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This is an interesting lesson in algo trading run wild. Roughly, house prices have a fundamental ceiling, and it is determined by the size of the monthly paymen

This is an interesting lesson in algo trading run wild. Roughly, house prices have a fundamental ceiling, and it is determined by the size of the monthly payment that banks will allow the typical homebuyer to assume when approving a loan. If Zillow was the only iBuyer in a particular market, then that ceiling would likely have held, as all other non-zillow sales would still be operating under the loan approval constraint, and that would get reflected in the comps. But in a market with multiple ibuyers, none of which are capital constrained, it would make sense that they run up the prices against each other, past what the local homebuyers can afford. Not sure how much that actually played a role here. But could be fun to do some back of the napkin math to see if that was the case in some of these markets.

derefr 5y ago
> house prices have a fundamental ceiling, and it is determined by the size of the monthly payment that banks will allow the typical homebuyer to assume when approving a loan. In the more irrationally-hot markets, why assume that housing is even being purchased on a mortgage by your average home-buyer, rather than being purchased cash-in-hand by a private or corporate investor looking to park wealth they've already generated? (Even if that isn't the majority of houses in those markets, the sales like that that do happen would still have an impact on property values in the affected neighbourhoods.)
- trident5000 5y ago
  Because the real estate sector is like 30-40 trillion. 2007 was the result of a massive infusion of debt by unsophisticated retail "investors" who bid prices up far higher than even their rental value. Lending standards dont allow this today. If big institutional money is going to cause a frenzy it would need to be irrational money managers that somehow clear their purchases through a panel and none of them say anything. Some point out that blackrock is on the other side of this zillow unloading but they have trillions in assets and only 60 billion in real estate. This is the largest money manager in the world and thats all the exposure they have.
  - copenja 5y ago
    According to this article[1], large investment companies accounted to 16.1% of all single family home sales in the US in Q2. I'm not an analyst. But, I would think that would be plenty of extra demand to influence the price?
    - trident5000 5y ago
      Investment companies are far less likely to lead a speculative bubble than retail buyers. They are professional investors who go through a valuation process. They have also always been part of the market.
      - dd36 5y ago
        Institutional investment in single family housing stock is brand new. Less than a decade old.
        rsj_hn 5y ago
        Nevertheless they are not buying houses for emotional reasons, but for the income stream. FYI, the reason this is happening is that interest rates are so low that people are desperate for yield, and rental yield fits the bill. There are a lot of benefits: - professionally managed properties. Most small time landlords are incompetent -- the horror stories you see about landlords being petty or vindictive is from the small time landlord, not the professional manager. - lower rental prices for properties people want to own. Institutional investors can move funds more quickly to increase rental stock where it is most in demand. Here, too, the yield will fall, which is another way of saying lower rents. Moreover despite the moral panic by journalists that ordinary households are being priced out, this doesn't actually happen because most institutional investors operate in unconstrained areas, where home prices track construction costs, at most with a small delay. In these areas, an increase in renter demand will result in more property built much more quickly if the institutional investors participate. This actually drives down prices over the long term by increasing supply. However in constrained areas, this would drive up prices for SFHs. But I thought people weren't supposed to buy SFHs in constrained areas - and institutional investors have been in the multi-unit market for over a century.
- deleted 5y ago
  [deleted]
- naniwaduni 5y ago
  Why not buy in on Ponzi schemes? It can work out great for you if you get the timing right!
- selcuka 5y ago
  If the current value of something is over a "fundamental ceiling" it means that it's already inflated. Why would an investor park their wealth in such an asset?
  - nradov 5y ago
    Sometimes there's just no good alternative. And real estate has less strict AML/KYC laws than other asset classes so we have some shady foreign money coming in.
    - eru 5y ago
      > Sometimes there's just no good alternative. You can always just stick your money in an ETF.
      - kgwgk 5y ago
        Which may not be a good alternative.
        eru 5y ago
        Well, you can also put your money into short-selling strategies, if you think stuff is overvalued. (Of course, taxes and regulations complicated this discussion.)
        dagw 5y ago
        Of course, taxes and regulations complicated this discussion. It doesn't complicate the discussion, it is the discussion. Basically the only reason foreign investors are buying real estate in North America is because of issues directly related to regulations and taxes.
  - oarabbus_ 5y ago
    P/E ratios of much of the S&P500 would indicate prices/values far over the fundamental value, yet investors continue to flock to large-cap equities in droves.
ashtonkem 5y ago
The iBuyers[0] are also capable of accidentally cornering a small market to weird consequences. When that happens, prices can temporarily spike and buyers can decide to defer their purchase/move until prices come down more. This is particularly pernicious because while there is a ton of housing, very few actual units in a city are ever on the market at once, making it easier for a well capitalized buyer to corner. My small city (pop ~1mil) only has 638 units for sale according to Zillow, which is pretty small all considered. 0 - What an unfortunate name we’ve settled on. Reminds me of the era where every cheap infomercial product had to ape Apple naming conventions.
HPsquared 5y ago
They do have a 'natural' ceiling, but with bold enough policy there is no ceiling in practice. Prices could still rise significantly with the use of negative interest rate mortgages (which exist in Europe), or simply direct financial subsidy to buyers (e.g. the UK's "help to buy" scheme), while maintaining reasonable monthly payments.

