2019 Bubble Report

Doesn’t it feel like we’re in another bubble?

Home prices have been on a tear for ten years straight, and are at their highest levels ever.

Is this bubble going to pop too?

Let’s look at the statistics first. I took the most recent 45 days to get the latest scoop, plus the MLS prefers to calculate the smaller sample sizes.

NSDCC Detached-Home Listings and Sales, April 1 – May 15 (La Jolla to Carlsbad)

Year
# of Listings
# of Sales
Avg $$/sf
Median SP
Median DOM
2012
640
415
$377/sf
$805,000
41
2013
788
464
$419/sf
$968,750
17
2014
791
376
$474/sf
$1,017,000
24
2015
785
448
$479/sf
$1,065,000
22
2016
774
439
$513/sf
$1,170,000
19
2017
726
445
$529/sf
$1,250,000
17
2018
749
394
$567/sf
$1,298,000
17
2019
712
379
$579/sf
$1,360,000
23
YoY Chg
-5%
-4%
+2%
+5%
+29%

It is remarkable that all-time-high prices aren’t causing more people to sell!

In previous markets, once prices started reaching new highs, homeowners would jump at the chance to move.  The inventory would grow and cool things off, and/or we’d hit an economic downturn and foreclosure sales would direct the market. But not today!

Other Factors:

We are a mid-level luxury market. The more-expensive areas like Los Angeles, Orange County, and the Bay Area feed us downsizers who think we are giving it away.

Homebuying has de-coupled from jobs. We do have substantial employers like Qualcomm, bio-tech, etc. but not near enough to justify these lofty prices. How do we keep afloat? It’s the big down payments; either from previous home sales, successful business ventures, or the Bank of Mom & Dad.

They changed the rules. Banks have to give defaulters a chance to qualify for a loan modification before they can foreclose. With everyone enjoying their equity position, they will find a way to hang onto their house or sell it for a profit, instead of lose it.

Mortgage rates around 4% are ideal.  Not likely to go up much either.

Reverse mortgages are an alternative for those who need money. They might crank down the amount of money you can tap, but as long as homeowners are flush with equity, they will be able to get their hands on some of it via reverse mortgages or the typical equity line.

Buyers have been full of money, and willing to blow it. I’ve seen sales close for 10% to 25% above the comps this year, so it doesn’t seem like people are worried about a bubble. Those sales could be creating unsustainable comps, and be short-lived values, but will the next buyer question them enough?

Coming Soon vs. ibuyer. We need a gimmick to transition us to the ibuyer era, and the ‘Coming Soon’ off-market sales will be the sexy distraction.  The price of an off-market sale isn’t necessarily lower than retail, and in some cases they can be higher when the buyers get jacked up about the opportunity.

The ibuyer era could be the last hurrah for open-market real estate.  If the big-money corporate buyers can build enough credibility and begin to dominate the space, they will be able to dictate the prices paid for their flips, and control the marketplace.  If so, they will make sure we won’t have another down market!

In the meantime, we might see prices start to bounce around, instead of the constant trend higher.  But if it gets harder to sell, then many will just sit tight instead.

If you think a bubble pop will happen, ponder this question.  Who is going to give away their home now?

I-Buyer Example

Will the ibuyers succeed?

Sure, they offer convenience, but the reason it works is because it’s so vague – sellers will never know the money difference between selling to an ibuyer or an open-market sale. The trendy-hip, sell-with-a-click factor could lure sellers into giving up an extra 5% or so without ever realizing it.

(pay 3% more in ibuyer fees and then sell for less than open-market sale)

Hat tip to reader ‘just some guy’ for sending in the article:

https://www.nytimes.com/2019/05/07/business/economy/ibuying-real-estate.html

An excerpt:

When Dora Cagnetto decided to sell her townhouse in Phoenix this year, a real estate agent told her that she could get around $375,000 for it. Maybe $390,000. But she would have to replace the carpet and paint the walls. At 68 years old and recently retired, she thought it sounded like a lot of work.

One evening, after the carpet had been ripped up, Ms. Cagnetto saw an online ad for Zillow Offers. Zillow, better known for telling people what their homes are worth, would buy her home itself. She uploaded some photos and got back an offer: $382,000, minus a fee for Zillow. No repair work or open houses necessary. And Zillow paid cash.

