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Zillow to stop flipping homes, loses more than $550M, lays off 25% of staff (marketwatch.com)
589 points by swatkat 24 days ago | hide | past | favorite | 458 comments

The previous thread on this, from earlier today:

Zillow seeks to sell 7k homes for $2.8B after flipping halt - https://news.ycombinator.com/item?id=29081118 - Nov 2021 (521 comments)

It seems the current article adds significant new information, so we won't treat it as a follow-up (or dupe).

Crazy. I recently sold a condo to Opendoor for significantly more than I would have even thought to list it for. When I negotiated with Opendoor after their initial offer, I pointed out a recently sold condo (days before, in similar condition, layout and finishes) in the same complex that sold for much higher than Opendoor offered. Within hours Opendoor came back matching that same selling price. The kicker? It was a unit that Zillow bought.

The algorithms are fooling themselves... Opendoor matches Zillow who matches Opendoor and that's how you get ever increasing offers.

Edit: oh, and now Zillow has that unit on the market, priced 14% lower than they paid for it, after 3 price cuts so far.

Edit 2: Phoenix/Scottsdale AZ market

Very much like the $5000 books on Amazon where the algorithms are anticipating flipping an existing listing. Congrats on winning this round! The next step might be interesting which would be to go back and re-purchase the Condo once the price corrects to the 'real' price and bank the difference.

I have read this article and the one before it and it sounds very much like some folks who fell in love with their own idea and got early feedback that it was "working", went all in and never checked to see if it was still working.

The lesson should have been, "When you perturb an emergent system, never assume that the current state is the new steady state."

The most interesting thing for me back when I was in college was a discussion on of the professors on feedback systems gave on LA's freeway systems. There are three major interconnected freeways, 405, 110, and 10 which at the time formed a triangle. Now there is the 105 which cuts off the tip so perhaps a smaller triangle. The professor shared a paper that tracked "brake waves" which were aggressive braking maneuvers that would "propagate" backwards on crowded freeways. The paper showed that at the right time of day, an aggressive braking on any of these three segments could result in your own braking wave to "lap around" and hit you again. Sort of a ringing of the system.

This sort of effect can be present in any system that isn't centrally organized but is instead a result of the interactions within the system. Buying and selling real estate is such a system, especially when you are a 'market maker' in that system.

There are a lot of papers on how HFT trading algorithms interfere (both constructively and destructively) with each other on wall street exchanges. Just interesting stuff in my opinion.

I knew about the brake wave back in 1980, as I could see it on I405 on my way home from work. Due to a curve in the highway, I could see about 3 miles ahead. The wave heading towards me was pretty obvious.

I found I could "break" the wave by letting a gap grow in front of me that would absorb the wave, and I wouldn't have to brake to a stop (and so my clutch would last longer).

It never occurred to me to write a paper about it :-)

A good example of why allowing for stress tolerance can make a system more efficient in the long run.

>letting a gap grow in front of me

How do you prevent someone from just filling the gap? If it's large enough to absorb the wave, someone will fill it just out of spite.

That's what I thought too until I started practicing this. Probably 75% of the time no one comes into the lane. It takes some practice to find the correct gap size.

Besides saving your clutch, you can do this type of brake-early maneuver at stoplights. Decelerating early and coasting at a lower speed means you don't have to stop and can increase your gas mileage significantly.

I do it for stop signs, too, so I only have to stop once. Especially if it is uphill.

I sometimes do what the gp said - let a gap grow in front of me if I'm in stop-and-drive traffic and get annoyed when someone selfishly rushes to fill the gap in front of me only to have to break 60 seconds later.

On further reflection, that's not necessarily selfishness, more that they don't understand what I am trying to do, but there's no way to communicate complex information car to car on a highway.

I started a job in Fresno in 2013, driving up from LA on Sunday and back down on Friday.

Bluetooth had started to become standard in all cars, and as I was working on a train project, the idea occurred that if we could link all the freeway cars in series, and treat it as one long train, then I would essentially just have to steer, and we all would avoid brake-waves.

One car only needs to be able to talk to the one car in front of and the one car behind itself.

