Tag Archives: Zillow

Zillow sought pricing predictability in the supposedly predictable market of Phoenix

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With Zillow stopping its iBuyer initiative, here are more details about how the Phoenix housing market was key to the plan:

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Tech firms chose the Phoenix area because of its preponderance of cookie-cutter homes. Unlike Boston or New York, the identikit streets make pricing properties easier. iBuyers’ market share in Phoenix grew from around 1 percent in 2015—when tech companies first entered the market—to 6 percent in 2018, says Tomasz Piskorski of Columbia Business School, who is also a member of the National Bureau of Economic Research. Piskorski believes iBuyers—Zillow included—have grown their share since, but are still involved in less than 10 percent of all transactions in the city…

Barton told analysts that the premise of Zillow’s iBuying business was being able to forecast the price of homes accurately three to six months in advance. That reflected the time to fix and sell homes Zillow had bought…

In Phoenix, the problem was particularly acute. Nine in 10 homes Zillow bought were put up for sale at a lower price than the company originally bought them, according to an October 2021 analysis by Insider. If each of those homes sold for Zillow’s asking price, the company would lose $6.3 million. “Put simply, our observed error rate has been far more volatile than we ever expected possible,” Barton admitted. “And makes us look far more like a leveraged housing trader than the market maker we set out to be.”…

To make the iBuying program profitable, however, Zillow believed its estimates had to be more precise, within just a few thousand dollars. Throw in the changes brought in by the pandemic, and the iBuying program was losing money. One such factor: In Phoenix and elsewhere, a shortage of contractors made it hard for Zillow to flip its homes as quickly as it hoped.

It sounds like the rapid sprawling growth of Phoenix in recent decades made it attractive for trying to estimate and predict prices. The story above highlights cookie-cutter subdivisions and homes – they are newer and similar to each other – and I imagine this is helpful for models compared to older cities where there is more variation within and across neighborhoods. Take that critics of suburban ticky-tacky houses and conformity!

But, when conditions change – COVID-19 hits which then changes the behavior of buyers and sellers, contractors and the building trades, and other actors in the housing industry – that uniformity in housing was not enough to easily profit.

As the end of the article suggests, the algorithms could be changed or improved and other institutional buyers are also interested. Is this just a matter of having more data and/or better modeling? Could it all work for these companies outside of really unusual times? Or, perhaps there really are US or housing markets around the globe that are more predictable than others?

If suburban areas and communities are the places where this really takes off, the historical patterns of people making money off what are often regarded as havens for families and the American Dream may continue. Sure, homeowners may profit as their housing values increase over time but the bigger actors including developers, lenders, and real estate tech companies may be the ones who really benefit.

iBuyers look to ramp up home purchases

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Several tech companies are looking to purchase more American homes:

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“Our financial goal is to drive rapid growth at scale with sustained improvement in our profitability,” Opendoor, the industry pioneer, wrote in its letter to shareholders this week. After going public last year, Opendoor has now expanded into more than 40 markets and purchased 8,500 homes in the second quarter, more than any other quarter by almost 50%. The company, which is reportedly searching out a new $2 billion revolving credit facility, also announced this week that it is now willing to purchase the majority of homes in every one of its current markets.

Zillow announced similarly ambitious plans during its recent earnings call. While it bought only 3,800 homes in the second quarter, Zillow is gearing up to scale massively through the rest of 2021, saying that it expects its Homes division to bring in around $1.4-1.5 billion in revenue next quarter, roughly double what the division made this quarter…

iBuyers say that in exchange for money they offer convenience, quickly offering a number to homeowners who, if they accept, can then pick their exact move-out date, avoid showing their home, and use the money to immediately go house hunting. (Zillow says its goal is become a “housing market maker.”)…

Still, it’s difficult to deduce at this early moment whether adding high-tech firms to the real-estate market will be a net positive or negative for the typical American family, said Roberto G. Quercia, a professor of city and regional planning at the University of North Carolina at Chapel Hill. Residential real estate remains the dominant form of wealth for such families, making up roughly 70% of median household net worth, so the answer could have potentially enormous ramifications for the country.

The biggest factor seems to be the marriage of tech capabilities and money. There are other actors in the market who have plenty of cash to use. There are plenty of websites and apps for real estate. Does putting them together offer unparalleled convenience or particular knowledge through algorithms and real estate data?

There are multiple sets of consequences to figure out. As the article notes, it is not clear if these new home selling options benefit consumers. More options or more competition could be good. What do other actors like lenders, developers, and realtors think about this? Additionally, many communities might have concerns about institutional buyers who can leverage technology and scale but do not necessarily have local knowledge or concern about local markets. Could these actions drive up prices beyond what regular buyers could afford?

