Quitting Real Estate - Selling Everything

What's up, Zillow? It's Redfin here. So it's not often that we talk about the real estate market where everything went horribly, horribly wrong, but that's what's happening here with thousands of homes underwater and about to be sold off at a loss, all thanks to the actions of one company: Zillow.

That's right, the same company who sends out more marketing emails than your expiring car warranty just completely quit the real estate market, with 66% of their homes being sold for less than what they paid just days before the Federal Reserve announced the plan to slowly begin raising interest rates, which has the potential to affect the future affordability of homes.

So given how much misinformation is being spread combined with some very interesting theories about what's actually going on, let's break it down. Let's discuss why so many homes are about to be dumped in the market for a substantial discount, whether or not this is something that you would be able to take advantage of—especially if you've been waiting on the sidelines for that money printer to stop.

But before we start, speaking of the real estate market, it would help me out tremendously if you flipped that like button for the YouTube algorithm by making it turn blue. At this point, it's pretty much like free real estate, and if you have an interest in taking it further, feel free to subscribe, because I post three videos every single week. So thank you guys so much.

Now, with that said, let's begin. First of all, it's no surprise that real estate is the most competitive it's ever been in history. While inventory is at the lowest level ever reported, buyers are paying a million dollars over asking in hot markets and even volunteering to name their firstborn child after the seller if that gives them an edge.

But now the madness continues even further, because we got this: just months ago, Vice came out with an article that stated that Zillow and other tech firms were ramping up to buy up American homes. This came just a month after the Wall Street Journal ran a story that if you sell a house these days, the buyer might be a pension fund while they buy up entire neighborhoods at a time, paying 20 to 50% over asking and ruining the dream of homeownership as prices continue skyrocketing.

See until now, websites like Zillow, Redfin, Offerpad, and OpenDoor were doing anything they could to expand their market share and gain dominance, the go-to real estate mega hub. The goal was to create a service that would make sunlit cash offers in 48 hours that would be comparable to what the seller would get on the open market. Then they'll sometimes make a few quick repairs and list the property back on the market, ideally at a higher price than what they paid to make a profit.

That has been catching on; in fact, Zillow was about to lock in $50 million worth of funding to buy even more homes. Rocket Homes just started their own iBuyer program, Redfin is racing to become the first major iBuyer to hit the Chicago market, and it basically just became like this real estate free-for-all while they tried to corner the market and make a long-term profit for these iBuyers.

The pitch is really about convenience, or as Redfin calls it, "It's like an easy button to sell your home," making the process almost as easy as selling a stock or a no-reserve auction on eBay. But this whole process really has to make you think: how much are these companies actually making by buying your house, making a few quick repairs, and putting it back on the market?

And why did Zillow suddenly abandon their entire plan for real estate domination while they laid off over 2,000 employees and dumped their holdings to the highest bidder? You're going to want to listen to this because I found this quite surprising. Most buyers are actively losing money at an average loss of $40,000 for each home bought and sold.

So what's going on? First, we got to take a look at how much they're paying for these homes in question, which I got to say upfront, it's a lot more than what you would expect for a totally virtual online service. That probably leads us down our first problem: it's very expensive for Zillow.

Zillow claims that homeowners who turn down their iBuyer offers only receive an average of 0.09% more by going the traditional route. However, more recently, it was found that not only are iBuyers paying an average of 104% of the home's market value, but they were also expanding the areas in which they purchased, leading them to even greater losses. Initially, Zillow completely acknowledged that their program was unprofitable and cost them tens of millions of dollars, but they said to be patient and that this was a part of their grand plan to transition real estate into an industry where buying and selling is as easy as buying and selling a car.

So what happened? Well, as it turned out, flipping was not as profitable as they expected. Actually, it wasn't profitable at all, and they continually lost money on every single flip until just recently, where they made the announcement that they would be permanently shutting down their iBuyer program and selling off more than 7,000 of their homes to stop the bleeding of money.

To make matters even worse, 66% of their inventory is going to be sold for less than what they paid for it, meaning they screwed up big time. They blame their algorithm model for being the root cause of their massive real estate failure, and they follow it up by saying that they've been unable to accurately forecast future home prices at different times in both directions by much more than they had modeled as possible.

CNBC reports that Zillow took a $4 million writedown due to unintentionally purchasing homes at higher prices than their current estimates of future selling prices. Or more simply put, they weren't able to buy houses at scale at a price that made sense for them to operate sustainably under these current market conditions. Or actually, more simply, they were spending too much money on houses because their algorithm couldn't give them a price that allowed them to make money.

So if we really get down to it, we could see that their biggest blockage wasn't that they thought the real estate market just peaked, but instead it was because labor and supply chain shortages made it impossible for them to fix and flip homes as fast as they would need to. After all, once Zillow buys a home, and that home needs a light remodel, they can't afford to wait an extra 12 weeks for the next flooring shipment while the home sits empty collecting dust—especially if their contractors are so backlogged on other jobs that they want twice the rates because everyone wants to hire them in real estate.

Every single day that home is empty is money being lost, and when Zillow can't efficiently fix and flip a home as fast as they need to on margins that are negative 4%, the business model just completely falls apart. It's really unfortunate because behind the story are thousands of people potentially losing their jobs, and it's an entire industry that’s under massive scrutiny because housing is still not affordable to the average American.

