What Is Happening With Zillow?
Ever since the pandemic arrived the naysayers have been waiting for signs that the real estate market will crash. There have been numerous times over the past 18 months headlines have warned that 2008 is here again. Fortunately, these worst case scenarios have never materialized. Instead, mortgage rates dropped to historic lows and have hovered near there ever since. Home buyers have responded to these fantastic mortgage rates and have dived into the real estate market head first. In turn, home prices and home values have surged in nearly every market around the country. In spite of the record bull run the housing market has seen, the naysayers are still around waiting for signs of a crash. Recently, real estate doomsayers have something new they are pointing to, the Zillow controversy. How concerned should you be about what is happening to Zillow if you are a home buyer or homeowner?
Is Zillow a Threat to Home Buyers and Homeowners?
Before we get into how worried homeowners and home buyers should be over what is happening with Zillow, it is important to understand the situation. As a sign of the times and an indication of where we’re at in society, the Zillow situation starts with a TikTok that went viral. A real estate agent in Nevada went viral by taking shots at Zillow and other iBuyers, such as Redfin.
Sean Gotcher recorded his videos and came out guns blazing. His argument was simply that iBuyers like Zillow and Redfin were artifiically propping up the housing market by buying and flipping houses. For Gotcher, this was more than taking advantage of a hot housing market. It was more about them using their proprietary data as the go-to home search sites to manipulate the market. His claim is that they would use their home search data to buy houses in the hottest neighborhoods in the nation where they could make a quick flip. In turn, this took up already limited inventory in already in-demand markets, which caused prices to go even higher.
Gotcher’s criticism did not stop there. He went on to explain how Zillow used other tactics to artificially inflate housing prices to then make more profit when they flip the house. He argued that they would buy houses in batches at a set price range. Then, they would buy a single home at a higher price. This would allow them to use the home they paid for at a higher price to be used as a comp to justify selling the first batch at a higher rate. Altogether, Gotcher believes that Zillow and other iBuyers were taking nefarious actions to cause home prices to skyrocket. While this would be great for Zillow’s profits, it hurts regular home buyers, especially first-time home buyers who are priced out.
How much of this is true is up for debate. Zillow and Redfin firmly denied Gotcher’s claims made throughout the TikTok video. What is not up for debate is what happened shortly after the TikTok saga. Zillow made a big decision to change their business model and get out of the home buying business.
Zillow Exits the Home Buying Business
About a week ago, Zillow made a dramatic announcement that it was exiting the home buying business and would be selling its inventory of homes. The real estate and financial world were taken aback by this decision. Last week, Zillow’s stock fell nearly $70 after they released their earnings, which showed significant losses from home flipping. According to Zillow’s CEO, Rich Barton, their decision was because “the unpredictability in forecasting home prices far exceeds what [Zillow] anticipated.”
Zillow’s decision has far reaching implications for the company itself and elsewhere. For many Zillow employees, this was devastating news. Shortly after Zillow made this announcement they layed off 25 percent of their entire staff. Thousands of people are now out of work because of the failure of Zillow’s home buying and home selling experiment. This is a major decision for a large corporation, so why was it made?
The reason why Zillow decided to abandon its home flipping business is because their algorithms were not reflecting market conditions. Zillow did not have real estate agents or humans making the decisions on which properties to buy. They used algorithms. These algorithms would sift through mountains of data to determine which houses to buy and at what prices. Their algorithmic home buying was supposed to be the next evolution of real estate. Unfortunately, it seems as if it is not quite capable of mastering the market. The algorithms did not do a good enough job of accurately understanding market forces, which exposed Zillow to big losses.
Will the Zillow Situation Blow Up the Housing Market?
Real estate doomsayers are arguing that the collapse of Zillow’s home buying and home selling business will crash the real estate market. Their argument is that when Zillow unloads their inventory it will depress the prices home buyers are seeing. The fear is that we will switch from a real estate market from where we go from limited inventory to excess inventory. In this world, homeowners would suffer as the value of their homes come crashing down. Home sellers would also suffer as we switch from the ultimate sellers market to a total buyers market.
Thankfully, that shouldn’t happen. Will the Zillow situation impact real estate markets? Probably, but it most likely will not lead to the types of doomsday scenarios we have outlined above. First, Zillow is not going to sell all of their houses at once. They are waiting until 2022 when seasonal home sales pick up in the spring. Second, there is simply too much demand from home buyers. With rock-bottom interest rates, many renters have wanted to become first-time home buyers but have been stymied by a lack of houses. With mortgage rates remaining low, there will still be plenty of home buyers to scoop up any properties Zillow sells. Second, Zillow did not buy homes in every market. They concentrated their efforts in specific markets like Phoenix and Orlando. Not every market in the country will see extra inventory. Simply put, Zillow’s home flipping collapse should have a marginal effect.
Final Thoughts
There is nothing to indicate that the collapse of Zillow’s home buying division will cause a housing market collapse. More likely, it will put much needed inventory back into the real estate market. Homeowners do not have to fear that home values will collapse. At worst, the added inventory will mean that home prices will stop accelerating as much as they have over the past year. To be honest, this is a great scenario for home buyers. It means there will be more houses available to take advantage of today’s low mortgage rates.
The bottom line is that the real estate market continues to be strong and the Zillow situation won’t change that. If you are tired of renting and want to become a homeowner, right now is a great time. The best thing you can do is be ready when an opportunity presents itself. The best way to be ready is to meet with a professional mortgage broker and try to get prequalified for a mortgage. This will make it so that as soon as a house you like becomes available you are able to pounce on it. So, even if it will take a few months before these Zillow homes make it to the market, taking steps now to prepare will have huge benefits. If you want to be ready to take advantage of Zillow’s sales, contact us. The team at Peoples Choice Mortgage will help set you up for success.
