By John Grace
Contributing Columnist
Does Zillow know something you don’t know? Let’s start with the data.
For this year, ending Nov. 2, while the S&P 500 is up 23% and the Nasdaq Composite is up 21%, Zillow’s share price is down about 25%. It appears Zillow prices took a nosedive after the company confirmed the challenges it is facing in its home-buying division.
In October, Zillow announced it was temporarily pausing its home-buying activities, which raised many analysts’ eyebrows. More recently, “the company is reportedly offloading thousands of homes at a discount,” per MarketWatch. This observer is concerned that there may be more unpleasant surprises baked into the cake. My job includes helping you prepare for the good, the bad and the unforeseen.
“iBuyer” is the company’s Zillow Offers division that buys and sells homes to consumers, often performing renovations between them. A mid-October report confirmed that Zillow Offers would not be signing any more contracts to purchase homes through year end, according to Bloomberg. In fact, Bloomberg now reports “that the company is selling off roughly 7,000 homes, looking to get back $2.8 billion in the process.”
In a research note, Key Banc analyst Edward Yruma “found that two-thirds of the homes Zillow has listed for sale feature an asking price below what Zillow paid for the property, with the average discount being 4.5%.” Yruma went on to say, “Zillow may have leaned into home acquisition at the wrong time.”
If you were competing to buy a home recently, it may not be a neighbor whom you lost out to. It may have been a large company, one of the pension funds, or a property investment group.
Blackrock, for example, has been “paying 20%-50% more above asking price and outbidding normal home buyers,” reports the Wall Street Journal. With current interest rates so low, investors have become high yield seekers grabbing single-family homes and driving up prices.
As of mid-year 2021, 1,368 homes in California “sold for $500,000-plus over list price,” reports the Orange County Register. “Nearly twice as many Los Angeles homes sold for 30% or more above their initial asking price compared to the first quarter,” according to Zillow.
Dent Research reminds us that housing is the largest sector of our economy. And even with interest rates so low, it is difficult for people to keep trading up to another bigger or nicer home, because people don’t buy houses that often, especially when home prices go through the roof from so much stimulus and demand.
What Dent Research sees now is that U.S. housing prices are “now just as overvalued as it was at the unprecedented 2006 peak, which was followed by the worst crash in modern history.” While you may be reading article after article that we’re not really in a housing bubble, it may be that we are no better prepared for the next bubble to burst than we were ready for the last ones.
The greatest pain from the last financial crisis was the housing bubble burst, along with all of the foreclosures, which hit the banks as well. You and I would like to think that consumers and economists would be hip to this bubble, but that may be wishful thinking. Many of us are too high off rising home prices to see clearly now.
From HS Dent Forecast, “There are already signs that demand is petering out because of such high prices with pending home sales down 2.3% in September versus the plus 0.5% expected. That was the first fall in six years. Even with unprecedented stimulus, existing home sales look unlikely to get back to 2006 levels for a very long time. It’s likely home sales have peaked already in this boom.”
How is the U.S. average $60,000 household income expected to buy a median $400,000 home now?
“The housing bubble and crash ahead truly will be global and will be the greatest in modern history, far worse than the Great Depression for real estate. Falling home prices hit far more people and financial institutions harder than falling stock prices,” said Dent Research.
Now is the time to take off those rose colored glasses that discolor everything and prepare for unprecedented events. Zillow’s spectacular crash may indeed prove to be a warning sign.
John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.
