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Comment by woeirua | Hacker News Reader

This is kind of a big deal in the real estate sector. The only reason that Zillow would sell everything right now is if they believed that the carrying costs of the properties until they (eventually) sell would eat all of their profits. They must be seeing flashing red signs across the board that there's a slowdown in the market and that scenario is exactly what will play out if they don't exit quickly.

There's no way that OpenDoor doesn't follow them out the door here in the next couple of months. The business model is exactly the same. Anecdotally I haven't seen any reason to think OpenDoor is doing much better around here.

This coupled with the Fed tapering could cause the real estate market to cool pretty quickly.

If you're buying a home right now, make sure you're moving somewhere you're willing to live for a while and that you're not going to be in financial duress if your home loses 20% of its value.

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It's a huge pivot to go from flipping houses to becoming a landlord. It would essentially be a disaster for them. That's a high-touch business and probably the costs associated with it, and the legalities around it are too complex. That's basically turning into an Avalon or something.

The interesting question is around their bonds. They were basically convertible bonds which likely triggered, but now they have to pay back the cash. How much of a liquidity crisis will this introduce to the company?

The more interesting thing is that this business crisis won't be reflected in their last quarter 10-Q which should be coming out soon. I'm assuming this is going to be talked about in that earning call, so that will be an interesting one to listen to.

I think Opendoor's model is a lot better, but I guess we will have to wait to see if there are any repercussions to their business.

Flipping is extremely high touch.

If you're already in the market of buying/selling homes and you find a good contractor for your area (if you plan on making any changes) then it can be low touch.

Zillow, in many cases, just bought and instantly relisted the property on their own site.

> you find a good contractor for your area

This is the hard part. All the good contractors do this themselves, or they charge so much you don't make any money on the sale, or they're booked out 3 months in advance.

not as high touch as finding a tenant, maintenance, etc.

Flipping is low touch compared to that. To flip, all you need is a buyer willing to pay money, and it's a single transaction.

They could work with a large property management company, or buy it outright. The demand for single family home rentals in the US is quite high.

One way to kill a good business is to start carrying inventory.

If you're buying a home right now, make sure you're moving somewhere you're willing to live for a while and that you're not going to be in financial duress if your home loses 20% of its value.

That's an odd way to say "I think you should probably consider renting right now" (which is absolutely what you should do if you think housing is likely to drop 20%).

That’s OK, if you’re trying to time the market, let alone based on forum comments, you’re already making bad decisions, so why not compound them

To the moon!

I actually don’t think you should be renting right now. Even if house prices were to fall by 20% tomorrow it would still be cheaper to own than to rent in most cities right now. That may not be true as interest rates move higher down the road.

> the carrying costs of the properties until they (eventually) sell would eat all of their profits.

Yes, they have to pay taxes. They have to maintain the property, and check on it against break-ins. There is a lot of cost to holding a property.

> They must be seeing flashing red signs

Hope those come from a different model than they used for buying.

The fact that they're also laying off a quarter of their staff looks significant, to me. They can't afford to hold these properties and keep the lights on. It's a lot like Uber -- in addition to the ordinary expenses of a real estate holding firm, they've also got a website to run, and that's stupid expensive because it seems like the industry still hasn't learned from the first .com bubble.

Is it not that they have a lot of people who are involved in buying and selling homes whose services are no longer needed?

> They must be seeing flashing red signs across the board that there's a slowdown in the market and that scenario is exactly what will play out if they don't exit quickly.

There could also be the issue summed up as "thr market can stay irrational longer than I can stay solvent" issue. Even if your bet is right if you lack available capital for the temporal range and trajectory you can never capitalize on any theoretical gains. Even if you were right about Atari going bankrupt if you shorted at the very beginning of their existence in the late 70s and it took until the 90s for it to happen chances are you would default even though you were right.

Well - if the Fed stops buying MBSes and interest rates go up - flippers in highly speculative markets (almost everywhere ATM) are likely to have a bad time.

Right. This is Zillow getting out before the Fed tapers, interest rates go up, and real estate sales and values go down.

Zillow paid too much. Tapering isn't going to have a material effect on new mortgages or home sales.

