isn’t Manhattan beach.
My parents bought their first house in suburban America in the early 90s about 25-30 years ago for 100k. It just sold here at the peak for 300k.
And guess what? It had to be repainted 4 times since. Half of the appliances replaced. A new roof. Property taxes every year. The carpet had to be replaced. Various repairs etc.
Again, housing sucks as an investment. You can’t cherry pick 1 or 2 markets to prove me wrong when 99% of real estate housing markets return less than the stock market consistently while also costing you taxes and upkeep.
You’ve got to be a real estate agent. And your name fits you well as the vast majority of socal dwellers have no idea what the rest of the country is like.
Was Zillow a discriminating buyer or did it not matter in the scheme of things?
They would give valuations based on the size of the house, but didn’t seem to care if it was a wreck inside.
Hmmm, maybe it’s just me being paranoid or trying to think outside of the pessimistic view but something doesn’t add up. Can Zillow truly be this dumb to rush in like the herd and buy high and sell low in matter of months? To me, it feels like too simplistic of an explanation and I know MSM already running away with the headline so that makes me extra suspicious as well..
I wonder if instead maybe their CEO is sort of telling it like it is and they are working through backlog? But then the selling low to clear out backlog is also dumb…there’s gotta be more to this story?
Having Zillow own so many homes is like pouring gasoline on the fire of a real estate price downturn. When most homes are owned by ordinary folks who live in them it causes the selling market to move slowly. But when a large number of homes are owned by entities like Zillow or other bubbly financial players they could find themselves with the real estate equivalent of a margin call and have to dump everything in to a collapsing market.
It’s possible that Zillow is threatening to unload 7000 homes and devalue the national real estate market unless they get a bailout from Uncle sham. Think about it. Pay me…I’m too big to fail and a collapse of the real estate market will be a domino that wipes out all sorts of financial assets and ruins the midterm elections.
7,000 houses isn’t even a rounding error in the grand scheme of things.
Yet here we are discussing the implications of this and what it says / how it might affect the overall market
This zillow story is dumb. The idea that you can buy something then flip immediately for a profit is just a dream. There is no free lunch.
Real estate is a long term investment. Short term real estate investments are very risky and unwise.
Real estate is not an “investment” at all, it’s an expense.
Living is an expense.
If you want to live in a house titled to you and the bank or rented from someone else, it’s an expense.
SocialJim: “This zillow story is dumb.”
I don’t understand what that statement means. The “story” (Wolf’s article?) is a critical description of how Zillow (a large significant player) has put itself in the position of *not* investing in real estate as a long term investment.
So the “story” seems to be in accord with your general principles.
I should reword that … short term real estate investments are dumb and zillow should know better.
Not so sure about that Jim. A good few years ago I knew a chap who flipped many homes by advertising them as “Fixers.”
Many buyers will pay way over the odds if they think they’re getting a deal.
They must be pretty motivated. I’m stoked to see the what the final value of the sales to the “smart” money is when they apparently haven’t had much luck peddling the houses to the “dumb” money.
A real AI learns from the bottom up, processing basic data that leads to failures as well as successes. The more historical data, the better. It is supposed to be better than old statistical models by being lighter on its feet, adjusting to the stream of new data instantaneously. And projecting probable trends in the future.
To be valuable for an investor, the AI also has to factor in risk – profit scenarios. It can’t become a real AI without humans setting tolerance for levels failure given a desire for specific success levels.
A real AI would have warned Zillow that buying houses in a weirdly expanded bubble would be very high risk. Any AI worth its bits would have quit working for Zillow and found a new employer.
Any real estate professional with decades of experience would have told Zillow this was a bad idea. But if they don’t hire seasoned professionals, how would they know. This reeks of bad management and malfeasance.
No offense, Petunia, that’s the funniest post I’ve read in a long time. “Any real estate professional with decades of experience would have told Zillow…” Yeah, right. And the Fed is going to taper quickly and get to the business of raising rates to get inflation below 2%. Sure.