How searching for houses online became sexy

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With SNL poking fun at the ways people in their late 30s use Zillow to look at housing, what makes online home shopping such a current phenomena? I thought of the numerous factors that had to come together – here is an incomplete list:

SNL “Zillow”
  1. The rise of online real estate sites and apps. These have been around for years but between Zillow.com, Redfin.com. Realtor.com, Trulia.com, and more, potential sellers and buyers have a lot of easily accessible platforms. These options are now ubiquitous: people can search at any time from any location for any length of time. And now that some online listings have video tours and/or 3D models, viewers can get a good sense of what a property is like without ever getting near it.
  2. COVID-19 adds much to existing patterns. With some people interested in moving out of cities and health risks making it more difficult to see homes, online viewing may be the primary option.
  3. The SNL spoof targeted a particular age group – people in their late-30s – who might be in the middle of a housing dilemma. By this age, those interested in settling down somewhere may or may not have the resources (think school loans, unstable employment during COVID-19 and the last economic crisis in the late 2000s) to buy in the places they want. But, the browsing is free and all sorts of homes in all sorts of locations are available.
  4. The single-family home has always been an important part of the American Dream. Today, this is true and in new ways. The home is a respite away from COVID-19 and political polarization. It is an important investment as buying the right home is not just about enjoying day-to-day life; it should pay off in the future when the homeowner wants to sell and housing values have continued to rise.
  5. Americans also like to consume and compare their social status or possessions to others. With homes occupying such an important part of American mythology, these larger patterns carry over to these sectors. Browsing homes online allows for window shopping and comparisons on one of the most expensive investments. And homes are not just dwellings; they offer windows into lifestyles and neighborhoods.

Put all of these together and you get an SNL reflection on how home searching and purchasing happens today.

Watching TV to see people use Zillow

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In watching a recent episode of House Hunters on HGTV, I was treated to brief scenes of the couple using Zillow:

HGTVZillow

Caveats:

-I know this is how people shop for houses today. I have done it myself.

-I would guess this means HGTV and Zillow are working together on the show in some capacity. (See a similar clip on ispotTV.)

-House Hunters tries (!) to show what looking at houses might look like.

Commentary:

Even though the scene was brief, I found it odd. It either seemed like obvious product placement (use Zillow rather than Redfin or MLS or other options!), uninteresting storytelling (watch people look at a screen!), or signaled some major change. As the couple then moved to driving around by themselves and looking at houses, I thought for a short moment that they would not even need a realtor: they had found listings online, arranged their own details, and would tour on their own. (Alas, the realtor just met them at the first house tour.)

While there is a lot of potential for HGTV and other similar programming to incorporate devices and screens (mainly smartphones and tablets) into their portrayals of finding property, there is a bigger issue at play for television and film: how can you interestingly portray handheld screens that so many of us are buried in on a daily basis within a story that has to move at a rapid pace? This is not easy.

Selling and buying a home with iBuyers

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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?

Earning more yearly from the growing value of your home than a minimum wage job?

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Zillow suggests the growth in home values in about half of the United States’ largest cities is higher than working a full-time minimum wage job:

The typical U.S. home appreciated 7.6 percent over the past year, from a median value of $195,400 in February 2017 to $210,200 at the end of February 2018. That $14,800 bump in value translates to a gain in home equity of $7.09 for every hour the typical U.S. homeowner was at the office last year (assuming a standard 40-hour work week),[1] a shade less than the federal minimum wage of $7.25 per hour.

Overall, owners of the median-valued home in 24 of the nation’s 50 largest cities earned more in equity per hour over the past year than their local minimum wage.[2] But homeowners in a handful of U.S. cities made out a lot better than that – in some cases much, much better.

The median U.S. household earned roughly $60,000 in 2017 ($58,978 to be exact),[3] or a little more than $28 per hour. But in six U.S. cities – New York, San Diego, San Jose, San Francisco, Seattle and Oakland – owners of the median-valued local home gained more than that in home equity alone. And if earning a six-figure annual salary represents a certain amount of privilege, homeowners in San Francisco, San Jose and Seattle all made comfortably more than that simply by virtue of owning a local home…

A home is often a person’s biggest financial investment, and according to the 2017 Zillow Group Consumer Housing Trends Report, the typical American homeowner has 40 percent of their wealth tied up in their home. A recent Zillow survey found that 70 percent of Americans[4] view their home as a positive long-term investment.

This is both an interesting and weird comparison. For the interesting part: most people understand the abstract idea of working a minimum wage job. They should know that a full year of work at that rate does not generate much money. The reader is supposed to be surprised that simply owning a home could be a more profitable activity than working.