Sometimes they would. But most of the time, they didn't.

"by letting a gap grow in front of me that would absorb the wave" would cause the freeway to carry fewer cars if everyone does it. My oldest one used to argue with me on this point when I asked him to keep a bigger gap from the car in the front for safety reasons.

But it could arguably increase the throughput (easier to on and off).

Which is better: more vehicles on the freeway at lower average speeds - or fewer, faster ones?

According to analysis from engineers, or Esther from a guy I used to work with who studied break waves for the state transportation board, less cars with larger gaps is better. That's why you see semaphores on highway entering ramps sometimes, ie 101 around SV or certain European big city inner highways.

This is a problem that can probably be solved someday with self driving cars collaborating to make highways huge coordinated conveyor belts.

Actually, this is a problem that is already solved by smart motorways in the UK (Europe too maybe?). They have a variable speed limit that dynamically changes according to traffic that stop brake waves happening.

Do you not have them in the US?

If my experience with smart motorways is anything to go by they seem to increase brake waves because there are often times that speeds get reduced significantly for arbitrary reasons that not everyone chooses to follow. You then get larger closing speeds which causes people to slam on the brakes.

Additionally the removal of hard shoulders is just dangerous.

Not only do we not have them, but I don't think I've ever read a freeway speed limit sign at all.

> I don't think I've ever read a freeway speed limit sign at all

Lol, why adopt the UK's variable speed limit when we have already de-facto reinvented the Autobahn....

Seattle adjusts the speed limit on one of their highways down to 45 or 35 during rush hour which increases the throughput as the cars can be closer together. Not sure if that has been picked up by other cities.

You should read about the "Fundamental diagram of traffic flow" and it's corresponding diagram. It's very well explained and shows that throughput can increase when having fewer cars on the road

Not if they all go faster. The human induced delay is the problem. Plus it causes accidents, which really slows down the system.

Ever since driving an electric car, I have come to believe that a gas-throttle car’s laggy response during stop and go traffic may be responsible for the elasticity of the delay propagation. From zero, a piston pumper goes through a complicated series of windups which seems like days compared to an electric motor.

Throttles have only become drive by wire over the last 15 years, prior to that it was cable actuated and was instantaneous. Like a lawnmower. One could argue carburetor cars were even (a fraction of a second) more responsive.

Also if you WOT a modern car you get the instant response without the ecu calculating pedal angle, comparing to accelerator history, humidity factors etc etc but kiss fuel efficiency bye bye. There are mods and tunes that reprogram the fuel map to cut out this processing time

I also drive a big turbo family sedan and am used to saying 2 Mississippi before the engine pulls at full boar

Though drive-by-wire throttles absolutely do modify and potentially hold back your throttle input for reasons of both economy, comfort and enforced driveline sympathy, there is also an inherent response difference between petrol and electric engines and also slop in the driveline system. That difference varies on the engine and transmission type.

Unfortunately I cannot find an easy good reference on what exactly that difference is quantifiably. Also many of the Electric cars right now are higher end even sporty vehicles, and more likely to have a throttle mapping that is more direct.

Brake waves happen because people brake harder than they accelerate afterwards. If you have enough following distance to brake gently, then hit the gas hard afterwards, and if everyone did this, then the waves would never appear.

Traffic fascinated me - please post a link to that paper

I will see if I can find it, not all papers published in the 80's are online. (and I just looked the professor is emeritus at USC now but still around so I'll send him the question too)

Okay, so I'm pretty sure it was done by G.F. Newell (UC Berkeley) I haven't found the paper we discussed in '82 but he went on to publish a 3 part description of traffic dynamics called "A simplified theory of kinetic waves in highway traffic" and reading through the abstracts for those it covers the same territory we were discussing in the systems class I was taking at the time.

Does this help?


A simplified theory of kinematic waves in highway traffic, part I: General theory



A simplified theory of kinematic waves in highway traffic, part II: Queueing at freeway bottlenecks

So Dr. Kuehl reminded me that he didn't teach me Linear Systems, he was teaching Electromagnetics at the time. (And no I don't know how I could confuse the two)

I would really appreciate it

yes please do find that paper (or the name of the professor)!

