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I suspect that the problem boils down to the following: 1) Zillow made a financial/ML model which would predict the sell price of a home in N months. 2) Zillo
by lumost 5y ago
I suspect that the problem boils down to the following:
1) Zillow made a financial/ML model which would predict the sell price of a home in N months.
2) Zillow leveraged dirt cheap mortgage rates + VC money to outbid other sellers to be able to sell the home in N months
3) Zillow drove property developers and house flippers out of the market.
4) The homes Zillow is looking to sell within N months don't have the "improvements" to justify the increased price.
5) The Zillow financial model turns out to have been biased on historic trends.
As others have noted Zillow makes money on more than just the price delta, they are also deploying capital to acquire more of the market to collect fees from. They are also theoretically able to benefit from appreciating prices being much much higher than interest costs in 2021.
The con of all of this is that it's a rent seeking business model entering markets that are already full to the brim with rent seekers. If Zillow acquires enough of the "float" in the market they can effectively set prices to be whatever the demand will bear. Surprisingly housing is so constrained at this point that in a major city like Boston you could purchase all outstanding homes for <200 Million dollars.
- jdross 5y agoThis isn’t really how this business works, nor why Zillow failed operationally to price correctly. To everyone at Opendoor when Zillow started to scale, this was a long time coming
- lotsofpulp 5y ago> Surprisingly housing is so constrained at this point that in a major city like Boston you could purchase all outstanding homes for <200 Million dollars. And then do what?
- taneq 5y agoSell them again now that you’ve pumped the market?
- lotsofpulp 5y agoIf it was that easy, what is stopping other cash rich entities? There are clearly large risks and liabilities associated with this maneuver.
- taneq 5y agoWhat makes you think they’re stopped? This is why Zillow doesn’t have to buy the whole market, all they need to do is buy enough for other investors to start piling on.
- lotsofpulp 5y agoAnd then? They trade houses between each other while paying property taxes and paying for security and upkeep of the houses? Real estate is not a secret business, and it is not like there is a massive population of buyers ready and able to pay top dollar. There are already many local players arbitraging real estate at any given time. It would be one thing if it was free or cheap to hold onto houses indefinitely, but not only is physical security a problem, but politically it is a minefield too.
- lumost 5y agoTwo problems emerge: 1) Housing is a leveraged asset and can't fall substantially without a lot of individuals, banks, and institutions going bust. Historic government interventions serve as a hedge against this. 2) If housing is expensive enough then individuals can't afford to sell their own home. If buying a new smaller home requires 2x the equity of my existing home then I probably can't reasonably move. This means that new homes are less likely to be offered for sale. It's clearly an unstable set of incentives, but it could be unstable for a very long time. My suspicion is that the only way for housing to exit its current cycle is a protracted period of high inflation in wages/goods/services which makes individuals more able to pay and depresses the financial returns on housing.
- lotsofpulp 5y ago
- Phlarp 5y agoRaise the rent
- WalterBright 5y agoIf someone's business plan was to buy all the houses, then my business plan would be to aquire/build houses, and sell to that person at enormous markups.
- rsj_hn 5y agoYup. Buying all the houses is possible in a constrained market, but Phoenix is unconstrained, and transportation allows us to substitute constrained for unconstrained locations.
- brendoelfrendo 5y agoThat would be, more or less, exactly what they want, because the artificial scarcity begins dictating prices. You might try to sell to them, but they're not obligated to buy from you; they could simply point to the properties you're offering at enormous markup to unload some of the property they own at an enormous markup. And if they did buy from you at an enormous markup, they can point to those purchases as "comps" for the purposes of valuing their portfolio. This actually happens in the art world; there's a guy who goes out of his way to overpay for Warhol paintings, because a) he can corner a finite market and b) when a Warhol painting sells for a record amount, the value of his entire collection goes up even if he's the buyer.
- lotsofpulp 5y agoUntil no one wants to buy a Warhol at the price he is seeking. There is no guarantee that this will work indefinitely, just like houses in Boston becoming undesirable at a certain price point. It is possible that Boston houses are underpriced, but it is also possible people will start looking elsewhere. Probably have to dig into income trends and more data rather than just “Boston has limited housing, so it will always be rentable/sellable at a higher price”.
- jjcon 5y ago>The Zillow financial model turns out to have been biased on historic trends. Accordingly and importantly I suspect it didn't take into account its own impact on the market
- scotuswroteus 5y ago"The con of all of this . . . " - I see what you did there
- diob 5y agoWe recently worked with our past realtor and she confirmed that Opendoor and the like have stopped actually fixing homes. Just buy and flip as is.
- bane 5y agoThere's not really much reason to put anything into them. The market moved so incredibly fast this past year there wasn't any motivation to do so. We have a property that three years ago was worth no more than $550k, we managed to sell it recently (get it under contract) in 2 days for nearly $900k with a few obvious fix-em-up issues -- including all cash offers. If the house had been in great shape our realtor believes we could have moved it for around a million easily. The jump in price occurred almost entirely in the past year.
- diob 5y agoYeah, it's just dumb. Only winners in this market will be those who own property as an investment. First time home buying is quickly becoming a pipe dream.
- maxerickson 5y agoIn areas with less than great job markets, housing has not really exploded in value. Which hey, they have less than great job markets. But there are lots of small to medium employers with solid jobs in most of those markets.
- aeternum 5y agoIf the goal is to acquire a sufficient percentage of the float, why is Zillow unloading these houses at a loss?
- malyk 5y agoYou have to pay for upkeep...electricity, gas, landscaping, local taxes, etc while you own the home. It also ties up capital for future purchases. They don't want to do that indefinitely as it would eat all the profit. They've probably done the calculation, realized that losing 1% (or whatever) is better than keeping the house on the books and making a small profit on the sale, but being negative after all the money they have to spend on ownership.
- throwawaysea 5y agoI hesitate to use such a negative word like “con” to describe what also seems like a potentially smart investment. At the individual level, many people buy assets with the intent to get something back from it - either use of that asset or appreciation in its value or whatever else. Whether it is Zillow buying up houses or a large number of individuals, isn’t the impact roughly the same because it creates equivalent scarcity? I get that Zillow can make unilateral decisions on pricing but I’m asking if there is some theoretical support for the notion that even a decentralized buying spree will lead to the same outcomes, but on a different time scale. Another question that comes to mind is whether there should be some threshold (percentage) of ownership in a given area subjects a given organization to anti-trust regulation. This isn’t a present reality of anti-trust laws but I wonder if such a framework will limit larger, more powerful organizations while still giving individuals the freedom to transact. A final thought that crosses my mind is whether this is an actual problem. If the price goes up too high, then buyers shouldn’t buy them. There are numerous cities and towns across the country with cheap housing and cheap land. No one is entitled to buy housing at a given price point at whatever location they want. People need to respond to the pricing signal and look elsewhere if some place like Phoenix is too expensive. Otherwise, their continued purchasing simply suggests that the price is not too high.
- antifa 5y ago> There are numerous cities and towns across the country with cheap housing and cheap land. But nearly none with jobs to afford it.
- kevindong 5y ago> VC money Zillow is a publicly traded company and has been since July 2011. I don't know how they raised capital before then, but regardless they're well past the VC stage.
- lumost 5y agoThis is a great point, Zillow has a P/E of ~170 and an ROE of 2.9%. It’s not inaccurate to say that directly lending money to individual buyers is a better deal for investors.
- prirun 5y agoI read that they've had trouble finding resources (people, materials) to fix up the houses for a flip.