(Most) RE professionals are purely looking to get paid. And pooping on ideas that generate commissions don’t get them paid. Even their internal staff surely included some RE professionals, who are always game to play with OPM.
Gato,
No offense, but I was referring to a person who has been managing real estate projects for decades, not some real estate salesperson. A real estate professional buys and sells too, but more importantly they fund a real estate business, manage and develop it.
In all likelihood Zillow needed someone at the top of this project who has developed single family communities across America, to tell them why every market is different.
The overbidding shows me a professional real estate manager was not in charge of this sh**show. Professionals know when to walk away from a deal.
I knew what you meant, thus my last sentence, “Even their internal staff surely included some RE professionals, who are always game to play with OPM.” But I admittedly took an added swipe at sales for extra points :-).
It’s highly, highly unlikely a business of this magnitude didn’t have someone who know RE at/near the top. I think they simply overestimated their ability to buy low/fix up/sell high. And IME, senior, seasoned RE professionals — who tend to be of the type who double-down until they blow up and someone else holds the bag — getting paid nicely in an organization like that adds even more willingness to roll ‘dem bones.
Gato,
Real estate professionals live and die by their last deal, this one is a mega stinker. I can see a professional close to retirement might take the money and run, but otherwise, no. I know a little about real estate and a lot about AI, and I would have stayed away from this stinker.
Love Zillow for the aspect of gauging home value. Hate Zillow waded into the buy and flip part of the equation. Personal preference, you bet. My concern is how this plays out with them getting the one time impairment to taxes based on loss. Does this set them up to take profits on wins and socialize the losses?
Looking at their Q2 2021 negative EPS
Q2 2021Miss -44.52%
What do you know, some wet behind the ear MBAs with a snazzy financial model got their asses handed to them.
Don’t be too hard on them. I used to be one of those :-]
Likewise Wolf. And as one business executive said, “With all of your hyperanalysis, all you MBAs really think about is making good decisions. In the real world, we have to think about making decisions good.”
Clearly Zillow is now trying to make the decision of acquiring all of these properties good. But I don’t see a “good” option for them here. Only one that is less bad – selling at a loss.
This decision also probably means that Zillow is seeing further price decreases in the near term. It is happening in my area – seeing more “price reduction” notices on the listings. Not a crash (yet), but definitely softer market conditions.
Cold In The Midwest,
A little softer, but one of the strongest fall periods I have ever seen.
I expect we see a strong market for another 10 months or so.
But as we get close to the mid-terms my base case is we see a correction in housing and other markets.
Cold, I doubt Zillow sees price decreases. I suspect they just find themselves in a risky position, holding a lot of RE when that’s not really what they’re supposed to be doing. I’m sure they were comfortable holding SOME inventory but not 7000+ homes, and now that they realize they’ve also overpaid, this is a giant mission creep into something they don’t want to be doing/risking.
FTR, I love Zillow because it has undermined the Realtor(tm) monopoly and given info to the masses. And I hate Zillow for the inflationary effect it has had (Redfin is worse, I think, with constant “This is a hot market, see it now before it’s gone!”).
It just reeks of Silicon Valley hubris. “I don’t care about the past, my AI will make gobs of money in houses, it’s smarter than everybody else.”
Just another reminder that because a corporation is throwing money into an asset doesn’t mean they know something you don’t. Sometimes it just means some arrogant shark in a suit convinced another to throw money at it based on a sales pitch.
Houses are what economists call an asymmetric information market. Like a used car, the seller knows a heck of a lot more about what’s wrong with it than the buyer can find out, even with a thorough inspection.
To think that an AI algorithm, without any on-site inspection, can figure out a proper value for a home is just ludicrous hubris. When they underestimate, the sellers won’t sell to zillow. When they overestimate due to factors known to the seller, the seller will dump the property on zillow. The only way Zillow could possibly make a profit is to seriously underbid each property to compensate for what they don’t know – which is why the ‘we’ll buy your house’ people always do, and why it’s seldom worth it to even bother with getting a bid from them.