But, there are a number of weird features of this comparison. Here are four:

First, not all that many Americans work full-time minimum wage jobs. People understand the idea but tend to overestimate how many people work just for minimum wage.

Second, roughly half the cities on this list did not experience such an increase in housing values. Without comparisons over time, it is hard to know whether this information about 24 out of 50 cities is noteworthy or not.

Third, the comparison hints that a homeowner could choose to not work and instead reap the benefits of their home’s value. This question is posed in the first paragraph: “Why work a 9-5 slog, when you can sit back and collect substantial hourly home equity “earnings” instead?” Oddly, after the data is presented, there is a disclaimer section at the end where the difference between working a job and earning money through selling a home is explained.

Fourth, to purchase a home, particularly in the hottest markets cited, someone has to start with a good amount of capital. In other words, the people who would be working full-time minimum wage jobs for a full year are not likely to be the ones who would benefit from the growth in their home’s equity. It takes a certain amount of wealth to even own a home and then even more if someone wanted to profit from just owning homes.

Overall, I would give Zillow some credit for trying to compare the growth in home values to a known entity (a minimum wage job) but the comparison falls apart pretty quickly when one gets past the headline.

“People want these larger homes”

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I’m quoted in a recent Zillow story titled “Upsizing on the Upswing: The Big Decision More Homebuyers are Making“:

The data corresponds with what sociologists are seeing firsthand, says Brian Miller, an associate professor of sociology at Wheaton College, just outside Chicago. Miller, who studies cities, suburban migration and culture, argues that several factors could be impacting the shift in housing trends, including the strength of the national economy.

“I see a lot about tiny houses and micro apartments in Seattle, San Francisco, and New York — these cities who are really grappling with housing issues and trying to fast-track 200- or 400-square-foot apartments,” Miller says. “And yet the overall pattern across America is that people want these larger houses.

“The economy has gotten better over the last few years,” he continues, with a nod to cities like Dallas, one of the hottest housing markets in the country. “It seems it’s enabled people to [buy large houses] again.”

Popular culture may be influencing this decision as well, Miller adds, pointing to how homes are depicted on television, in both the reality and scripted genres.

“The typical home on TV is huge. Think about the ‘Friends’ apartments, which were impossibly large,” he says. “I’m thinking of HGTV shows I’ve seen over the past few years, where the dining room seats 10 or 12. I don’t have those parties, but if you’re watching HGTV, it just seems like everything is huge.”

I think the larger story goes like this: Americans tend to like large homes and even major financial issues, such as the bursting of the housing bubble, may not be enough to reverse that trend. This does not mean the desire for large homes will continue forever. Yet, major changes need to occur to the economic system and/or enduring values need to shift for Americans as a whole to embrace smaller homes.

Related topics:

–McMansions are back.

–There are a limited number of tiny houses in the United States.

Zillow defines McMansions but doesn’t really capture their essence

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The recent Washington Post analysis on the return of the McMansions depends on Zillow’s definition of a McMansion:

(Since a “McMansion” is in the eye of the beholder, Zillow doesn’t have a targeted way of tracking them nationwide. For this article and the video above, they approximated the category by focusing on houses built after 1980 that were greater than 3,000 square feet but less than 5,000 square feet. They also looked for houses located on streets where the homes are similarly sized, on similarly sized lots, and built within six years of each other, to isolate cookie-cutter communities.)

This definition has several key aspects:

  1. A time period after 1980. The term McMansions arises in this era.
  2. A certain square footage. Once a home is too large, it is no longer a McMansion.
  3. The large homes are built as part of a development of similar homes.

This definition of a McMansion would seem to primarily capture suburban McMansions. Indeed, the analysis spends more time discussing general suburban trends than it does McMansions:

Many casual onlookers have forecast the death of the suburbs in recent years, especially as younger renters and buyers turn an eye to city centers. Skylar Olsen, a senior economist at Zillow, says that young people today have far more interest in living in urban environments. “That’s where jobs had been growing fastest over the course of this economic recovery over the past five years,” says Olsen…

Their decision is also supported by cheap energy costs, which make it affordable to commute. in mid-June, the nationwide average price of regular gasoline was $2.32 a gallon. Like the McMansion and the pickup in the housing market, it’s another source of deja vu. After remaining elevated for years, oil prices are now roughly the same as they were June 2000, when adjusted for inflation.

This definition leads to two major problems with defining what homes are McMansions:

  1. Not all suburban houses are McMansions. It may be easy to conflate the two – the majority of McMansions are likely located in the suburbs – but they are not the same.
  2. The Zillow data provides little insight into the architecture of the home. A home of that time period and square footage in a cookie-cutter neighborhood is not necessarily garish or poorly proportioned. Such homes might be more likely to be McMansions but it is not a guarantee.