So given the very real problems of Zillow, with interest rates about to increase, the obvious question then becomes: is the market going to begin cooling down? And how could I buy one of those homes at a discount?

But before we go that, I want to share a quick message from our lovely partner, Zillow. "Hey, are you tired of expensive homes costing you too much money? Well, Zillow could help because we've spent the last year spending our investor money to bring you the holiday deals of a lifetime. See this tow right here? We just spent $600,000, but you could buy it for less than what we just paid. Or how about this lovely white picket fence cottage? Go ahead, take the keys and short stock while you're at it. We have absolutely no idea what we're doing, but the stock market hates this one simple trick that’s going to save you money. Just come on down to Zillow Housing Emporium, located on the corner of Google and Yahoo. Beat anybody these prices, or your property is free!"

That was a joke. But as far as where these homes are going to be sold, unfortunately, it doesn't look like these are going to be publicly available in the open market for people to individually pick and choose from. Even though you would think that they could just list these on Zillow as a for sale by owner, it was a joke.

Anyway, as of right now, it's reported they're being pitched to institutional investors like BlackRock and Invitation Homes, who have the funds to buy large portions of these at a time. Realistically, it would just be a logistical nightmare to individually list, negotiate, and sell different homes separately. So if they just bundle these up in a few smaller deals, then they get them off their plate much faster, and BlackRock can add them to their balance sheet.

However, in terms of the future of the real estate market, that doesn't mean that prices won't just keep going up forever. Because as of the other day, the Federal Reserve just laid out their blueprint to begin raising rates. And here's what they said: as of right now, they're purchasing about $120 billion a month of treasuries and mortgage-backed securities to keep interest rates near record lows. But if they do that for too long, then inflation stays high, our money loses value, and when everyone loses their minds, so they openly laid out a roadmap for everyone to see.

As they mentioned in Wednesday's meeting, they will begin to reduce those purchases by $15 billion a month until there's no more left and the economy is running on its own again. The implication is that interest rates are planned to slowly rise in the process.

And even though inflation is still believed to be transitory, Jerome Powell believes that supply chain and labor shortages are going to have a much bigger impact on the economy over the next year, and most likely, real estate is going to remain high. In terms of raising rates, they said that this would be done extremely carefully. And if there are any unexpected problems, they could adjust as needed either way.

So overall, the stock market just keeps going up because it knows what to expect. Now, obviously, no one can predict what's going to unfold in the short term, and anything can happen. But JP Morgan believes that a rate hike could be in store at the end of 2022, which could affect the overall affordability of a mortgage.

In terms of real estate prices, though, it doesn't seem like most analysts believe they're coming down anytime soon. Even though year-over-year housing is up a staggering 20%, prices are beginning to rise at a slower pace, suggesting that things might begin to cool down, although they very well could remain high for quite some time.

Like a year ago, there was plenty of talk about high mortgage forbearance rates and the worry that those owners would eventually default, but today only 2.15% of all mortgaged homes are still in forbearance, and many of those are expected to resume payments by the end of the year. And of those homeowners who are not able to make their payments, most of them are sitting on a record amount of homeowner equity, meaning they could list and sell their home for a profit rather than give it back to the bank to foreclose on.

So even despite Zillow dumping 7,000 homes in the market, it does seem like real estate might continue to go up simply based on higher material and building costs, which makes it more expensive to develop. And by the way, if you want to read about these topics before I'm able to make a full-fledged video on them, feel free to check out The Hungry Bull app down below in the description. It's something we've been working on for the last year, and we post a daily newsletter on there for you guys to read. So if you're interested in that, the link is down below in the description, and it's totally free.

Now overall, in terms of my thoughts about this, I hate to say it, but I made a video discussing this in 2018 where I called them out that it was a bad idea to get into the business of home flipping. Years ago, I discussed the difficulties of flipping houses that just can't be done with an algorithm. Every home is different, every market is different, every neighborhood is different, and flipping properties at scale is nearly impossible without a team of dedicated experts who know exactly what they're doing on every single property, which is really something that Zillow couldn't do unless they offered 50% of market value for every single house.

I had a feeling this wasn't going to work out for them, and I was shocked to see how much they were overpaying for homes. But I simply chalked it up to the cost of gaining market share, and that was it. Evidently, they went as far as they could before realizing that it was not a profitable path, and then they quit to sell everything off.

It's a really smart move for the company, who should have just been focusing on housing data instead. And if supply chain shortages are impacting them to such a large degree, then most likely, they're impacting you too. The problem with the housing market today is that supply chain bottlenecks are making it impossible to build homes fast enough as demand wants it. And then the homes that are being built cost more to make, and that gets passed on to you as the customer.

Personally, I'm in the train of mind that eventually things will have to begin to normalize, but until then, the housing market could remain higher than usual. And for everybody on the sidelines, my advice is pretty much always the same: don't rush to buy something until you find the perfect property, negotiate the best you can, plan to keep it at least 7 to 10 years, lock in a 30-year mortgage at the lowest rate you can, and then smash the like button for the YouTube algorithm.

So with that said, you guys, thank you so much for watching. I really appreciate it. As always, make sure to destroy the like button, the subscribe button, and the notification bell. Also, feel free to add me on Instagram and on my second channel, The Gr8est Show. I post there every single day, not posting here. So if you want to see a brand-new video for me every single day, make sure to add yourself to that. Thank you so much for watching, and until next time.