You can’t make a loss on every deal and make up the difference with volume.
It’s cute that people buy the story that the AI got it wrong, or that they even used AI at all. Laughable. More likely this is just money laundering along with an attempt to pop the bubble so the VCs that fund Zillow and came up with this con can pick a lot more than 7k houses for pennies on the dollar.
I think your on the money, fleecing retail shareholders, is the VC game.
Something to remember from the last housing bubble which popped 13 years ago:
“On top of a bad development pattern, recent construction quality is atrocious—chipboard, vinyl, and “innovative” spray-on stucco finishes.
In the humid Southeast air-conditioning vies with the heat on exterior walls to condense moisture in the framing and buildings rot from the inside out. Mold and mildew can render them uninhabitable.
In Florida, foreclosed houses left unlived in are often ruined in months as humidity infiltrates the Sheetrock and toxic mold grows.”
I personally observed how the whole developments were rased to the ground in OH & CO.
Looks like not only Zillow but everybody else got weary of the RE Bubble #2.
Lets pop it ASAP and,after the dust settles,double down and start blowing RE Bubble #3.When $400K will buy probably windowless 3″ x3″ storage shed.
With the shortage of labor and rising materials prices right now you’re going to see a lot of substandard work and corner-cutting in housing construction. I’d be very wary of buying anything made in 2020-21, except maybe if it was built by the owner for themselves to live in.
Ooo..I can keep my favorite shot glass in a shed like that!
I thought the price of all properties only went up and fast and was a guaranteed way of making lots of money. How could this of possibly happened? I’m so confused now.
“Wait a minute. Zillow owned $1.17 billion in houses at the end of Q2, after having bought 3,805 houses during Q2, but now it’s suddenly trying to sell 7,000 houses for $2.8 billion?”
This is the funny part.
The real question:
What are Zillow home price analysts aware of that no one else is aware of (yet)?
You’ve got to remember, understanding/forecasting all aspects of the economics that goes into real estate prices is their full time job.
China? Maybe their investors need their money back fast.
Here’s some AI for you … 7,000 ÷ 6,290,000 = 0.1% of existing home sales in 2021
Don’t get too excited about home prices coming crashing down any time soon. If anything, Zillow is a great contrary market indicator. If Z is selling, I’m buying.
CCCB: I think your logic is sound, but watch your timing…
Like the prospect for self-driving cars, the value of AI is apparently seriously overestimated also. I used to be in the house business and I remember how ridiculous the “estimated price” numbers Zillow would come up with (and how wildly they varied from week to week).
Anyone that would actually base a business decision on such “data” is a moron.
That’s not to say that AI isn’t a powerful and useful tool in situation where it is well suited and where there is enough data to actually infer facts. Real estate will never be like that – there are too many intangibles that go into the value of a property.
Amazing that folks wilingly embrace the narrative and expect Zillow and other MSM appointed “experts” to be just that. I think it is laziness – off-loading your own due dilgence hard work onto the latest and greatest labor-saving app. Will get fooled again.
Is there a way to search zillow for homes they own in my area? I could not figure it out. I want to see how they are doing around here. Thanks.
Obviously, the Fed’s handiwork is all over this one…
So much money sloshing around and no interest rate hurdle whatsoever causes companies to make uneconomic business decisions.
yeah, unfortunately, ordinary people who don’t have access to that sloshing around money get hosed.
Yeah well just because someone hands you a gun that is no excuse for shooting yourself in the foot.
Not sure if it may be connected to the cooling of the Zillow market but an upset broker brought this AI up on Tiktok of all places about a month ago, I heard a rumble of people planning to boycot anything being sold by Zillow. Maybe it happened in the end.
yeah that’s nonsense. no one is boycotting anything. if someone wants a house and it’s available for the price they’re willing and able to pay, they’re not going to care who the seller is.