Zillow may be limited in the architectural data they can access. For example, they may be able to know how large the garages are on these homes but it doesn’t really know how exactly these garages are presented. Yet, painting McMansions with a broad brush may not be very accurate and fall into the trap of painting most of suburbia as filled with McMansions.

American homes grow in size yet lots shrink

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Zillow finds that American homes continue to grow larger even as their lots shrink:

Nationally, the median size of a new house is now 2,600 feet, a full 500 square feet (or almost 25 percent) more than it was just 15 years ago.

Yet the median lot size is now 8,600 square feet, down 1,000 square feet (or about 10 percent) over the same period:

Zillow continues to find interesting patterns in real estate data. So what could be behind this trend? Both the land and the home (materials, labor) cost developers and builders money. Thus, smaller lots with bigger houses can reduce land costs even as the home price might stay similar or increase because the home is growing. Or, perhaps this is also the result of land regulations from municipalities. Small lots could be preferred by some places because subdivisions and residential properties then take up less space.

One of the common complaints about McMansions is that the big house are on small lots. Yet, this may be necessary for some housing in order to (1) make housing more affordable (lower the costs for land) and (2) to limit damage to the environment (use less land and open land for more green space or open space).

The perils of analyzing big real estate data

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Two leaders of Zillow recently wrote Zillow Talk: The New Rules of Real Estate which is a sort of Freakanomics look at all the real estate data they have. While it is an interesting book, it also illustrates the difficulties of analyzing big data:

1. The key to the book is all the data Zillow has harnessed to track real estate prices and make predictions on current and future prices. They don’t say much about their models. This could be for two good reasons: this is aimed at a mass market and the models are their trade secrets. Yet, I wanted to hear more about all the fascinating data – at least in an appendix?

2. Problems of aggregation: the data is analyzed usually at a metro area or national level. There are hints at smaller markets – a chapter on NYC for example and another looking at some unusual markets like Las Vegas – but there are not different chapters on cheaper/starter homes or luxury homes. An unanswered questino: is real estate within or across markets more similar? Put another way, are the features of the Chicago market so unique and patterned or are cheaper homes in the Chicago region more like similar homes in Atlanta or Los Angeles compared to more expensive homes across markets?

3. Most provocative argument: in Chapter 24, the authors suggest that pushing homeownership for lower-income Americans is a bad idea as it can often trap them in properties that don’t appreciate. This was a big problem in the 2000s: Presidents Clinton and Bush pushed homeownership but after housing values dropped in the late 2000s, poorer neighborhoods were hit hard, leaving many homeowners to default or seriously underwater. Unfortunately, unless demand picks up in these neighborhoods (and gentrification is pretty rare), these homes are not good investments.

4. The individual chapters often discuss small effects that may be significant but don’t have large substantive effects. For example, there is a section on male vs. female real estate agents. The effects for each gender are small: at most, a few percentage points difference in selling price as well as slight variations in speed of sale. (Women are better in both categories: higher prices, faster sales.)

5. The authors are pretty good at repeatedly pointing out that correlation does not mean causation. Yet, they don’t catch all of these moments and at other times present patterns in such a way that distort the axes. For example, here is a chart from page 202:

ZillowTalkp202

These two things may be correlated (as one goes up so does the other and vice versa) but why fix the axes so you are comparing half percentages to five percentage increments?

6. Continuing #4, I supposed a buyer and seller would want to use all the tricks they can but the tips here mean that those in the real estate market are supposed to string along all of these small effects to maximize what they get. On the final page, they write: “These are small actions that add up to a big difference.” Maybe. With margins of error on the effects, some buyers and sellers aren’t going to get the effects outlined here: some will benefit more but some will benefit less.

7. The moral of the whole story? Use data to your advantage even as it is not a guarantee:

In the new realm of real estate, everyone faces a rather stark choice. The operative question now is: Do you wield the power of data to your advantage? Or do you ignore the data, to your peril?

The same is true of the housing market writ large. Certainly, many macro-level dynamics are out of any one person’s control. And yet, we’re better equipped than ever before to choose wisely in the present – to make the kinds of measured judgments that can prevent another coast-to-coast bubble and calamitous burst. (p.252)

In the end, this book is aimed at the mass market where a buyer or seller could hope to string together a number of these small advantages. Yet, there are no guarantees and the effects are often small. Having more data may be good for markets and may make participants feel more knowledgeable (or perhaps more overwhelmed) but not everyone can take advantage of this information.