Zillow Flipped Its Plans to Buy & Sell Homes!

Zillow the on-line Home-Listing Platform, said on Monday October 18th, it would pause its automated House-Flipping operations for the rest of the year!  Instead Zillow said it would close existing purchase contracts and selling the homes it has on hand.  Zillow further said, it was experiencing back logs related to to renovating the homes.   Constraints for on-the-ground workers created back logs.

To further detail the announcement I have gone to the Wall Street Journal for Tuesday October 19, 2021;  Zillow stated the practice of buying refurbishing and selling homes using its database 3 years ago.  The WSJ article further opines that sales volume has recently begun to cool.  This was a profitable business for Zillow as they obtained fees on both the buy and sell side.  We call that DOUBLE ENDING.  While most realtors and agents have mixed opinions on the practice as it puts to question Agency, whose interest do you represent, the buyer or the seller?  

Zillow Offers, the house flipping unit accounted for more than 1/2 Zillow's revenue last year, some $772 million.  This was a 70% increase over the same period in 2020.

The article stated unsold units at the end of the second quarter totaled 3,142 units for a total value of $1.17 billion.  This does not include the 3rd quarter which it is believed it purchased more homes, notes RBC Capital Markets.

When I consider the inventory of homes for sale the Fix & Flip inventory appears to be an iceberg that sunk the Titanic.  More is below water than above.  Opendoor Technologies, another I-Buyer or Flipper, bought 8500 homes in the second quarter with another 8200 in the 3rd quarter.

How do we know what the inventory is and how much risk banks have made in funding these projects?

Further on in the October 19th issue in "Heard On The Street column, "ZILLOW GETS OUTPLAYED AT ITS OWN GAME", The article warns investors to start asking some broader questions.   Zillow, who has prided itself on technology to replace human work is now faced with human work to refurbish, and to sell their properties through their Premier Agent Network.  

Is it poor planning for the 17 year old company where many buyers, sellers and agents have gone to for a "Zestimate" of the value of a property.  Was it truly a :"Zestimate" or a price that moves their inventory.  Conflict of Interest certainly comes to mind!

Zillow's action points to other I-Buyers; such as, Opendoor  previously mention but also Offerpad Solutions a public company that has sold 4.7 times that of Zillow last year, stated the article.

The article cautions investors, and I warn buyers and sellers, to tread more lightly around what has been a banner year for real estate.  

The article further states, Opendoor has a 15% profit margin from flipping.  Where they not suppose to save sellers 5 & 6% commissions?

Mike Del-Prete, a real estate tech strategist and scholar in residence at the University of Colorado Boulder, "given that it is unusual that Zillow's pause happened so suddenly and across all of it markets".

"The real estate market has finally started to cool a bit", states the article in quoting Redfin reports on comparative home sales and prices to 2020.  7% drop in sale versus list is becoming common in certain parts of our area.  Of course we do get over bids when agents and seller decide not to test tops but to allow the market to price the house and under price a property.  There are no shortages of buyers at the moment.

Per the recent report Zillow has $8.77 billion in real estate inventory, how much now?  That is a good jump from the $1.17 billion previously quoted above.  Technology was supposed to create deflation , not inflation.  They maybe getting high on their own inventory!

Let me not forget to comment that technology companies are not the only players in the market of "Fix & Flip". Real Estate Brokerage firms have their own "I-Buyer" programs.  Some have teamed up with outside sources to help supplement their business and some have teamed up with income buyers.

Locally, I am still getting emails and texts from Flippers asking for my lead in properties not listed.  There will be a time when those communications end, if the Home-Price Growth continues to decelerate.  

As I look at the MLS reports on sales I see prices soften and list prices sell at lower prices.  That still mens we have buyers, but they are not being fed higher prices.

That could be the reason is that Home Price Growth Decelerated for the first time in more than a year.

I begin to wonder if the Fat Lady is singing when "Flipping 101" is a hot reality TV show?

The caution I bring to the table is the work performed in this Flipped House.  The demand on workers and supplies can push to the use of unskilled /semi-skilled, or fully experienced labor and poor quality parts.  Home inspections are very much needed.

As a final note that makes me lean toward softer prices is a comment a mortgage broker for a well known bank told me.  The bank has a special program for "Flipper". special in Terms?  The only issue is DUE DATE.  Once the property is "fixed" and certified, the note is due.  Then it becomes a "sell or we will" option.

As a closing comment there is the Friday, October 22, 2021 Wall Street Journal front page article, "More Chinese Developers Default".  Read into that as you wish.

Eviction Ends, Interest rates rising, Inflation and the possibility of China's Evergrande Default

 On September 30, 2021 the eviction moratorium ended.  The estimates I have is that there were 1.7 million homes in forbearance.  These are properties which have not made mortgage payments during the Pandemic.  1.7 million is down from over 7 million at the peak of the Pandemic.  There were 600,000 homes for sale in the U.S. at that time. The benefit today is that this is not 2007 during the financial crisis.  Home values have escalated at rates that have ben historic.  That would indicate that of the 1.7 million in forbearance a major portion should be able to refinance or re-negotiated to present-day mortgages.  Considering that interest rates are at historic lows; this gives the new mortgage payments a lower payment that previous loans in forbearance.  Those owners who are unable to afford have the benefit of a strong real estate market to sell their homes and pay off the debt and walk away with proceeds.  This was uncommon during the  Financial Crisis.