Ms. Cagnetto estimated she effectively paid $10,000 to $15,000 for the privilege of turning over to Zillow the job of replacing the carpet and the bathroom countertops and doing other light repair work.

“My son, he’s like, ‘Well, oh, I could have done that,’ and maybe he would have saved a little money,” Ms. Cagnetto said. “But to me it was like, I don’t want to do that. I don’t want to hire somebody to do that, I don’t want to put carpeting in, I don’t want to paint these walls.”

The Phoenix area has become a hub of the iBuying phenomenon. With its relatively new housing stock and miles of buff-colored subdivisions, the market is affordable, uniform in look and steadily growing.

Whether iBuying works outside markets like Phoenix and Las Vegas is an open question. The model has yet to break into the Northeast, where the housing stock is older, the weather drives up maintenance costs and there are fewer of the kind of cookie-cutter subdivisions that the industry’s algorithms assess best. Prices are higher, too, making mistakes costlier for the companies.

 

The Big Dumb-Down

While the old tradition of broker cooperation via the MLS is slowly eroding, there is an opening for others to intrude.  Two quotes seen this week in different articles:

Founder and CEO Rich Barton said in a radio interview on April 1st that he sees Zillow Offers as an evolution of Zestimates. In fact, at some point in the future, a Zestimate and a cash offer may be the same thing, he said in an appearance on National Public Radio.

“Ideally, I would like to have the Zestimate be a live offer on every home in the country,” said Barton, adding, “It will take quite some time to get there.”

Glenn Kelman, CEO of Redfin, a real-estate brokerage that has also got into the home-flipping business, said he still believes the endgame for Opendoor, as well as his own company, is to get buyers to purchase homes without necessarily using an agent.

“A large number of these companies, Redfin included, are going to be selling direct to consumers,” he said.

Will consumers trust them enough to buy and sell houses based on their fabricated estimates of value, without a realtor on their side?  All that needs to happen is for these ibuyer companies to overwhelm the public with advertising, and convince you that their value estimates are close enough.

The advertising is the key.  Consumers don’t have much real estate experience and education, and it’s not easy finding helpful resources (how many real estate blogs are there?). They just want to click and go!

It will be like TrueCar, where they advertise that their valuation system gives you an advantage, and to go down to one of their dealers to buy the car for that amount.  TrueCar has sold over 2 million vehicles!

Get Good Help….while you can!

Before MLS-input:

After MLS-input:

Fabricated value history:

Zillow Offers

Mike has been the leading resource on the ibuyer industry, and he sees it the same way I do – Zillow wants (and needs) to commit fully to their ibuyer program because advertising income from agents is starting to lag, which could be a major shift in the real-estate-selling business. He is having a seminar for those who might be interested.

From Mike:

Zillow, the world’s largest real estate portal in terms of revenue, recently underwent a major shift in strategy. In effect, its advertising revenue stream has run out of runway; while still a billion-dollar business, growth has stopped. Thus, it is reorienting towards iBuying and its Zillow Offers program.

In the world of grand strategy, the move is a rare, bet-the-company moment focused on one thing: the battle for the start of the consumer journey. Designed as a maneuver to simultaneously disarm competitors and strengthen its already powerful position, it’s either a masterstroke or a mistake. But in either case, Zillow is clearly “all in” on the gold rush that is iBuying.

Zillow has set lofty goals: buying 60,000 houses per year and $20 billion in revenue. The stock price is up and the company is valued $2 billion higher than it was pre-announcement. This is big.

This Friday I’ll run through all of the major points from this move, complete with charts, data, and insights. I’ll look at the numbers that matter, the metrics to keep an eye on, and what it all means for the larger ecosystem. I’ll also answer your questions! Read more details and register.

Who should attend the webinar?

  • Zillow’s competitors and potential competitors (portals and iBuyers).
  • Real estate incumbents looking to formulate their iBuyer strategy.
  • International real estate portals looking to learn from Zillow’s move.
  • Investors interested in iBuying and what the market impact will be.
  • Start-ups with a desire to understand the new landscape, and how they fit in.
  • Rich Barton

When the announcement was first made two weeks ago, Zillow stock went from 34 to 44, but it is back down to 38 today (LINK).

