Zillow Breaks Ground As A Real Estate... Investor?
/Zillow is breaking new ground.
The Seattle-based company serving as the largest online real estate database announced it will test its hand at real estate investing. Zillow's goal is to own between 300 and 1,000 homes by year-end in the Phoenix and Las Vegas test markets. Here is how:
- Zillow will make immediate offers to home sellers.
- Zillow will update/repair the home as needed.
- Zillow will work with a prospective buyer's agent to sell the home within 90 days from original purchase.
If you think this sounds a lot like flipping homes, you would be right. It represents a major pivot from Zillow's ad sales-based revenue model. It poses a lot of questions about what it means not just for the future of Zillow, but for real estate agents and real estate in general. CEO Spencer Rascoff justified the decision by repeatedly citing that the company's vast housing analytics supported the move.
Okay... But something seems off about this, or at least missing. Zillow revenues are growing +24%. Why deviate so sharply from the core business model? I appreciate creative thinking and applaud any business that is mindful of skating to where the puck is headed rather than where the puck is at. If this is the case, what are the bigger implications?
Rascoff highlighted two things: Initial feedback from real estate agents has been positive and home sellers want to complete the sale faster than the industry currently allows. I have no idea about the first part. I have not had the chance to chat with any agents about this news. The second part interests me more. In addition to saying that sellers want quicker closings, Rascoff said the following:
"There are people who are basically stuck in their home that would love to go buy another home but can't sell their home. We think that this is another additive to the real estate industry. This could provide the ability to un-stick people from their home."
Is this actually true? He is implying that current homeowners cannot sell their homes because either overall demand is weak or because they cannot pull off a contingency-based purchase (where buying the next home is contingent on selling their existing one). The former cannot be true, because if it were, that would mean the housing market is weakening and logically Zillow would not want to buy into a falling market.
If the latter is true -- that contingency-based deals are cumbersome -- then inserting Zillow into the market will only drive down real estate values. Zillow will be able to offer less than a traditional buyer would because they can offer something no one else can: an instantaneous closing. As a seller, Zillow would be able to still receive top-dollar, but how long will that last before Zillow-the-buyer systemically forces prices lower?
Perhaps that is the brilliance of the idea. Zillow can have their cake and eat it too. They can offer 90 cents on the dollar as the buyer and then tap the traditional sales channel as the seller to obtain the highest price possible. I just see this playing out in Seattle where Zillow buys a property for full-ask (or less) and then turns around and attracts a bidding war when they flip it.
All of this assumes that home sellers care about quick closings as much as Zillow says they do. It also assumes that an average bid from Zillow is competitive enough to entice the seller, rather than some low-ball offer.
An industry shift coming? I heard some feedback discussing that this is merely a step in the direction of where the industry is headed, toward more automated real estate transactions. I don't know enough about the industry or technology to say either way, but I do know one thing... the more complicated the process the harder it is to automate. Real estate transactions are complicated and rarely seamless, so whatever technological shift is happening will likely be a slow one. Then again, maybe this is breaking eggs to make an omelette.
How will it impact agents? Zillow says it will work with agents. For instance, an agent representing a seller could shop the house to Zillow as the interested buyer. Beyond that, I'm unsure exactly how this endeavor benefits agents to the degree that Rascoff implied.
The looming risk: Zillow will take on loans to make these purchases, just like any other buyer, which presents considerable risk if there is a housing market decline. Hence why Zillow is testing it out in a small scale first. The initial investor reaction was negative, as Zillow shares fell -7% Friday off the news.
I am learning more about this as it develops. If you think I've got it wrong I would love to hear your insight.
In The Market...
The S&P 500 gained +2.1% this past week. Let's look under the hood:
(price data via stockcharts.com)
The S&P 500 was up +2% this week but it feels like it could have been more than that. The market jumped higher to open Friday before gradually sliding lower throughout the day. But after all it was Friday the 13th...
Despite that, the week was largely positive. Eight of 10 stock sectors were positive. High-yield bonds had the best week since early February. This time a week ago it looked like the bottom might soon fall out if the S&P fell below its 200-day moving average. That did not happen and is sitting roughly 2% above that moving average. Stocks are not out of the woods yet, but there were positive developments for sure.
On that note, we purchased a Technology sector fund (XLK) for most client accounts. Like the rest of the U.S. stock market, Tech has see-sawed since late-January and remains roughly -7% below its previous peak set back in mid-March. This offered what I believe was a nice buying opportunity so we did just that. For those accounts affected it represents an allocation size ranging from 10% to 30% of your total account size.
Additionally, we purchased an Energy sector fund (XLE) for some select accounts. Energy prices broke higher this past week and I suspect that rise to continue, at least in the near-term. I will be looking to add Energy to other accounts as well over the coming weeks if this analysis proves correct. For now though, most accounts are fully invested so it is about opportunity cost.
In Our Portfolios...
In Financial Planning...
Tax day is Tuesday, April 17th! Let me or Gale know if you have any last-minute questions. If you plan to make a Traditional IRA or Roth IRA contribution for 2017 and your bank account is not already linked to your IRA, I advise you make the contribution by check and back-date it prior to April 17. If you date it beyond April 17th it will count toward 2018. There is not enough time to link your bank account and make a 2017 contribution before the Tuesday deadline.
What's New With Us?
Quick story about the value of Amazon Prime Now...
My wife was traveling for work this past week. While she was gone, our daughter ran a temperature so I had to pick her up early from daycare. We had run out of Infant Motrin and, in my haste, thought that I had bought the right one when I made a quick stop at the store. I didn't. Apparently Children's Motrin and Infant Motrin are two different things.
Upon realizing this back at home I knew I was stuck. I was not heading back to the store, with her being sick and all. This is where Amazon Prime Now came to the rescue. Within 2 hours I got the correct Motrin delivered to our door.
Amazon Prime is great, but Prime Now is a game-changer. Even though Prime Now is available in more than 30 major U.S. cities, it is far from mainstream adoption. Of course if Amazon starts delivering pharmaceutical prescriptions in the coming year that will change fast...
On a completely different note, I am going to my first Mariners game of the year tonight. It should be fun!
Have a great weekend,
Brian E. Betz, CFP®
Principal