I believe the paper's author was Newell, but the USC professor was Dr. Kuehl (Dr. Cool :-). He was teaching Linear Systems when I was there and always had some really great "real world" applications of the stuff we were learning.

Appreciate the effort

Your comment on traffic reminded me of this article I read a long time ago about how to clear up “traffic waves”: http://trafficwaves.org/trafexp.html

Can you recommend a few of those hot papers? I would love to read about that more.

Yea this is super interesting

This is an interesting lesson in algo trading run wild. Roughly, house prices have a fundamental ceiling, and it is determined by the size of the monthly payment that banks will allow the typical homebuyer to assume when approving a loan.

If Zillow was the only iBuyer in a particular market, then that ceiling would likely have held, as all other non-zillow sales would still be operating under the loan approval constraint, and that would get reflected in the comps. But in a market with multiple ibuyers, none of which are capital constrained, it would make sense that they run up the prices against each other, past what the local homebuyers can afford.

Not sure how much that actually played a role here. But could be fun to do some back of the napkin math to see if that was the case in some of these markets.

> house prices have a fundamental ceiling, and it is determined by the size of the monthly payment that banks will allow the typical homebuyer to assume when approving a loan.

In the more irrationally-hot markets, why assume that housing is even being purchased on a mortgage by your average home-buyer, rather than being purchased cash-in-hand by a private or corporate investor looking to park wealth they've already generated? (Even if that isn't the majority of houses in those markets, the sales like that that do happen would still have an impact on property values in the affected neighbourhoods.)

Because the real estate sector is like 30-40 trillion. 2007 was the result of a massive infusion of debt by unsophisticated retail "investors" who bid prices up far higher than even their rental value. Lending standards dont allow this today.

If big institutional money is going to cause a frenzy it would need to be irrational money managers that somehow clear their purchases through a panel and none of them say anything. Some point out that blackrock is on the other side of this zillow unloading but they have trillions in assets and only 60 billion in real estate. This is the largest money manager in the world and thats all the exposure they have.

According to this article[1], large investment companies accounted to 16.1% of all single family home sales in the US in Q2. I'm not an analyst. But, I would think that would be plenty of extra demand to influence the price?

Perhaps. Unlike in 2008 though, those buyers aren’t typically hoping to sell those houses for a short term profit, most of those investors are hoping to turn them into rent income. This could easily distort prices, and have pernicious social effects, but might not be an asset bubble. After all, if those investors manage to actually charge enough rent to make a profit, is the asset really over priced then?

Investment companies are far less likely to lead a speculative bubble than retail buyers. They are professional investors who go through a valuation process. They have also always been part of the market.

History indicates the opposite. The largest speculative bubbles in history are typically driven by professional investors or high-net-worth individuals, not retail buyers.

Your fund managers make their money in short term win or lose. So they really do not have option to just sit on money, but have to look someplace to invest. Even if it doesn't work out in long term.

Where is this data coming from? Thats simply not true. The dot com bubble, housing bubble, crypto bubbles were all retail.

Where is this data coming from? Almost nothing you said is true or perhaps you don't actually understand what retail traders are. Retail traders, essentially by definition, do not have sufficient capital to cause large asset bubbles. Once an individual's net worth exceeds a threshold (generally enough to where their purchases or sales affect the spreads and liquidity of the underlying market) they are not considered "retail" by definition.

Even now, with retail being the most powerful they've ever been in human history, they might be able to squeeze a single, small or mid cap equity (GME being the most famous example) but they cannot move sectors of markets, much less create a generalized bubble in ANY asset class.

Crypto 2017 is the only "bubble" which you might claim was retail-driven (even then, you'd need to provide evidence for such a claim), and even that had institutional money such as Grayscale, high-net-worth speculators, and algotrading from high-net-worth speculators driving the bubble. Not to mention that was a tiny bubble relative to any equity market bubbles.

