Real estate. It is on an upward swing and has been that way for a long time. The present bull run is over a decade. Bear in mind, this is not uncharted waters yet it is longer than most housing bull runs.
That said, are we seeing the top being put in place? It is always hard to tell, especially with real estate since, unlike markets such as stocks, rarely is the reversal instant. What occurred in 2006 in the United States was an outlier in the fact the market turned, basically, over a weekend.
Nevertheless, it is always prudent to try and look for some signs to see if a topping might be in place. For this reason, it is helpful to look at the recent woes of Zillow.
Home Flipping Extraordinaire
Back in 2018, Zillow got the idea that it would enter the home flipping business. The idea was to use its access to data in a way to revolutionize this industry. Its plan was simple: to algorithmically buy homes, contract the work out, and then sell the homes at a profit. As much as this is easy to write, anyone who engaged in this business knows how difficult it is.
Over the past year, the market has not liked what Zillow was up to.
That is a nasty looking chart. It is not a company that you want to be involved in. At least not based upon the market action. It is clear the market is not happy with what is taking place.
Over the past few days, news is blowing up about Zillow's home flipping business. The operation is stopped and now it is time to pay the piper as they say.
According to reports, Zillow is putting 7,000 homes on the market for a total price of $2.8 billion. It is looking to sell these to institutional investors.
The report isn't being confirmed by the company.
Barton didn’t confirm or deny the numbers in the Bloomberg report. He told CNBC that the company has always sold to those types of buyers since entering the market, and he acknowledged that Zillow does have properties that it needs to sell. The company bought 3,805 houses in the second quarter and sold 2,086 in that period.
Either way, the company is laying off 25% of its workforce and just announced an awful quarter. It looks like more pain is going to be in the future for this company.
Impact On Overall Market
Is this going to impact the overall real estate market? That is hard to say. While $2.8 billion is a lot of money, it is nothing more than a drop in the bucket when it comes to the overall size of the real estate market. As painful as this is for Zillow, it is honestly nothing more than a blip on the radar.
That said, we never know what shifts sentiment. Part of Zillow's strategy was to get sellers out of their homes quickly. Anyone in real estate knows that homes sitting is the enemy. There are holding costs and they run into big numbers if having to sit on a property.
Zillow softened this buy giving sellers a quick outlet to move their property. Unfortunately for the company, it was not a profitable one.
Nevertheless, this option is now exiting the market, perhaps creating a bit of a slowdown in some markets.
At the end of the day, all real estate is local. This is an saying as old as the moon in real estate yet it holds true. Zillow tried to offer a data driven service to an arena where local market knowledge is often the difference between profit or loss on a project.
What we can say is this market is long in the tooth. Affordability is becoming an issue and the University of Michigan Consumer Sentiment is showing buyers are not very optimistic that this is a good time to purchase a home. At the same time, we keep seeing mortgage applications falling.
We have no idea what ever knocks a market off the rails. For real estate, there are a number of variables in place. Will any of them hinder the forward progress? Only time will tell.
Personally, I think this Zillow thing is truly just a minor blip. The bigger news brewing is Chinese real estate and how large those tentacles are. We will have to watch the CMBS market to see if things run into a wall.
If you found this article informative, please give an upvote and rehive.
gif by @doze
logo by @st8z