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This isn’t really how this business works, nor why Zillow failed operationally to price correctly. To everyone at Opendoor when Zillow started to scale, this was a long time coming

> VC money

Zillow is a publicly traded company and has been since July 2011. I don't know how they raised capital before then, but regardless they're well past the VC stage.

This is a great point, Zillow has a P/E of ~170 and an ROE of 2.9%. It’s not inaccurate to say that directly lending money to individual buyers is a better deal for investors.

>The Zillow financial model turns out to have been biased on historic trends.

Accordingly and importantly I suspect it didn't take into account its own impact on the market

No far end echo canceling.

Ah, so the Hunt brothers and their wild silver ride in the 1980's.

We recently worked with our past realtor and she confirmed that Opendoor and the like have stopped actually fixing homes. Just buy and flip as is.

There's not really much reason to put anything into them. The market moved so incredibly fast this past year there wasn't any motivation to do so.

We have a property that three years ago was worth no more than $550k, we managed to sell it recently (get it under contract) in 2 days for nearly $900k with a few obvious fix-em-up issues -- including all cash offers. If the house had been in great shape our realtor believes we could have moved it for around a million easily.

The jump in price occurred almost entirely in the past year.

Yeah, it's just dumb. Only winners in this market will be those who own property as an investment. First time home buying is quickly becoming a pipe dream.

In areas with less than great job markets, housing has not really exploded in value.

Which hey, they have less than great job markets. But there are lots of small to medium employers with solid jobs in most of those markets.

That's why WFH is such a game changer, especially if you have a tech job.

This doesn’t necessarily mean housing is more affordable. If incomes are 1/4th SF and housing is 1/4th the price of SF then housing is still utterly out of reach for most people.

I mean, I live in an area like that and for the jobs I'm talking about, housing is affordable. Median household income here is about 70% of the national median, there's decent houses available for $125k (and nicer stuff available as you go up from there).

"The con of all of this . . . " - I see what you did there

If the goal is to acquire a sufficient percentage of the float, why is Zillow unloading these houses at a loss?

You have to pay for upkeep...electricity, gas, landscaping, local taxes, etc while you own the home. It also ties up capital for future purchases. They don't want to do that indefinitely as it would eat all the profit. They've probably done the calculation, realized that losing 1% (or whatever) is better than keeping the house on the books and making a small profit on the sale, but being negative after all the money they have to spend on ownership.

> Surprisingly housing is so constrained at this point that in a major city like Boston you could purchase all outstanding homes for <200 Million dollars.

And then do what?

Raise the rent

If someone's business plan was to buy all the houses, then my business plan would be to aquire/build houses, and sell to that person at enormous markups.

Yup. Buying all the houses is possible in a constrained market, but Phoenix is unconstrained, and transportation allows us to substitute constrained for unconstrained locations.

That would be, more or less, exactly what they want, because the artificial scarcity begins dictating prices. You might try to sell to them, but they're not obligated to buy from you; they could simply point to the properties you're offering at enormous markup to unload some of the property they own at an enormous markup. And if they did buy from you at an enormous markup, they can point to those purchases as "comps" for the purposes of valuing their portfolio.

This actually happens in the art world; there's a guy who goes out of his way to overpay for Warhol paintings, because a) he can corner a finite market and b) when a Warhol painting sells for a record amount, the value of his entire collection goes up even if he's the buyer.

Until no one wants to buy a Warhol at the price he is seeking. There is no guarantee that this will work indefinitely, just like houses in Boston becoming undesirable at a certain price point.

It is possible that Boston houses are underpriced, but it is also possible people will start looking elsewhere. Probably have to dig into income trends and more data rather than just “Boston has limited housing, so it will always be rentable/sellable at a higher price”.

Well, the other side of the financial engineering project is that he can donate a Warhol to a museum and get a tax write-off for the value of the painting--a value that is likely set primarily by his actions.

Not something you can do with a house, I grant you. You'd more likely end up in a bubble situation where property just churns through the hands of investors until the bubble pops and someone is left holding the bag.

> but they're not obligated to buy from you

Hence attempting to buy all the houses is an impractical business plan, unless, of course, it becomes possible as a side effect of government mismanagement.

The Warhol example is fundamentally different, as Warhol isn't painting any more.

Why not both? That's the f'ed up future that's already begun: the builders are also the landlords.

Sell them again now that you’ve pumped the market?

If it was that easy, what is stopping other cash rich entities? There are clearly large risks and liabilities associated with this maneuver.

What makes you think they’re stopped? This is why Zillow doesn’t have to buy the whole market, all they need to do is buy enough for other investors to start piling on.

And then? They trade houses between each other while paying property taxes and paying for security and upkeep of the houses?

Real estate is not a secret business, and it is not like there is a massive population of buyers ready and able to pay top dollar. There are already many local players arbitraging real estate at any given time.

It would be one thing if it was free or cheap to hold onto houses indefinitely, but not only is physical security a problem, but politically it is a minefield too.

Two problems emerge:

1) Housing is a leveraged asset and can't fall substantially without a lot of individuals, banks, and institutions going bust. Historic government interventions serve as a hedge against this.

2) If housing is expensive enough then individuals can't afford to sell their own home. If buying a new smaller home requires 2x the equity of my existing home then I probably can't reasonably move. This means that new homes are less likely to be offered for sale.

It's clearly an unstable set of incentives, but it could be unstable for a very long time. My suspicion is that the only way for housing to exit its current cycle is a protracted period of high inflation in wages/goods/services which makes individuals more able to pay and depresses the financial returns on housing.

1) does not apply since Zillow is not going to be buying the houses with taxpayer funded mortgages from FannieMae or such

2) it is true that people may not be able to afford to move, but people will keep dying and their houses will keep opening up.

But the biggest thing is developed (buildings) real estate is very expensive to just hold empty, so there is incentive to keep it moving.

I am not talking about foreign millionaire and billionaire apartments in tier 1 cities, those are obviously bought and sold under a different set of constraints and goals. But your general purpose houses in 99% of communities across the US need to be lived in and property taxes paid.

I do agree with you that housing prices will not go substantially down nominally. Politically, all voters like to see their position improve, which means land and public stock market prices need to go up. But that does not mean Zillow will earn any decent risk adjusted return on buying and selling suburban tract built houses at scale.

I hesitate to use such a negative word like “con” to describe what also seems like a potentially smart investment. At the individual level, many people buy assets with the intent to get something back from it - either use of that asset or appreciation in its value or whatever else. Whether it is Zillow buying up houses or a large number of individuals, isn’t the impact roughly the same because it creates equivalent scarcity? I get that Zillow can make unilateral decisions on pricing but I’m asking if there is some theoretical support for the notion that even a decentralized buying spree will lead to the same outcomes, but on a different time scale.

Another question that comes to mind is whether there should be some threshold (percentage) of ownership in a given area subjects a given organization to anti-trust regulation. This isn’t a present reality of anti-trust laws but I wonder if such a framework will limit larger, more powerful organizations while still giving individuals the freedom to transact.

A final thought that crosses my mind is whether this is an actual problem. If the price goes up too high, then buyers shouldn’t buy them. There are numerous cities and towns across the country with cheap housing and cheap land. No one is entitled to buy housing at a given price point at whatever location they want. People need to respond to the pricing signal and look elsewhere if some place like Phoenix is too expensive. Otherwise, their continued purchasing simply suggests that the price is not too high.

> There are numerous cities and towns across the country with cheap housing and cheap land.

But nearly none with jobs to afford it.

I read that they've had trouble finding resources (people, materials) to fix up the houses for a flip.