It's well-known Tech bubble 2001 was driven by investment banks. It's even more well known that the 2008 bubble was driven by investment banks, hedge funds, and derivatives trading. The current $2.5T+ market cap crypto bubble has been formed by large institutional buyers, high net worth individuals, and corporations pumping money.

Dutch Tulips, South Sea Trading Company stocks, 90s Japan were all from institutions or high-net-worth individuals (nobles, royalty, corporations, etc) as well. Your post really couldn't be further away from reality. The historic bond bubbles have all been inflated by institutions and governments. Making a claim that even one bubble, much less "most" bubbles are caused by retail, is an outrageous claim which requires extraordinary evidence that you would need to provide.

Im sorry but everything you wrote is just incorrect. The notion that retail cannot and has not caused bubbles in the past is asinine and your explanations of past bubbles are just factually wrong. Anyone in 2001 remembers their barber telling them which tech stocks they were invested in. The housing market was clear cut retail debt in 2007. And the entire crypto thing is retail. Blackrock is not invested in Bitcoin. You sound so confident but are just so wrong.

You need to read your last sentence out loud, to yourself, while looking in the mirror. You gave... an anecdote of a barber as proof? 2001 was caused by investment banks, venture capitalists, and changes in overnight repo lending. Not some folks each with an extra twenty grand chatting with his barber.

You're embarrassing yourself at this point between the barber and stating housing was "clear cut retail debt" in 2007 when it was actually a trillion dollar derivatives market that caused the bubble/crash, significantly driven by predatory/abusive from the mortgage lending side? Where do you think retail got all the money for the houses? "the entire crypto _thing_ is retail" uh, no, it's not. Tesla bought over a billion in bitcoin earlier this year, and large investment banks opened crypto desks early this year. And bringing up companies like Blackrock(?) which I didn't mention, oh my you are all over the place. Grayscale is not Blackrock... Can you present any evidence at all that retail has caused historical asset bubbles?

Sorry, you're just straight making things up and have a very poor or nonexistent understanding of markets. I won't waste my time here any longer.

Well you’re very dramatic and passionate but still very incorrect. The underlying housing market rise and collapse was from retail speculation, period. Sure they borrowed from banks but they still did the borrowing and actions. And who cares what the derivatives did in terms of diagnosing the underlying cause which was retail speculation. Wall street had a hand in causing the severity of the collapse theres no doubt about that, but they didnt drive the foundational bubble directly, only indirectly. The point is retail stupidity causes foundational bubbles. Derivatives made things worse but they were...derivatives, they're called that for a reason dimwit. And who cares about relatively small tesla position and “crypto trading desks” which have no permanent exposure. Thats absolutely nothing in the 2 trillion retail crypto environment. Crypto is retail driven regardless if its a big or small investor. Its not proper institutions buying. Please get real on this because you sound like a clown. I think part of the issue is you cant distinguish between retail and institutions. Retail doesnt become institutional just because they have a lot of cash/assets, rich people are still retail unless its a formal family office of which most people do not have (and even then Id say it more of a formality and still retail).

>Retail doesnt become institutional just because they have a lot of cash/assets, rich people are still retail


No, you're wrong on this and basically every single other statement you made. High net worth individuals are typically considered separate from retail traders, and yes, just because they have a lot of cash/assets. Part of the reason I kept saying [institutions OR high-net-worth individuals]. I didn't think that was such a challenging concept.

> Derivatives made things worse but they were...derivatives, they're called that for a reason dimwit.

>Please get real on this because you sound like a clown.

Real classy. Well at least I know now you were here just to be pompous and find a way to broadcast your lack of understanding of the market.

Institutional investment in single family housing stock is brand new. Less than a decade old.

Nevertheless they are not buying houses for emotional reasons, but for the income stream.

FYI, the reason this is happening is that interest rates are so low that people are desperate for yield, and rental yield fits the bill.

There are a lot of benefits:

- professionally managed properties. Most small time landlords are incompetent -- the horror stories you see about landlords being petty or vindictive is from the small time landlord, not the professional manager.

- lower rental prices for properties people want to own. Institutional investors can move funds more quickly to increase rental stock where it is most in demand. Here, too, the yield will fall, which is another way of saying lower rents.

