Greater Phoenix Real Estate Update 11/5/2021

While the company that we love to hate is struggling, we are all left on the sidelines guessing what will happen next. This is not the end of iBuying, nor is it the end of Zillow, and this certainly does not mean the market is crashing (the price reductions are only bringing the asking price down to market value). It may mean that Wall Street investors decided profitability is important and it is time to stop buying high and selling low.

Zillow:

Zillow’s CEO, Rich Barton, described Tuesday as “a tough day at Zillow” following his announcement on Zillow’s earnings call that Zillow Offers is shutting down and they are laying off 25% of their workforce. After 3.5 years and $1 billion in losses, they have had enough. Barton’s comments state, “We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated…and would result in too many earnings and balance-sheet volatility.” This does not create confidence in the Zestimate, which was supposedly the foundation of their offers. It will take several months for Zillow to sell the giant inventory of homes it amassed in Q3.

60% of Zillow’s operating revenue and expenses are allotted for iBuying. The company currently owns 9800 homes and has another 8200 under contract to purchase, a total of 20,000. The company expects to lose 5%-7% on these properties. It is also currently looking for an institutional investor to purchase about 7,000 properties for $2.8 billion.

Here in Greater Phoenix, Zillow’s active listings are asking a median of $29,000 less than what they paid for the property. Zillow’s median buy-to-sale premium for October was a loss of $9,000 per home. (Opendoor’s was a loss of $2,400 and Offerpad actually made $6,400 per home) For more information on Zillow’s pricing struggles, check out Mike DelPrete’s recent article, here.

68% of its $1.73 billion in revenue came from Zillow Offers and yet the company still ended Q3 with $328 million in losses. Zillow’s shares have dropped nearly 20% in only a matter of days. And despite the drop, it still has a market cap of over $20 billion.

What is next for Zillow? Barton noted the recent $500 million ShowingTime acquisition as well as the 220 million unique monthly visitors and hinted at pivoting to being an “asset-light” company. I could see Zillow moving into power buying, like Knock.com and Orchard, rather than carrying the expense of real property. It would also take Zillow back to its roots, focusing on buyers.

National Real Estate:

• After increasing by 8% in August, pending home sales declined by 2.3% in September. Locally we saw a slight dip in demand in August and September and oddly enough, demand is actually increasing right now. This is unusual given the timing, Q4 tends to see demand decline, and the recent news of a major buyer leaving the market as well.

“Contract transactions slowed a bit in September and are showing signs of a calmer home price trend, as the market is running comfortably ahead of pre-pandemic activity. It’s worth noting that there will be less inventory until the end of the year compared to the summer months, which happens nearly every year.”

-Dr. Lawrence Yun, NAR’s Chief Economist

• Last year investors accounted for 11.5% of purchases, so far in 2021 that number has increased to 15% of all properties. In Arizona it is 21%. And 50% of the investor purchases were made with cash. Will this number change without Zillow’s purchases?

Real Estate News:

• The Federal Reserve announced that it would begin tapering its monthly bond ($80B) and MBS ($40B) purchases this month. This news came as no surprise and rates did not jump as the announcement was made. This is the tentative tapering schedule with the goal of completion by June. Rates are expected to continue to rise slowly. Fannie Mae predicts we will be at 3.4% interest rates by the end of 2022 and the MBA predicts it will be up to 4%.

• In Q3 2021 refinances dropped to 47% of all loan originations, which is a 23% year over year decline.
• The Villa Aurora in Rome is the world’s most expensive listing with an asking price of $547 million. This 30,000 square foot estate includes the only mural painted by Caravaggio around 1597.

Final Thoughts:

After years of iBuying and a third quarter of purchasing over 9300 homes, Zillow pulling out of the market has caused quite a stir. Upon reflection, this is healthier for our market in the long run. While sellers were able to benefit from way above market offers, it is unhealthy for the market. Artificially inflating the market ultimately benefits very, very few. The market is going to do what the market is going to do and we just have to be prepared for whatever is thrown at us.

Copyright 2021 Sarah Perkins