Do you think lower interest rates had no effect on prices? Or do you think it did - but that raising rates for some reason won't have an effect?

Yes, they did, but they could’ve still come out ahead if monetary policy wasn’t about to significantly shift and the carrying costs were reasonable.

Rising interest rates is absolutely going to have an impact on home values and mortgage rates. What it does to home transaction velocity is yet to be seen.

That's exactly what the Fed is expected to do: https://www.reuters.com/business/wall-street-banks-step-up-p...

lol, there is zero chance that Opendoor stops iBuying in the short term.

They are indeed much better at systematically valuing houses than Zillow. This was already the case 5 years ago when I worked there, and they have relentlessly improved on their core model since.

Maybe Opendoor will follow, but there's also this perspective:

Selling or shorting Opendoor due to Zillow’s flaws is akin to shorting Google due to Yahoo’s inability to monetize search well or return long tail queries properly.

https://twitter.com/rabois/status/1455564619494436870

Rabois is a founder of Opendoor.

You don’t need ML algorithms to know that interest rates in the medium term will be rising which puts downward pressure on home prices.

It can, but it's more downward pressure on higher cost homes (eg coastal metros). Even with higher rates, average home prices can increase like in the 60s through 80s, albeit just to keep up with inflation from higher interest rates.

https://fred.stlouisfed.org/series/MSPUS https://fred.stlouisfed.org/series/FEDFUNDS

> They must be seeing flashing red signs across the board that there's a slowdown in the market and that scenario is exactly what will play out if they don't exit quickly.

The Fed is (likely) going to announce bond purchase tapering this week, they’re currently buying $80B of US Treasuries and $40B of MBS every month. I believe the plan is to taper buying completely before raising rates.

The lack of QE could see the long end of the yield curve start to rise, which would push home prices down. If and when they start hiking the FF rate, look out!

What I'm waiting on is for the Wall Street firms to decide that being a landlord isn't for them. Either because the margins aren't what were predicted, they don't want to be in the handyman business making repairs the tenants need, or because something else becomes trendy.

The aftermath when they decide to unwind their positions will be far-reaching. Probably not another 2008, but it'll certainly depress valuations across the country. Like you said, if you're buying now, buy because you need a nice place to live, not because you intend to flip.

>They must be seeing flashing red signs across the board that there's a slowdown in the market and that scenario is exactly what will play out if they don't exit quickly.

Only for flipping. The real value was buying during the pandemic and holding as housing supplies starts tightening up.

Supply has been tighter than ever throughout

Agree 100%... I'm astonished that a large corporation trying to get into this business, would "bite off more than they could chew". Don't they have MBAs and financial models to assess this sort of thing?

> Don't they have MBAs and financial models to assess this sort of thing?

All models are wrong, some are useful.

Zillows were wrong, and apparently not useful.

Isn't Zillow more like a post-IPO startup than a bigcorp? If so, it makes complete sense that they might "bite off more than they could chew," (e.g. Pets.com) a lot of startups end that way.

They're not amazon/google big but they're not small. They have tons of employees and billions in cash.

If MBAs and financial models can predict slowdowns, we won't have them at all. If anything ML models will exacerbate the situation IMO and they probably relied on them too much and bought more than they should. Of course what I said is also a projection (without even an ML model), so that is not accurate either :)

The models don't have to predict a slowdown. They just have to account for the total amount of risk Zillow is assuming.

Which should really just boil down to carrying costs vs future expected profits

Their risk model should really account for the possibility that housing prices go down. I mean, there were famously in 2008 banking firms whose models didn't even allow for that.

Yeah, throw your model at: "contractors took six months longer than expected to finish the kitchen"

Extrapolate that out a hundred thousand times and you get a sense of what they were trying to manage. How did they predict remodel costs? Pre-pandemic material costs and back-of-the-napkin labor estimates?

LOL. It’s kinda like estimating software!

It's worse. These people are relying on unskilled labor hired by contractors to fulfill requirements they dreamed up in a game of telephone.

Mobilizing professional contractors is very difficult unless you are the highest bidder. And even then, shit happens...a lot.

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