Tech actors now in the real estate business continue to try to shake up the process:
They work like this: These companies, dubbed “iBuyers,” make cash offers for your current home at an algorithmically determined “fair market price,” allowing you to take the money, buy your next home, and move out at whatever date works best for you. The transaction closes in a matter of days.
The companies then clean and fix up your old house and sell it on the open market, collecting a fee from the seller. And because the price at which iBuyers buy the house is usually not the maximum the house would fetch if it was sold traditionally, they likely make a small gain on the sale price…
Perhaps the most striking evidence of iBuyers’ influence on the real estate industry came from Keller Williams CEO Gary Keller in January. When discussing the company’s intent to launch an iBuyer program later this year, Keller told Inman “I feel like I have no choice now.”
After posting $1.33 billion in revenue in 2018, Zillow announced a three- to five-year revenue target of a whopping $22 billion, $20 billion of which was projected to come from buying and selling homes.
It will be interesting to see how much iBuyers are co-opted or acquired by traditional real estate actors or whether they will stand on their own. And will this lower costs for consumers and/or give them advantages or will it consolidate power and knowledge into different hands?
Does all of this threaten to keep moving real estate toward a commodity? This appears to be the road we are already on with the shift from thinking about American homes as places to live and anchors in a community to seeing them primarily as investments and critical parts of retirement portfolios. Imagine doing more and more of this without seeing the homes in question and with lenders and middlemen who have little knowledge of the particularities of a neighborhood or community. Algorithms can do a lot – and possibly even reveal patterns humans tied up in local details have a hard time seeing – but they may have a hard time imparting the aesthetic and lived experience of homes and locations.
Going further, iff more people are moving toward less civic engagement, more engagement with screens, and social ties primarily chosen based on family, friends, and interests (some evidence to back all of these up), perhaps it may not really matter exactly where people live as long as it is relatively close to what they want. Why would you need to visit a place or pick a specific home or neighborhood if those local ties and interactions matter little?
A list of items millennials may have affected begins with starter homes:
Statistically, the generation that coined the phrase “adulting” has put it off longer than previous generations (see marriage, kids, home ownership). According to Zillow, millennials are currently the largest group of homebuyers, but CEO Spencer Rascoff notes that “starter home” inventory is limited, forcing millennials to rent until they can afford the bigger, more expensive crop of houses. On the bright side, chances are their Pinterest and DIY skills have their rentals looking lovely.
Many of the underlying economic factors limiting the number of and access to starter homes is out of the hands of millennials. Additionally, Americans as a whole are conditioned and pushed purchase and live in larger homes.
Theoretically, millennials could push back more on the delayed adulthood that is now common – but that has its own confluence of factors pushing adults toward achieving adult milestones later.
In the long run, it appears millennials still want to buy homes and are interested in a suburban life. However, this might look different: the process will be pushed back, homeowners may own fewer homes, and the homes themselves could be larger and have specific features. There will still be many smaller homes in the United States but they may require a good amount of renovation, may be fairly pricey to acquire, and Baby Boomers may be in them for a while. The homeownership process does not have to look the same in the future and there might even be some positive twists along the way even as it can be difficult to move away from established patterns.
The national and international flow of capital in real estate is a well-established phenomena in the biggest cities but it is recognized less in suburbs. Here is an example of this in Wheaton, Illinois:
In the bigger deal, San Francisco-based FPA Multifamily acquired Wheaton Center, a 758-unit property in downtown Wheaton, from Edge Principal Advisors of New York, according to a statement from HFF, the brokerage that arranged the sale.
It’s unclear how much FPA paid—the statement did not include a price and FPA and Edge representatives did not return calls—but the property was expected to fetch about $135 million, according to Real Estate Alert, a trade publication. At that price, the sale would generate a big profit for Edge, which paid $44 million for Wheaton Center in 2014 and invested about $40 million in a major renovation.
The main culprit: property taxes. Wheaton 121’s taxes rose so much after Invesco bought it that the added expense significantly depressed the property’s value, according to people familiar with the complex. A jump in the property’s assessed value pushed Invesco’s 2018 tax bill up to $2.0 million, a whopping 47 percent increase from 2016, according to DuPage County records.