Moreover despite the moral panic by journalists that ordinary households are being priced out, this doesn't actually happen because most institutional investors operate in unconstrained areas, where home prices track construction costs, at most with a small delay. In these areas, an increase in renter demand will result in more property built much more quickly if the institutional investors participate. This actually drives down prices over the long term by increasing supply.

However in constrained areas, this would drive up prices for SFHs. But I thought people weren't supposed to buy SFHs in constrained areas - and institutional investors have been in the multi-unit market for over a century.

> home prices track construction costs

But construction costs track home price so this doesn't prevent an unbounded faster than inflation growth.

Yes, the correlation is not necessarily causation, but we can add some other data points -- for example the size of new construction has been steadily growing at roughly 2%, which does not suggest any kind of odd explosion in house size as a result of the price going up. Of course ultimately, ability to pay determines the price of housing and also house size.


> Because the real estate sector is like 30-40 trillion. 2007 was the result of a massive infusion of debt by unsophisticated retail "investors" who bid prices up far higher than even their rental value. Lending standards dont allow this today.


2007 was the end of a long road, paved by unsophisticated "money managers" and doubly unsophisticated "bank regulators" and even more unsophisticated "politicians" since WW2.

There are people buying houses for more than their rental value right now where I live. Because there's one crime-ridden trailer park maintained on the freeway nearby to make them all within a certain distance of a "disadvantaged zone" and thus every former manufacturing country factory boss looking to move to the US only has to lose $400-$500 dollars a month to buy his way to the top of the green card list.

What is this green card prioritization mechanism you allude to?

EB-5 investor visas

> Under regulations ... an EB-5 investor would need to invest ... a minimum of $1 million normally or $500,000 in economically disadvantaged areas...

> You'll need to plan on having your money tied up in the business for several years. When you first get your green card, your permanent resident status will be conditional for two years. During the 90-day period before the end of the two-year conditional residency, you'll need to submit a petition to remove the conditions—to show you invested the required amount and created ten jobs. These two years and government processing times result in your money being parked until you finally get your unconditional permanent residency.


Edit: Not OP, just guessing

That's the one.

So practically it's pretty cheap to get yourself to the top of the list for permanent residency. All you have to do is buy a couple of $500k houses, rent them for whatever rent you can get for them, claim you created 10 jobs by hiring maintenance guys and landscapers and whatever else to maintain them, and then when you've got your paper from the US government you can turn around and sell them for what you paid for them (or even a little less, who cares, you bought your American residency).

The rules were changed from the original law to not only allow properties in economically disadvantaged areas but near them.

As I said, that's why there's a trailer park which resembles some "third world" country slums right on the freeway in the wealthier north Dallas suburbs where I live. All of those realtors selling rental houses to Chinese factory bosses, Russian mobsters' children, South American cartel finance guys, etc need them to be near the trailer park to qualify for the program. Similarly, via a ridiculous string of foot paths and bike lanes, Hudson Yards in NYC was determined to be economically disadvantage due to its proximity to Harlem, so they could also sell apartments that no one else wanted to Chinese factory bosses, children of Russian mobsters, South American cartel finance guys, etc.

If the current value of something is over a "fundamental ceiling" it means that it's already inflated. Why would an investor park their wealth in such an asset?

A large part of the "foreign ownership" plaguing west-coast cities like Vancouver and Seattle is capital flight from China. In this case, real estate has the valuable property of being harder for a foreign government (who happens to be the government to which the homeowner is subject) to confiscate+liquidate than other assets, so said government will prioritize softer targets. Real estate as an investment class here is acting like a club on a car steering wheel—de-prioritizing theft, rather than inhibiting it.

Sometimes there's just no good alternative. And real estate has less strict AML/KYC laws than other asset classes so we have some shady foreign money coming in.

> Sometimes there's just no good alternative.

You can always just stick your money in an ETF.

Which may not be a good alternative.

Well, you can also put your money into short-selling strategies, if you think stuff is overvalued.

(Of course, taxes and regulations complicated this discussion.)

Of course, taxes and regulations complicated this discussion.