A nice one bedroom apartment in my area was starting at $1350 in the beginning of 2019. Today that same one bedroom is going for $1900. This is in Fresno, CA. We have a large amount of Bay Area and Southern CA residents moving to Fresno. Fresno rent is cheap to them and they keep coming. I noticed Zillow has picked up a lot of properties in Phoenix area and San Diego, two cities that many priced out Southern CA residents have decided to move to since the WFH phenomenon began. Wolf, you actually outlined the notable rent increases seen in Phoenix, notably Scottsdale, Mesa and Glendale, and also San Diego in one of your posts.
Interested to know the specs on these homes that Zillow is selling. Starter homes? Condos? Let’s consider the skyrocketing rents across the country and how “starter” homes have been washed out of reach for countless first time buyers for a moment.
Let’s say Zillow will be taking a portfolio of “starter” homes and selling them to big investors. Yes, Zillow may be taking a loss. That said, can’t the big investors take this portfolio and rent these homes out to the potential first time homebuyers of whom they have priced out? Look at the rent increases in the cities Wolf outlined. Investors know people will pay! Why not turn it into a nice monthly profit with how rents are trending?
What then?
Thoughts?
the thing is, many people can’t and won’t pay. wages haven’t gone up nearly enough to make people be able to afford these increases. i think a lot of this is wishful thinking on the parts of landlords.
I agree with you, to a point. That said, the investment companies are smart enough to figure out who is going where and what these LA/Bay Area California transplants can afford.
Every time rents go up the homeless population increases. If you live in a cold climate you won’t notice as much as homeless people migrate.
No one seems to be smart enough to try and track that unless they actually care. Even then, the numbers are not accurate.
You also might benefit from knowing the numbers of housing units that are held empty as “investments” with no maintenance being done on them. But those numbers are nowhere to be found. A good deal of those I suspect are held with Chinese money. One or 2 margin calls and they’ll be on the market further driving prices (and rents) down.
We are seeing many long time renters in the Fresno area being priced out and forced to move to smaller cities in the surrounding area 30-45 minutes out or out of state. So perhaps it’s wishful thinking in some cities for landlords but in some cities it’s working out well for landlords. I’ve heard similar stories in Boise and SLC. The small cities surround Joshua NP are becoming unaffordable due to the influx of LA residents.
right, but what happens then to the places where those people moved out of? what if the employers tell them they want them back in the office in January, at least part of the week. a lot of people have made housing decisions, both with renting and buying, that have been very impulsive. i’m expecting at least some of it to unwind in the next year or so.
“right, but what happens then to the places where those people moved out of? what if the employers tell them they want them back in the office in January, at least part of the week. a lot of people have made housing decisions, both with renting and buying, that have been very impulsive. i’m expecting at least some of it to unwind in the next year or so.”
Getting a hotel room or commuter room for one or two nights may still be cheaper than dishing out the cash to get another Bay Area apartment. I commuted for about a year from the Valley, once a week, into SF. My company at the time was cool enough to let me expense the hotel, but even if they didn’t, commuting made more sense financially and we have a better quality of life in the Valley, IMO.
Some of the rent increases in Mesa, Scottsdale, etc., are the result of new “luxury” rentals hitting the market. These aren’t the traditional apartments, but apartment homes, modeled after SFR’s. They also have more amenities (pools, party rooms, patios, some have attached garages). It ain’t your grandma’s second floor walkup.
Just about every square foot of developable land has a bulldozer on it. It’s nucking futs. During the day, the little two lane road that feeds our little corner of the world now looks like the San Diego Freeway.
Same in the Fresno area. Do you think these new luxury places are truly catering to the Southern California or Bay Area transplants considering how absurdly priced they are versus the regular market? Who is renting these places? People from the Phoenix area? In the Phoenix area case, you have a ton of tech companies who have moved their offices there… with new tech offices… comes tech salaries. Just curious…
There will come a real big inflection point soon. Smart builders will realize they have a short window to catch all the demand and then things will tank again.
There are some people who are now tele-commuting and have higher salaries to pay for higher priced units, but I think that the spreading out of the population should actually lead to lower real estate prices, because in a place with lots of develop-able land, you simply cant see really big land price increases.