I suspect most suburbanites know little about who owns major pieces of land in their community, let alone who owns large apartment buildings (which may be more or less common depending on the suburb). Unless the owner makes a big deal of their ownership with signs or presence in the community, daily life just moves on.
But, this infusion of money from far away could have a significant influence on a suburb. Local developers may not be interested in sizable projects or may not be able to access the same amounts of capital. At the same time, a local developer may be more attuned to local conditions. Presumably, all the owners of nicer properties want to be seen as good actors in the suburb but they may have varying levels of involvement and commitment to the exact community.
Pittsburgh is home to a lot of profitable house flipping activity:
Today, old industrial cities such as Pittsburgh, Buffalo and Cleveland are among those offering the greatest returns. They have struggled to recover from the recession, but now are beginning to attract tech firms, such as Google-parent Alphabet Inc, Uber Technologies Inc, and Amazon.com Inc.
The influx of new workers is boosting demand for urban homes in areas that have some of the oldest housing stock in the nation and not much new construction, creating richer opportunities for flippers than in Las Vegas or Miami at the height of the housing boom more than a decade ago…
In Pittsburgh, home flippers made a gross profit of 162.7 percent on average during the second quarter of this year, while in Buffalo, the average gross return came in at 107.5 percent, according to ATTOM data. Nationally, the average house-flipper earned a 44.3 percent gross return on investment this year, compared with the 35.3 percent during the boom…
“Pittsburgh’s housing market was under-invested in for 40 or 50 years,” said Aaron Terrazas, senior economist at real estate listing firm Zillow. “The housing stock in the urban core of these cities requires substantial investments to update these older homes and bring them up to modern living standards.”
There are plenty of Rust Belt cities that would want in on this action. Do you think political and business leaders in places like Syracuse or Milwaukee or Lansing wouln’t salivate over the prospect?
But, it sounds like Pittsburgh could be a unique place. Certain conditions were in place:
- An influx of tech workers. Pittsburgh has a university and research base that not all Rust Belt cities can draw on. Everyone wants part of the tech industry but how many cities, particularly struggling ones, can attract significant numbers of tech employees?
- Relatively cheap homes. Many Rust Belt cities have this.
- An attractive urban core. In addition to jobs, a vibrant city or neighborhood scene could go a long way to attracting new workers and residents.
- While the article mentions concerns about residents being priced out of their own neighborhoods, I assume leaders in Pittsburgh are at least okay with the house flipping activity if not outright encouraging it. A “favorable business climate” could signal to developers and investors that the city wants redevelopment and is okay with seeking profits. This does not even account for the moves local leaders may have made to encourage the growth of the tech industry.
In other words, if the conditions change in Pittsburgh – such as there are fewer cheaper houses to make money on – it is not guaranteed that house flippers will simply move on to the next Rust Belt city with cheap housing.
A report on the real estate market in the Chicago region hints at a possible trend to watch: Americans will buy fewer homes in their lifetime.
Many first-time buyers share the Joshis’ perspective that it’s smarter to find the right house to grow into than to get a toehold in the market with a starter house, only to see much of that early equity sapped by transaction costs a few years later when moving up to a larger house.
“When we started looking, I had in mind a starter house, but it was so exhausting to look that we thought, no, one and done,” says Vrushank Joshi.
There are numerous societal changes that contribute to this:
- People are getting married later and going to school longer. This means they are not buying a home in early adulthood as often and are waiting longer to purchase their first place.
- With more education, increasing student loans means it takes longer for potential owners to save money for a down payment.
- Fewer starter homes have been constructed in recent years.
- Mobility is down in recent years as Americans seem interested in staying in places for longer.
- The specter of the late 2000s housing bubble haunts possible buyers.
A system that used to rely on people starting with a smaller product and then working their way up over a lifetime may have to make some major adjustments if Americans buy fewer and different homes compared to before.