As the Law of Supply and Demand creates more inventory the affect on prices paid will still be above the home prices of Pre-Pandemic levels.  My evaluation is that the statistics of the U.S. cannot equally relate to Silicon Valley.  The strong housing market is backed by a strong economy.  If anything the affect of home prices will be either a stalling of prices or a slight decline.  Now the issue is who is in forbearance.  I find it highly doubtful that high end luxury housing will be affected.  The strength of the IPO market and Venture Capital Market along with the net worth of the owners of Luxury homes will not be affected.  There is no forbearance.  But there will be forbearance in the homes of workers laid off during the Pandemic.  That is where the sales will occur.  That is where opportunity exists.

The Federal Reserve (FED) has thought it best to keep rates low to keep our economy moving.  The return of semblance of economic growth has seen a slow growth in the market place as measured by 10-year government Bonds, which are not under the control of the Federal Reserve (FED) in pricing.  The FED has had a long term policy of buying bonds of all sorts in the after market to keep rates down and has accumulated a multi-trillion dollar balance sheet.  The FED has indicated that is will begin to cease it buying program.  As a result the after market has seen some slight increase in the interest rate of all bonds and mortgages.

As an example, a 10-year US Bond is a marker from which all bonds vary.  As the 10-year moves up mortgage rates will move up, in turn all rates of US bonds greater than 10 years move up,. That increase will affect corporate bonds and all bonds sold in the world that are US $ denominated.  The greatest rate paid are the bonds of low ratings.  In the US they are referred to as "Junk".  They are corporations who do not have the financial ability to hold out during economic crisis.

After US Junk there are the Foreign Debt Markets in US denominated Bonds.  Asia is one of the markets who have had historic failures; along with some South American countries like Argentina.  Asia relies on the US to buy goods manufactured in the Asian Countries.  When orders cease, the ability to pay in US$ is under threat.  Default is common and expected  irrespective of the corporation.  One default or expected default puts all corporations in the same bucket.  Now here is something the FED cannot manipulate or control. Buyers of Asian bonds will demand higher rates for the risk.  The higher rates will affect the "yield spread" of all $ denominated bonds.  This will eventually pull up rates down to the 10-year US Government Bond.  

The Greatest Risk in Asia is a Chinese Corporation name Evergrande.  Originally a property developer it grew to the largest developer in China not regulated by the Chinese Government, a capitalist creation like our own corporations.  Its growth moved into other areas other than real estate by debt growth.  The greatest risk now is a potential default of Evergrande in an interest payment.  Supposedly, not confirmed by myself, is the Evergrande gave the Chines holders of thee Chines debt apartments.  Here is one of the greatest risk in Chinese land development of apartments.  They are largely unoccupied and bought as investments.  Chinese buy real estate as a retirement plan.  They have no Social Security or Pension Schemes.

China's Government has already warned Government Banks to prepare for a default.  The next payment this past Thursday is a payment due on all US denominated debt.  No record of payment has been found in my research and the value of the debt is down some 75% per the Guardian.  In addition other Real Estate Developers are signaling warnings of potential defaults.  

These defaults will affect the interest rate market, and the supply chain of goods to and from China and other Asian countries.

Inflation is the last comment for me to address.  The inability to supply essentials as Silicon chips in Auto's and the fear shortage os essential of toilet paper has caused difficulties in the market.  The government attacks on oil based energy has caused shortages in in oil supply.  The recent storms in the gulf has stopped or limited production of oil and gas; as well as, forcing refineries which dominate the gulf coast to slow or stop.  Gas prices have gone up.  

Businesses which have been closed down during the pandemic start up with higher prices, both to make up for months of no income and higher wages to draw back past employees and higher product costs.  The thought that business will cut prices and inflation will dissolve is fool hearty.   Why would prices come down when a business has lost money and depleted savings for 18 months?

Inflation has an effect on interest rates.  Rates are higher from the fear the value of the bonds will be worth less.  Rising interest with inflation feed upon themselves.

The above comments are a BLACK SWAN of monumental proportions.  Will this affect housing?  Builders are not building as they have in the past, as they are concerned about rates and the cost of building supplies. 

We still have a seller's market throughout the US and most certainly in Silicon Valley. I cannot see the crisis in our economy, just a point in which the long and lasting price of assets stop, maybe pull back a bit or consolidate.

For buyers, this is your chance to look at the subjects in this Blog to help your find and buy a home at a low interest rate.  It is not the price of the property you buy.  It is the interest rate on the mortgage, I played with rates of mortgages and payments on homes that deprecated 20% with a 20% deposit and found that affordability is till in the hands of the buyer.  

The Perfect Storm that will create opportunity.