It is all about interest rates. Mortgage rates are still almost nothing. This is financial insanity pushed to the edge. Let’s see what happens to housing prices with a mortgage rate at 4%, which is still relatively low. How about 5% or 7%? If the Fed lets inflation get out of control, that is where we are headed.
This makes sense only if the interest rates remain low.
If the interest rates are high then why would i invest say $500K for $2K rent/month when I can safely get good money from other safer avenues.
I was always puzzled by Zillow’s plan. Not only did their algos cause them to overpay, but like other situations I’ve seen where financial types and techies delve into hard assets, they overestimated how scalable the business actually is.
House flipping really isn’t. It’s hard to cookie-cut (unlike new construction), and as anyone who has ever renovated an old house knows, “what’s behind that wall?” is a dreaded thought. It’s almost never anything pleasant – or cheap!
Yes, David… my other half is in construction and remodels never go as planned. Ever! Even our simple home projects always end costing more.
What Zillow does is not really intended as house flipping, it is becoming the middle of a two sided transaction. They make their money because the owner pays a commission rate to them and Zillow theoretically sells the home at the same price it buys it.
Where Zillow got into trouble was that they bought into huge price escalation, chasing the bid price up. That is pure insanity.
When you collectively add up Zillow and Opendoor and Redfin and all the other offer sites, plus all the investors that have been buying homes, I bet that was a huge part of the price increases.
If I were an investment group, I would want a further 15% haircut to take those homes, because when they are liquidated to individual owners, they will flood the market and cause prices to drop rapidly. Or maybe some of these investment groups plan to hold onto the homes on the assumption that prices will continue to rise. Which might set up a longer-term melt-down. Real estate is always a leverage asset, I assume the investment groups would be using leverage to buy the assets, and this looks like a really bad investment right here.
We have not yet even seen the effects of rising interest rates, which continue to be suppressed. Once we see rising interest rates, watch out below on home prices.
It seems that every day there are a dozen stories about huge rent increases. Rather than take a loss on 7000 houses, why not put them up for rent?
And, yes, I know that being a landlord is no picnic, but ZG doesn’t actually have to do the hard work. These houses are spread out across local markets all over the US. Each one of those markets has many (probably dozens) of local property management companies.
They could package these things into groups of 5-10 houses and then bid out the actual landlording to those local companies. Even if they only covered their carrying costs, at least they aren’t just throwing up their hands and taking the loss.
(For the record, I am exceptionally naive about how big money works. Maybe doing stupid fire sales with valuable assets is how the 1% stay on top of the heap, after all. I’ll never know, that’s for sure.)
Wow, Zillow just fired 25% of its workforce and has just put their home buying program in the dumpster.
SocalJim should be dip buying at this point.
The dip is yet to come, give it a year , the cure for high prices is high prices, when the FED have allowed 17% inflation because they have no choice, they cannot raise interest rates without bankrupting the treasury, and the USA along with it, (unless some form of radical debt forgiveness, in effect default, is instituted), then your average house price will be $3,000,000, and the average mortgage term will be 90 years that will be the top, no more buyers except the 1%
Actually, it is a misnomer that by hiking the rates, FED would bankrupt USA. USA debts so far already has fixed rate.
Exactly. And a 0.25% rate hike has a worst case annual cost about 1/2 the current monthly QE cost ($75 billion annually vs the current $120 billion QE monthly). But as stated, much of the debt is longer term and wouldn’t be affected at all today by rate hikes.
this home
zillow bought it for $925K in July-2021 and now price has come down from $983K to $769K. Still on market
Zillow stock dip to $76 after hours!!!! opening in 96 is more than 20% for a day.
Z’s heading back to the 50’s. Might be a buying opp if heads roll appropriately.
Ya know what is really frightening? The distinct possibility that these folks REALLY believe that this is investing for success.
Never mind all that, whats the real estate tax bill on 7000 houses….Lmao!…