Buying 60,000 houses a year isn’t the game-changer by itself. What matters is what their nationwide advertising does to the seller’s psyche – and will agents keep spending big money to get connected to the sellers who want more $$ than Zillow is willing to pay.

iBuyer Flipping in SD

There hasn’t been much concern around San Diego about the ibuyers because they have been cutting their teeth in the lower-priced and more homogenized housing markets, where valuations are easier.

Hat tip to the reader who sent this in though – Offerpad did purchase a Talmadge home in December.  They took title as Offerpad, and they used their regular Gilbert, AZ address too:

Link to Zillow listing

They paid $564,000, and tried all year to do better:

But the market didn’t come their way, and they ended up selling for less:

Even if they get a discounted commission (two different agents were involved, and the buyer’s agent got 2.5%), losing money on flips has to get old quickly!

A softer market should cause more of these guys to ‘self-sideline’.

I-buyer Advantage

Everyone is getting into the home-buying business.  First it was the well-funded disrupters like OpenDoor and Offerpad, and then Zillow, Redfin, Knock and others jumped in – which caused Coldwell Banker, Keller Williams to also announce their programs (plus Compass and others won’t be far behind).

What will the real estate world be like if sellers have multiple choices of cash buyers?  Which ibuyer will have the advantage?  Zillow is already in the driver’s seat, and they include the additional service of offering a third-party realtor’s opinion too.

From Mike DelPrete – an excerpt:

Zillow announced its Zillow Offers program in Phoenix earlier this year, and started buying houses in May. It is heavily promoting the program across its site. While looking in the Phoenix market, a prominent message is displayed on all active for sale listings.

In its latest quarterly results, Zillow revealed how effective the promotion was: “Since launch, we have received more than 10,000 offer requests from potential sellers.” And: “…in Phoenix, for example, we are seeing about 15% of all dollar value that’s being sold in Phoenix any given month.” That translates to about 1,600 offer requests per month.

Opendoor is on record saying that more than “one in two sellers who received an Opendoor offer” will accept it. It’s currently buying around 300 houses per month in Phoenix, so that’s about 600 offers made per month.

There’s a difference between an offer being requested, and an offer being made. What’s clear, though, is that Zillow is generating a massive amount of offer requests each month, at volumes that rival (and exceed) Opendoor.

Most importantly, Zillow’s leads are coming with zero incremental customer acquisition cost, while Opendoor and other iBuyers must advertise directly to consumers to generate leads.

They aren’t in San Diego yet, but it’s coming. Read Mike’s full article here:

http://www.mikedp.com/articles/2018/10/8/zillow-opendoor-and-controlling-the-consumer-journey

The Reality of iBuyers

The ibuyer is the sexy new shiny object in the real estate game.  While the idea of a quick and easy sale sounds great, the reality is already much different – and, as the market transitions, their quotes and repair costs should get more conservative (and home sellers be less enamored).

The only local story I’ve heard was one where the ibuyer checked out the property in person, but then didn’t offer, saying it was outside their buying range. You can’t blame them for being picky, and only take the gravy. They will probably stick to the lower-end vanilla properties that are more predictable.

Here’s an article with more examples:

Link to Full Article

An excerpt:

Opendoor, which launched in 2014, says it’s not a house flipper. “We aim for fair market offers, making money on the fees we charge, not the profit on resale,” says Jim Sexton, head of Opendoor’s broker development. The company says it sells 800 homes a month across its 11 markets, with plans to expand to 50 markets by the end of 2020. Currently, it has nearly 3 percent market share in Las Vegas.

Opendoor eyes markets with ample volume, size, and liquidity, Sexton says, adding, “We’re looking for markets that don’t have many barriers to entry, such as hefty transfer taxes or other local or state regulations that make a transaction difficult.”

An Opendoor competitor, Offerpad, operates in eight markets with plans to expand, while Zillow, one of the newest entrants into the direct buying niche with its Instant Offer program, has been successful in Las Vegas and Phoenix, where it expects to buy and sell up to 1,000 homes by year’s end. The new Redfin Now program is available in two California test markets, and Knock, operating in Atlanta and in Charlotte and Raleigh, N.C., enables “trade-in” clients to buy a new home before their existing home is listed.

These companies all claim to speed up and simplify the real estate transaction while removing uncertainty and inconvenience for sellers and buyers. The appeal of the marketing spiel is easy to understand, but how applicable is this model for most consumers? And how likely is it that these companies will become significant players in many markets?

