The real estate industry was thrust into the spotlight last week, when Zillow, the digital property listing company, announced that it would be shuttering “Zillow Offers,” its “iBuying” division. In a dire earnings report, the company announced that it stood to lose hundreds of millions of dollars as a result of the division’s collapse and would be forced to lay off a quarter of its total workforce (A majority of the layoffs will be related to Offers, according to the company). It was an unceremonious end to what had been a large force in the housing industry. Prior to its downfall, Zillow was the 2nd largest “iBuyer” on the market and had been on a voracious house-buying binge for months.
Unsurprisingly, the average person with marginal knowledge of the real estate industry was likely left wondering what iBuying actually is and why it would be worth hundreds of millions of dollars in the first place.
What is iBuying?
The basic idea behind iBuying is pretty simple: Companies deploy algorithms and other automated technology to swiftly assess and procure houses and then flip them for a profit. The benefit for house sellers is, according to iBuyer PR, a simplified, expedited selling process. The benefit for the iBuyer, meanwhile, is hopefully a shitload of money.
Companies like Zillow use something called an AVM, short for “automated valuation models.” Just as they sound, these are algorithms used to help market analysts decide whether a property is worth buying and at what price it should be purchased. iBuying isn’t just a matter of algorithms, though. Companies have entire divisions — like Zillow Offers — where teams of people work on forecasting and procurement strategy. In Zillow’s case, the Offers division was tasked with collecting a whole assortment of data points to help it decide which properties it wanted to buy. According to the company, this included stuff like macroeconomic data, Bureau of Labour statistics, and real estate and transaction data at the local and regional levels.
Mike DelPrete, a real estate tech strategist and scholar-in-residence at the University of Colorado-Boulder, told Gizmodo that iBuyers try to “smartly combine people and technology,” though — as you can see with Zillow — that doesn’t always work out so well.
“They’re spending tens of millions of dollars a year on technology. Big data science team. Lots of data, lots of smart people, machine learning, artificial technology,” said DelPrete, of the biggest iBuyer on the market, Opendoor. All of this data and analysis is devoted to understanding house pricing in the near and long term: “It’s not just ‘what is a home worth today?’ it’s what do we need to offer to get this home today, what’s it going to be worth.”
How Zillow fucked up
But too much faith in algorithms is a recipe for disaster. In Zillow’s case, such models ran into trouble when they met with the fluctuations of the volatile, often unpredictable housing market.
“The challenge we faced in Zillow Offers was the ability to accurately forecast the future price of inventory three to six months out, in a market where there were larger and more rapid changes in home values than ever before,” said a Zillow spokesperson, in a statement provided to Gizmodo.
In other words, Zillow’s algorithms weren’t all they were cracked up to be. A big part of the problem is that, for much of its iBuying career, Zillow was operating from a position of loss — losing millions and millions of dollars but hoping to eventually make the money back and then some. However, it didn’t work out that way. Essentially, the company overpaid for the houses they were buying while also over-projecting the price at which they would be able to sell them in several months’ time.
“Zillow really effed it up in a way that other iBuyers haven’t,” said DelPrete, adding that the company had put “too much of a reliance on an algorithm.”
Historically speaking, real estate isn’t a business that changes much and that’s what makes iBuying — which has brought with it a lot of swift, industry-wide transformations — such an odd phenomenon, says DelPrete.
“iBuying has grown really fast,” he said, explaining that the industry’s market share has doubled pretty much every year since it began around 2017. The exception to that growth was 2020 when the onset of Covid-19 across the country understandably hobbled home-buying trends. However, now that the pandemic is subsiding, iBuying is rocketing back into action and breaking its previous records. As of Q3 of this year, they now make up approximately 1.75 per cent of the overall housing market nationwide, up from 1 per cent last quarter, DelPrete says.
While that might not sound like a lot, the reality of iBuying’s growth is more readily apparent in specific communities, where their share of the market may hover around 5 to 6 per cent of total transactions. Most companies are fairly transparent about their procurements, publishing regular reports on how many houses they have been buying, at what prices, and where. And the numbers are accelerating at an even faster rate for specific communities. The new “high water mark” is in Phoenix, Arizona, where, as of August, iBuyers accounted for 10 per cent of the total market, said DelPrete.
A White Hot Market
Understandably, a lot of people are concerned about what kind of effect iBuyers might be having on the housing market and, if you listen to the stories told by average home-buyers and real estate agents, it doesn’t sound particularly good.
The housing market has been totally fucking nuts this year — with words like “crazy,” “surging,” and “bubble” thrown around to capture the out-of-control way in which prices are soaring and properties are being scarfed up left, right, and centre. The National Association of Realtors published numbers in April that showed the average price of a single-family home had climbed to an all-time high. Apparent “bidding wars” between potential buyers have routinely caused houses to sell for thousands of dollars over their initial asking price. On Reddit forums, you can find anxious screeds comparing the current climate to the one that existed prior to the 2007 crash.
Amidst all this madness, would-be home-buyers are also being pitted against iBuyers and other institutional investors — like banks and investment firms — which are buying properties not out of necessity but for profit. In particular, it is in large metro areas — where iBuyers have most frequently congregated — that has seen some of the most explosive growth in home prices. Stories from real estate agents show your average home-seeker getting edged out from deal after deal, as large companies swoop in with all-cash offers to grab properties.
iBuyers are also often turning around and selling such properties not to new families but to Wall Street firms, who then convert them into rental properties from which they can collect more profitable monthly rent checks.
“They can and do sell them directly to institutional investors — single-family rental companies like Invitation Homes and American Homes for Rent,” said DelPrete. “So, the iBuyers are hoovering up all these houses and selling them directly to Wall Street to rent them back out to Americans — not giving everyday Americans the chance to buy these houses on the open market.”
iBuyers: the Real Estate Apex Predator
While iBuyers may make up a very small part of the overall market, that doesn’t stop them from being a formidable competitor for the average family who just wants to buy a single-family house but doesn’t have, say, $US600,000 (A$822,796) in cash lying around to outbid the local investment firm.
“I do think iBuyers impact the bigger market,” said DelPrete. “They’ll say, ‘Oh, we’re so small. We’re just 1 per cent of the total market.’ Bullshit,” he said. “They have to impact the market. They’re buying and selling hundreds of houses in any one market at any period of time. They could be re-listing those houses for sale at any price they want,” he said, adding that such firms don’t have to operate within the same constraints that normal buyers do.
“A pure housing market is buyers and sellers connecting directly to each other. What we have with iBuying is a corporate, for-profit middleman, getting right in the middle of that transaction,” he went on.
All of it inspires a lot of questions. “What are they doing to pricing? What are they doing to the supply side, [and] inventory? All of those questions are still valid, even if they’re [a] small [part of the overall market],” DelPrete said.