Zillow Group (ZG) announced in early November that it was suspending purchases of single-family homes for the rest of 2021. The company cited “home pricing unpredictability” and a “difficult labor and supply chain environment” as reasons for the suspension in their announcement. Zillow Offers, a subdivision of the company, had been speculatively investing in the residential real estate market even as the company was also providing real estate listing and internet home pricing services. Zillow Offers is one of several new iBuyers, or “instant” buyers, including Redfin, Opendoor, Offerpad, and others that have been increasingly participating in the residential housing market. iBuyers have gained increased popularity purchasing homes using internal pricing models since they have characteristically offered quicker closing times, flexible move-out timeline, and repair costs included.
But just how many homes have iBuyers been purchasing? A recent report from Zillow itself estimates that 15,028 homeowners used an iBuying service to sell their home, for a total of $5.3 billion in the second quarter of 2021 . According to the data, iBuyers represented 1.0% of the national market, and an even more significant share of the market in several cities including Phoenix, AZ (5.7%), Atlanta, GA (5.3%), and Charlotte, NC (5.3%). The data for Portland, OR and Seattle, WA — markets in the Washington Trust Bank footprint — observed iBuyer market share of 2.3% and 0.5%, respectively. Unsurprisingly, iBuyers are not the only investors participating, and speculating, in the residential housing market. A September report from Redfin states that real estate investors collectively bought 18.2% of homes that were purchased in the third quarter of 2021 (totaling $63.6 billion, or 90,215 homes) , up from 16.1% of homes ($58.8 billion or 81,969 homes) in the second quarter.
The impact of iBuyers to the residential real estate market impact is difficult to discern. According to Zillow, “iBuyers are not house flippers”. A key difference between a flipper and a real estate investor is that an investor likely has a long-term buy and hold strategy, converting a purchased home to a long-term rental. An investor operating in this way takes available housing inventory out of the market and exacerbates the (low) supply problem observed in the market this year. Typically, iBuyers don’t look for distressed properties that need a ton of work. Instead, iBuyers argue they are simply offering liquidity to single-family homeowners who are looking to sell. That said, iBuyers are clearly operating as house flippers, looking to quickly return purchased homes back to the market at higher prices. In this scenario, the impact of iBuyers to the market and to available housing inventory should be minimal. However, should price of real estate prices fall, the impact to the market could be significant if iBuyers choose to liquidate inventory faster into a declining market, which could potentially flood the market with supply and exacerbate price declines.
The speculative residential real estate purchasing and pricing model for Zillow Group (ZG) clearly did not work as expected in the second half of 2021. However, it is difficult to ignore the growing impact that iBuyers and investors are having in the residential real estate market. As noted in a previous blog post , the housing market has been very hot this year, with low inventory and supply leading to increased bidding activity and higher prices. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index reported a 19.5% year-over-year increase as of the end of September 2021 . iBuyers and investors have arguably contributed to the strong increase in home prices, although their models are not yet perfected. An open question remains, however: is it possible to have confidence in the accuracy, independence, and objectivity of real estate listing platforms and internet home pricing services like Zillow and Redfin, when they are also actively participating in the residential real estate market and seeking to profit on higher prices? Only time will tell.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Nick is a Vice President and Portfolio Manager for Washington Trust Bank’s Wealth Management & Advisory Services. He offers our clients the expertise to analyze portfolios and unique assets to ensure that they are suitable for meeting our clients’ goals and needs. Nick partners with our Relationship Managers to provide continual analysis to ensure that these customized portfolio solutions maintain the balance between risk and growth in order to ensure continued success in meeting the clients’ goals.