“The market is really driving this model,” says real estate consultant Victor Lund, founder of WAV Group. “The convenience factor, along with an alignment of circumstances are contributing to the growth of iBuyers. Consumers have built up a lot of equity in their homes since the recession, interest rates are low, days on market are low, prices are up, and there’s lots of competition, which puts cash buyers in a better position to buy.” These circumstances create the optimal environment for iBuyers to thrive. Lund believes that once prices slip and homes generally take longer to sell, consumer interest in iBuyers will fade.

Among agents who have interacted with these models, what are they finding? Despite iBuyers’ claims to revolutionize the real estate transaction, some agents are finding their transactions are neither quick nor seamless.

For example, after Ockey’s clients accepted the Opendoor offer, the next step was the inspection. A team of five Opendoor contractors—one for electrical, one for plumbing, one for foundations, and so on—went through the house with a magnifying glass, says Ockey. “They asked us to fix everything you could think of. They wanted bathtubs and toilets replaced if there was even the slightest blemish. They wanted showers retiled and regrouted. It wasn’t little projects; they wanted to remodel the home, and they wanted the seller to pay for it.”

The requested repairs came to about $16,000 on a $300,000 home. Ockey spent weeks negotiating that figure down, which added time and worry to the transaction. “Having representation saved my clients thousands of dollars, but in the end, they made about $10,000 less than they would have selling to a traditional buyer. It’s not horrible, but it’s a lot of money when you only have $20,000 or $30,000 in equity.”

The automated aspects of working with Offerpad didn’t faze Kellie Parten, an agent with HomeSmart Realty in Phoenix, who helped her clients buy a home from the company in May. “It was robotic, but in a positive way,” says Parten. “You can tell that they’re a little bit of a machine, but I didn’t mind because they were very responsive and organized. I never had to ask for something twice.”

Although Parten wouldn’t hesitate to bring a buyer to an iBuyer home, selling to one is a different story. “Offerpad and Opendoor offers on a couple of properties I’ve listed seemed exciting at first, but after you factor in the concessions they request and the additional credits in lieu of repairs after inspections, the net is usually too low and the deals never came together,” she says. One iBuyer recently offered $750,000 on a home that Parten later sold to a traditional buyer for $900,000.

Open Chaos

Opendoor, the ibuyer who purchases your home for cash and closes escrow at your leisure (as long as you don’t mind paying their 6% to 13% fees plus home repairs) has made a deal to acquire a discount brokerage:

Opendoor announced Tuesday morning that it has acquired Open Listings, a real estate site that offers homebuyers a 50% refund on the fees their real estate agent would have received.

With the acquisition, Opendoor will now be able to buy a home directly from a seller, then help that seller find a new home (whether it’s a newly built home or an existing one), offer them a mortgage, and close on the sales through its own title operations.

Basically, buyers who use Open Listings find, tour, and buy homes through the platform. Real estate agents only come into the process when it’s time to make an offer on the home.

Link to Article

They are building a platform similar to the Red team’s, and both are weak in the beginning – they both offer inexperienced agents or no help at all at the initial showing of the home.  These guys expect you to go to the listing agent’s open house, and then make an offer with their online agent.

I believe that every buyer should receive professional advice from their agent while at the property – and reflect those details into the offer price.  Otherwise, you pay too much!

The online agents haven’t seen the house in person, and can’t offer the same expertise.  Besides, if you are an online agent, you just want to hurry up and write the offer and expect any defects to come out during the home inspection.  The buyers end up basing their entire investigation on a $500 guy who has no fiduciary duty to them and whose job is limited to the moving parts of the house.

But let’s say you can live with that.

These types of disrupter platforms are entirely dependent upon all agents sharing their listings on the MLS.  But as the major brokerages continue to input their listings on their company website first (Redfin’s publicly-stated policy), the MLS will soon become a relic, and the marketplace of last resort.

All of the market conditions are pushing in this direction.  We are transitioning from the Wild, Wild West to Full-Tilt Chaos!

Get Good Help!

Welcome, Incumbents

The way to sell houses is turning into a jumbo bowl of jambalaya now, and this version toes the fiduciary-duty line by gathering investor offers, instead of making cash offers themselves.

Reprinted with permission from the author Mike:

A Keller Williams team in Phoenix recently launched OfferDepot, an instant offer play, to “help with all the confusion with cash offers vs bringing your home to market.”