derefr 5y ago

> house prices have a fundamental ceiling, and it is determined by the size of the monthly payment that banks will allow the typical homebuyer to assume when approving a loan. In the more irrationally-hot markets, why assume that housing is even being purchased on a mortgage by your average home-buyer, rather than being purchased cash-in-hand by a private or corporate investor looking to park wealth they've already generated? (Even if that isn't the majority of houses in those markets, the sales like that that do happen would still have an impact on property values in the affected neighbourhoods.)

trident5000 5y ago
Because the real estate sector is like 30-40 trillion. 2007 was the result of a massive infusion of debt by unsophisticated retail "investors" who bid prices up far higher than even their rental value. Lending standards dont allow this today. If big institutional money is going to cause a frenzy it would need to be irrational money managers that somehow clear their purchases through a panel and none of them say anything. Some point out that blackrock is on the other side of this zillow unloading but they have trillions in assets and only 60 billion in real estate. This is the largest money manager in the world and thats all the exposure they have.
- copenja 5y ago
  According to this article[1], large investment companies accounted to 16.1% of all single family home sales in the US in Q2. I'm not an analyst. But, I would think that would be plenty of extra demand to influence the price?
  - trident5000 5y ago
    Investment companies are far less likely to lead a speculative bubble than retail buyers. They are professional investors who go through a valuation process. They have also always been part of the market.
    - dd36 5y ago
      Institutional investment in single family housing stock is brand new. Less than a decade old.
      - rsj_hn 5y ago
        Nevertheless they are not buying houses for emotional reasons, but for the income stream. FYI, the reason this is happening is that interest rates are so low that people are desperate for yield, and rental yield fits the bill. There are a lot of benefits: - professionally managed properties. Most small time landlords are incompetent -- the horror stories you see about landlords being petty or vindictive is from the small time landlord, not the professional manager. - lower rental prices for properties people want to own. Institutional investors can move funds more quickly to increase rental stock where it is most in demand. Here, too, the yield will fall, which is another way of saying lower rents. Moreover despite the moral panic by journalists that ordinary households are being priced out, this doesn't actually happen because most institutional investors operate in unconstrained areas, where home prices track construction costs, at most with a small delay. In these areas, an increase in renter demand will result in more property built much more quickly if the institutional investors participate. This actually drives down prices over the long term by increasing supply. However in constrained areas, this would drive up prices for SFHs. But I thought people weren't supposed to buy SFHs in constrained areas - and institutional investors have been in the multi-unit market for over a century.
deleted 5y ago
[deleted]
naniwaduni 5y ago
Why not buy in on Ponzi schemes? It can work out great for you if you get the timing right!
selcuka 5y ago
If the current value of something is over a "fundamental ceiling" it means that it's already inflated. Why would an investor park their wealth in such an asset?
- nradov 5y ago
  Sometimes there's just no good alternative. And real estate has less strict AML/KYC laws than other asset classes so we have some shady foreign money coming in.
  - eru 5y ago
    > Sometimes there's just no good alternative. You can always just stick your money in an ETF.
    - kgwgk 5y ago
      Which may not be a good alternative.
      - eru 5y ago
        Well, you can also put your money into short-selling strategies, if you think stuff is overvalued. (Of course, taxes and regulations complicated this discussion.)
        dagw 5y ago
        Of course, taxes and regulations complicated this discussion. It doesn't complicate the discussion, it is the discussion. Basically the only reason foreign investors are buying real estate in North America is because of issues directly related to regulations and taxes.
- oarabbus_ 5y ago
  P/E ratios of much of the S&P500 would indicate prices/values far over the fundamental value, yet investors continue to flock to large-cap equities in droves.

ashtonkem 5y ago

The iBuyers[0] are also capable of accidentally cornering a small market to weird consequences. When that happens, prices can temporarily spike and buyers can decide to defer their purchase/move until prices come down more. This is particularly pernicious because while there is a ton of housing, very few actual units in a city are ever on the market at once, making it easier for a well capitalized buyer to corner. My small city (pop ~1mil) only has 638 units for sale according to Zillow, which is pretty small all considered. 0 - What an unfortunate name we’ve settled on. Reminds me of the era where every cheap infomercial product had to ape Apple naming conventions.

HPsquared 5y ago

They do have a 'natural' ceiling, but with bold enough policy there is no ceiling in practice. Prices could still rise significantly with the use of negative interest rate mortgages (which exist in Europe), or simply direct financial subsidy to buyers (e.g. the UK's "help to buy" scheme), while maintaining reasonable monthly payments.