It doesn't complicate the discussion, it is the discussion. Basically the only reason foreign investors are buying real estate in North America is because of issues directly related to regulations and taxes.

P/E ratios of much of the S&P500 would indicate prices/values far over the fundamental value, yet investors continue to flock to large-cap equities in droves.

It's a bubble but it's hard to fight it. US runs a trade deficit vs other nations meaning the trade surplus nations have too many dollars which they send into the financial markets of the US. They most likely buy international companies that have a presence in their own country.

Not the same thing though. The ceiling here is about affordability, not the value of the asset. A house is a need for the individual buyer, not an investment.

That isn't true, even if it's not the majority, a significant number homes are purchased as rental/investment properties.

Why not buy in on Ponzi schemes? It can work out great for you if you get the timing right!

The iBuyers[0] are also capable of accidentally cornering a small market to weird consequences. When that happens, prices can temporarily spike and buyers can decide to defer their purchase/move until prices come down more.

This is particularly pernicious because while there is a ton of housing, very few actual units in a city are ever on the market at once, making it easier for a well capitalized buyer to corner. My small city (pop ~1mil) only has 638 units for sale according to Zillow, which is pretty small all considered.

0 - What an unfortunate name we’ve settled on. Reminds me of the era where every cheap infomercial product had to ape Apple naming conventions.

They do have a 'natural' ceiling, but with bold enough policy there is no ceiling in practice. Prices could still rise significantly with the use of negative interest rate mortgages (which exist in Europe), or simply direct financial subsidy to buyers (e.g. the UK's "help to buy" scheme), while maintaining reasonable monthly payments.

I spent a lot of time doing quant models for financial products. Two lessons:

- It's easy to get wrong. If you see a lot of opportunity all the time, it's your model that's wrong, not the market. Very trivial things can mess up your model, like not understanding what the input data means.

- Good trades are hard to get, common rule of thumb that your boss will tell you. Someone selling a house too cheaply? Either there's lots of other buyers or there's something about the house that you didn't think of.

I remember seeing an FX volatility model that almost never traded. It always said "the market is right, plus minus costs". Now and again it would ding and we'd carefully try to get it done in the market, you wouldn't do like Zillow and surprise all the sellers with a massive payday.

I also wrote an arbitrage bot from Bitstamp to MtGox once. I looked at it, didn't turn it on. Percentage wise it was a massive arb, but you couldn't see this in the raw numbers: credit risk on one of the legs. It just shows you that you still need to understand how things actually work. The model is only a calculator for quantifying opportunities that you understand.

This is perhaps the oddest thing about this story. Zillow must have run into several situations where they were paying more than what's sensible, and their staff must have reported this? Surely at the start of an algo buying program, you are vigilant to evidence that the program is wrong?

> Percentage wise it was a massive arb, but you couldn't see this in the raw numbers...

Counterparty risk, that is where the profit came from. I did the same thing, but went into it knowing what the exposure was and how to mitigate it: don't leave crypto in an exchange's hot wallet any longer than it takes to execute a trade and take profit only on exchanges that you could legally pursue in the event that they fail to execute a USD transfer. I also anticipated the debanking that followed... as far as I know I'm still blacklisted by one bank and two money transfer services. What I didn't anticipate was how many exchanges would get hacked and what that would look like to anybody who aggregated the transactions: I get cold called by actual financial institutions a few times a year, always looking to bulk up their dark pools - they somehow have it in their heads that I'm sitting on billions of dollars in BTC. They likely don't have enough of the puzzle to put together the fact that arbitrage doesn't take much when you only need three confirmation blocks - USD wire transfers were the bottleneck.

> arbitrage bot from Bitstamp to MtGox once

The issue with that arbitrage is that it was always one-sided. If you're arbing 2 equivalent markets (e.g. name trading on two different US exchanges), you'd expect to buy and sell on both markets in equal amounts, on average.

Bitstamp vs Mt Gox arb required traders to always buy BTC on Mt Gox and sell on Bitstamp (which is a strong indicator of cp risk). This makes inventory management very difficult - especially towards the end of Mt Gox where fund withdrawal times were of the order of months.