Why it matters: This is the first move from a traditional real estate company into the instant offers space.

The idea that traditional real estate incumbents would enter into the iBuyer’s instant offers party isn’t new. Back in February, I wrote:

“…the more successful Opendoor becomes, the more of a threat they become to industry incumbents, which forces them to respond. The most logical response from a major player such as Realogy or Keller Williams would be to launch their own iBuyer program.”

This isn’t a top-down corporate initiative on the part of Keller Williams. Rather, this is a local team reacting to the rising interest in iBuyers and pushing to stay relevant.  The Keller Williams team isn’t buying houses directly. It is collecting inbound leads from potential sellers, gathering information on the home, receiving instant offers on their behalf, and presenting everything back to the home owner (including an option to list the home on the open market) in a comparative analysis.

We can speculate as to the reasons this Keller Williams team decoded to jump in to the fray:

  • It doesn’t want to miss the boat. Whether it’s Opendoor raising another $325 million or Zillow jumping in with both feet, interest in the space has never been stronger. Traditional real estate agents — and Keller Williams  — are in the business of selling homes. Why would they let this new model pass them by? Doing nothing is not an option.
  • A one-stop-shop. It’s relatively easy for traditional agents to bolt on an instant offer service, thereby turning them into a one-stop-shop for home sellers (and negating the need to contact an iBuyer like Opendoor or Offerpad).
  • Seller leads are super valuable. This is another form of lead generation for traditional agents, with each request representing a likely customer.

Implications for iBuyers

In my previous analysis, I summed up the major implications of incumbents entering the instant offer space. The first deals with the user experience:

“Make no mistake, the offer and the experience from the incumbent is going to be bad. They’re simply not set up to provide the same quality of service as Opendoor.”

The online experience isn’t great. In a design reminiscent of the mid- to late-90’s, users must struggle through a form to submit their home’s information. It’s a far cry from the premium experience Opendoor strives to offer its customers through the entire process.

But it works. It does what it needs to and collects leads. And it is this dilutive effect that is the biggest implication to dedicated iBuyers like Opendoor. As I wrote in that same analysis:

The proposition from the incumbents will be poor, but it will be enough to soak up a portion of the demand in the market and take momentum away from Opendoor and other iBuyers.”

It’s simple economics. If we assume the demand remains constant, the addition of supply will dilute the amount of business any one iBuyer receives.

There will also be more customer confusion as incumbents get into the game. When Opendoor was the only option in town, it was simple. But now there are a variety of choices: multiple dedicated iBuyers (Opendoor, Offerpad), a popular web portal (Zillow), a tech-enabled brokerage (Redfin Now), and a traditional real estate agent (OfferDepot). What’s the difference? Who do I trust? It’s difficult to explain the various propositions to consumers.

At the end of the day, that’s good for traditional brokers and agents (as they can soak up additional demand), and bad for dedicated iBuyers (because of the dilutive effect and customer confusion).

This is just the start! Expect a lot more activity in this space by the incumbents. It’s only a matter of time before a big incumbent launches a well-funded, well-designed initiative. And it may not stop at just presenting offers on an iBuyer’s behalf…

Link to Article

Opendoor is Deceitful

In the video below, a Las Vegas realtor compares an actual offer from Opendoor to what happened when he put the home on the open market.

But it’s the deceit that is note-worthy.

The first number supplied by Opendoor was the average market time, which they said was 75 days for the zip code.  But the actual MLS data showed 22 days, and then the agent sold this house the first day on the market.

Opendoor also packed an extra 2% in costs for seller concessions when selling with a realtor, which is untrue.  Buyers don’t ask for concessions in our pricer market, let alone in Las Vegas when houses are selling over list price.

No surprise that flippers use the lowest comps they can find – that’s expected.  But they also stack enough other false evidence that, in the end, is what sways the seller to go that route.

Opendoor’s final estimate twisted the numbers to show that the seller would make $11,000 more money by selling to Opendoor, rather than listing with an agent.  But the client actually cleared $15,416 more with a realtor!

Flippers have no obligation to tell you the truth – they say whatever they want. Get a second opinion!  If timing is an issue (quick closings are one of the big benefits they push) – then I will give you a quote today, and get you into escrow as fast as you need.

Link to video:

https://www.facebook.com/gafford2/videos/10155312061946750/

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