The Connecticut suburb of New Canaan is testing banning “for sale” signs:
The “trial ban” on real estate signs will run from July 1 to Jan. 1, according to Janis Hennessy, president of the New Canaan Board of Realtors.
The decision was made by members of the Board as well as the New Canaan Multiple Listing Service, “to further improve our already beautiful town,” Hennessy said in a release…
“Millennials and other potential buyers shop for real estate online and we believe they will be able to find New Canaan homes without these signs. We have seen how eliminating the signs has improved the look of other towns in Fairfield County without impacting the real estate markets. New Canaan Realtors believe it is worth a try here in the ‘Next Station to Heaven’ as well.”
The question of whether to implement a ban, such as a longstanding one in Greenwich, has been battered around New Canaan for some time. Saying the sheer number of ‘For Sale’ signs undermines the town’s attractiveness and ability of some property owners to sell, advocates for the change are cheering the decision.
There are four explanations provided or hinted for why “for sale” signs will not be allowed for six months:
- Younger homebuyers do not go driving around looking at homes; they look online.
- Other suburbs nearby already have a ban in place. New Canaan needs to keep up.
- Not having the signs makes the properties more attractive.
- There are too many “for sale” signs.
There may be a single underlying reason behind these explanations: the higher social class of residents in New Canaan. “For sale” signs may be gauche in a community that is one of the wealthiest zip codes in the United States (with Greenwich also as one of the wealthiest zip codes). Selling and buying property in a wealthy community does not have to be such a public event. The crass exchange of money for property is essential to American life but may be too prosaic to acknowledge in a place where residents could live in a myriad of places. Not making the sale as public (no signs plus pocket listings and listing only in certain places) may just add to the cachet of the community.
In a place where there are no “for sale” signs and where there may be limited community interaction (one of the findings of The Moral Order of a Suburb), there may be few indications that a property has changed hands. The cars in the driveway may change a bit and home repairs may happen here and there but the single-family homes may be more permanent than residents.
The declining shopping mall has led to a drop in value for these properties:
“It’s a tough environment. I don’t think anybody really anticipated the decline of the department store to happen as quickly as it did,” said Joe Coradino, chief executive officer of Pennsylvania Real Estate Investment Trust, which owns 21 malls in the Mid-Atlantic region. “The sellers are clearly on their knees.”
The Philadelphia-based REIT has sold 17 bottom-tier malls since 2013. The last deal, completed in September, was a $33.2 million transaction for the Logan Valley Mall in Altoona, Pennsylvania, anchored by Macy’s, JCPenney and Sears stores. If those same properties were on the market today, prices would be substantially lower, Coradino said…
Not long ago, some of the biggest names in private equity, such as KKR & Co. and Barry Sternlicht’s Starwood Capital Group, were laying out substantial sums to snap up retail properties. In 2012 and 2013, Starwood purchased a combined $2.6 billion of malls from Westfield, followed less than a year later by a $1.4 billion deal to buy seven malls from Taubman Centers Inc. From 2012 to 2014, KKR bought four regional malls for about $502 million, Real Capital data show. That demand has all but evaporated as timing a wager on American malls becomes increasingly treacherous…
It’s easy to understand their reluctance to sell now. Prices for malls fell 14 percent in the past 12 months, even as values for other types of commercial properties, such as warehouses and office buildings, rose or held steady, according to Green Street Advisors LLC. At least four properties have been pulled from the market in recent months because the bids were too low, Dobrowski said.
Even with efforts to save some shopping malls, from adding restaurants and entertainment options, housing, and community spaces, a good number will simply not survive. They will not be desirable enough for retail activity nor prime spots for redevelopment. They may sit empty for much longer than communities desire or can bear. I suspect we will see a lot of potential creative solutions to these dead shopping malls as land owners, developers, and communities try to turn them into sites that again contribute to the surrounding area.
Perhaps the most interesting question here is how low prices will get before they interest someone who will buy them. Are we headed for the equivalent of $1 homes for shopping malls? Perhaps they will become subject to blight and renewal programs? Will the price be low enough for neighbors or communities to buy them simply to raze them? Perhaps they will be the dystopian spaces featured in films like Gone Girl?