If Zillow’s October announcement that its iBuyer unit is hitting the brakes on its home buying streak through the end of the year wasn’t startling enough, now the company is reportedly shutting down the entire business unit, laying off employees, and offloading thousands of homes at a discount.
What it portends remains to be seen. But if it signals volatility may be seeping into the booming residential real estate market, access to real-time property intelligence could become even more critical to making investment decisions.
In recent years, Zillow Offers, RedfinNow, Opendoor, and newer entrants like Offerpad have all been battling to become the Amazon of iBuying, an operating model that entails purchasing homes directly from homeowners and then reselling them after making minor renovations.
After buying a record number of homes earlier in the year, Zillow sent ripples through the industry when it announced that a shortage of labor and materials in some markets was slowing its ability to relist homes. Instead of purchasing new properties, the company said it would temporarily focus on its backlog of renovations and clear its existing inventory. But now, reports that Zillow is exiting the iBuying business and selling 7,000 properties in an effort to recoup $2.8 billion in expenditures have some wondering if hairline fractures are emerging in the real estate market.
Looking Under the Surface
So what’s going on? According to Realtor.com’s September 2021 national housing report, home prices are up nationwide, and supply is at its lowest point since the 1970s. But growth in median asking prices is slowing down, particularly in large metros—and the share of homes featuring price reductions has reached 17.9%.
None of this suggests the housing market is in for a crash anytime soon, of course. Nor have Zillow’s competitors slowed down their acquisition activity, either. But Zillow may know something the rest of us don’t. According to a study from KeyBanc, two-thirds of the homes Zillow has put up for sale feature average asking prices 4.5% lower than those the company paid for them.
It’s entirely possible that Zillow was simply too confident in its model and was overbidding on properties. But there may also be something more ominous in play. Indeed, the fact that data from Zillow’s main business tracks the pulse of buyer demand can only fuel speculation that the company expects home prices to cool, at least in some of the 25 cities where its iBuyer division operates. That alone could scramble the calculus for investor strategies nationwide.
Navigating the Uneven Distribution of Risk
Margins for flipping properties at scale are thin as it is, especially when you add in the cost of renovations. And with so much new capital pouring into the market, many iBuyers and investment firms purchasing thousands of properties at a time at sizable discounts as recently as 2019 have been forced to pay above market value throughout 2021.
But while a rising tide lifts all boats, reversals sink unequally. The further away from core metro areas, for instance, the steeper the possible price declines. And outlier properties in need of extensive repairs get tougher to flip regardless of location. iBuyers in particular need to be careful about adverse selection. If markets are rising with strong prices and a short number of days on market, there will be less desire to sell to an iBuyer. And with limited supply, an iBuyer could be stuck picking up homes that are the “tail risk”— those with condition, location, or typicality issues. As a result, look for a growing number of investors to source solutions that can help them quickly identify the best investment opportunities and avoid properties requiring costly repairs at scale.
CAPE’s own solution, for instance, leverages machine learning and geospatial analytics to deliver real-time property condition data on more than 100 million unique properties nationwide, instantly, on-demand, to enable smarter, faster investment decisions. As too many firms may soon find out, accurate, up-to-date property intelligence is highly valuable in the best of real estate markets—and could prove crucial to avoiding financial disaster when things get volatile.
To learn how property intelligence can help you grow your business and improve your investment strategies, request a demo at capeanalytics.com
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