Now’s probably as good a time as any to start exploring the notion that the biggest speculative real estate market in history* (*yes, even bigger than that one) is happening today as tech companies like Zillow, Redfin, and Opendoor are currently pumping up the bubble to a size that is both untenable for individuals and unsustainable in communities like yours and mine.
The trend surrounds an iBuyer (a tech giant instead of a human as buyer) which was called out recently by Vegas-based real estate agent Sean Gotcher (@seangotcher on TikTok.) He posted a two-minute explainer how these tech companies exploit their user-generated databases to pump and (eventually) dump actual homes.
Gotcher posited that if a company bought thirty homes within a two-mile radius for around $300,000 and then they buy the 31st home for $340,000, that resets the market and drives up the home price for the entire neighborhood, falsely manipulating the value.
While Gotcher never named Zillow directly it’s not difficult to see why they were the ones fingered. In August, Zillow Group Inc. raised $450 million from a bond backed by homes they’ve bought but not yet sold.
The offering, led by Credit Suisse Group AG, was modeled on the loan facilities that car dealerships use to finance their models, restructuring it to entrench investors further into the residential market to take advantage of the most active housing market on record.
The investment was so popular it was over-subscribed, and Zillow is now selling an additional $700 million in bonds against properties it’s been scooping up.
This is all predicated on CEO Rich Barton’s push to mitigate the “pain point” of how long it takes a home to sell (usually a minimum of ninety days.) With an iBuyer, sellers can bypass escrow, pesky inspections, haggling between buyers and realtors, and go straight to cash and carry. An attractive notion, especially for the Silent Generation and Baby Boomers who are looking to divest and also currently own a little more than 58% of all homes in the U.S.
Two things will happen here as neighborhoods are gutted, and markets are falsely inflated: 1) You’re going to have empty shell homes that are bought and sold on spec until the bubble bursts (and it will burst: again, see; 2007-2010) and 2) The companies that drive this debt into the hundreds of billions won’t be left holding the bag, it’ll be you and me whose neighborhood is now an empty shell and who will watch 80% of a home’s value vanish overnight.
“We could very quickly be talking about more than $100 billion in debt,” said Tomasz Piskorski, a real estate professor at Columbia Business School. “What happens to the iBuyers when home prices drop? You could imagine a situation where they have a big inventory of homes, and they aren’t able to repay their debt.”
In 2014 Opendoor, a startup that pioneered the model, began to enable homeowners to request an offer on their house, then used algorithms to come up with a price.
Then they purchase the property, make minor repairs, and flip. They are now the biggest iBuyer in the game. Zillow joined the trend in 2018 and, in some cases, now automatically offers buyers the chance to “sell to Zillow for your Zestimate,” which is the company’s often-stalked instant estimate of a home’s value.
Other players new to the buying-and-holding game include listings giant Redfin, which released a statement last week that was kind of a buyer beware: “intentionally overpaying for homes would be a terrible business model... We’re honest with sellers that they’ll likely net more by listing on the market with an agent.”
It’s estimated the four largest iBuyers snatched up about 15,000 homes in the second quarter of 2021, which is just over one percent of all home sales. With its additional funding, Zillow expects to acquire 5,000 homes a month by 2024. A new competitor, Offerpad Solutions Inc., is targeting 70,000 homes a year; Opendoor has set a goal to account for 4% of all home sales in its top 100 markets over the next 24 months.
Combined, these growing behemoths will account for purchasing, and in many cases, falsely inflate more than $100 billion worth of homes a year, and if you’re in a warm or hot market, you can bet at least one will be your neighborhood.
25987 Mission St Carmel, CA 93923
The soon-to-be belly-up investments that Zillow used as collateral to secure mega loans from Credit Suisse Group et al. were all in the sunbelt (Nevada, Arizona, Colorado primarily.) More than 1,400 3/2 stucco literal dead-end cul-de-sacs that are easy to flip and create fake margins of 20-60%.
This means some of the more rarified properties in coveted markets with limited inventory are going untouched for now—they’re too big a capital risk with too few buyers in the offing. If you have seven figures to throw at the neighborhood’s most architecturally notable sauna designed by a second-tier Midcentury guy, you might as well go in head first.
The cliff’s edge is safe from the vultures for now.
This one in Carmel on the good (ocean-adjacent) side of Mission street is tucked into an awkward-shaped but big lot with enough foliage and space left over for water catchment to get you through when Things. Inevitably. Start. To. Go. Very. Bad.
Designed and built by Mark Mills—who apprenticed for Frank Lloyd Wright at his Taliesin West winter home and training center in Scottsdale, and then off to SF to work for Joseph Eichler before settling into Carmel and building more than 40 coastal homes—this property is an early ‘50s fever dream of a future that never came true; one that emphasized community spaces and downplayed the kitchen.
…Only room for one to boil seawater in this terra firm galley.
There’s a 300-square foot guest house for sojourners who make their way. Perhaps that’ll be subdivided out one day and sold for seven figures on its own to a giant bank as we wait for the financial steamroller to come and flatten us for good. In the meantime, print out those fliers and start the revolution from the main seating area; we’ll come watch if only for the views.
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