My favorite story of algorithmic pricing gone mad was discovered by a postdoc in my grad school lab, leading to an out of print book being listed on Amazon for over $23 million: https://www.michaeleisen.org/blog/?p=358

I worked on software that did algorithmic pricing. It was a race to the bottom because some bozo wanted to be on the first page of sellers. So they’d price it one penny under the lowest price. The next seller would match it. Before you knew it, the product was worth dollars or cents. We also had people do it on purpose (we called it price bombing), but that was easy to negate since we filtered out competitors with low ratings. But there went that bozo, price matching and beating the price by a penny…

It was madness trying to code around people not thinking about their effects on the market and still turn a profit. Spoiler: we never did turn a profit on bozo powered listings, because at some point, it’s better to free the inventory space instead of waiting for the bozo to sell their items and let the price climb back up over the course of months or years.

Why does pricing competitively to appear in the front page earn the label “bozo”? Should they prioritise the effects on the market ahead of their own profits or goals?

It sounds like a really interesting story that’s missing a few steps due to space - it’d make a great blog post in detail!

I think it is probably a great illustration of how merchants actually think. The idealized vision of a market induces a seller to act as you say, in reality there is probably a lot of indirect collusion, where people don't undercut each other too much, to not "damage the market", even without explicitly communicating with each other.

There has to be a floor. This is the point where no one is making any money, ever. You can sell below the floor when you’re just trying to make some inventory space because the things you can replace that space with is more profitable. But “bozos” were people who would irrationally price one penny less, even below the floor. Once a couple of them got in the same listing, the value of the item would drop pretty slowly over the course of days or weeks. Especially if their inventory was in the 10-40 range (yeah, we had a way to guess other people’s inventory) and the velocity of the item was 1-2 per week. With the value of the item dropping by a penny every day, we could work out how long we had. Sometimes we would just outright buy their entire inventory just to get rid of them and get the price under control for high value items. People pricing competitively above the floor was fun to write software for. It was the irrational actors that could seriously damage things for everyone.

Now most used books on Amazon cost 1 cent, with $10 shipping costs, because that's the default sort

They make a killing on that shipping too, you’re paying retail rates for shipping, but you better believe they have contracts with DHL, USPS, etc. that is well below retail cost.

I feel pretty smart because I immediately found that same book on eBay for only $8 million

Textbook arbitrage - congrats on the fortune

Unfortunately, I have a feeling that the bid-ask spread on that book is approximately $23 million.

So that’s why I couldn’t flip it

How do you know it was a textbook?

Whenever I see items like that, all I can think is embezzlement or tax evasion - but then again you'd think they would do that on less unique items (like $1200 for playstations).

I actually have that book, bought when it was first published, so long before the Amazon story.

This is great. Thanks for posting.

I don't know how many people remember the Lean Startup movement and Steve Blank's book "Four Steps to the Epiphany" which is about how to take one's product hypotheses and rigorously validate them before scaling up. But somewhere there's a side note that basically said, "If we end up in another bubble, ignore all of this, because in a bubble being careful and capital-efficient isn't a great strategy."

I think about that a lot these days given the absolute oceans of capital sloshing around. I'm glad you got a piece of it! But this is a really weird way to redistribute excess wealth.

I suspect the 'AI software' running these companies is using linear regression to predict housing prices and one of the inputs is the price of similar houses nearby.

I recall in one of the previous crashes it turned out a firm had a model that couldn't handle homes going down in value. A linear model is superior to that.

This is basically how human-lead appraisals work in most markets.

There was a Kaggle Competition in case you missed it. At least here you can see what kind of features they are using and what models people employed. See https://www.kaggle.com/c/zillow-prize-1

Zillow Offers team was isolated from the Zestimate team. They didn't share algorithms.

AFAIK this is false; Offers began transacting at the Zestimate price in several markets earlier this year

Could be stale information. I talked to them a while back. Still, transacting at the Zestimate price doesn't mean they're privy to the Zestimate algorithms.

What could possibly go wrong with that approach? :-)

In fairness, I would think humans include nearby home prices as one of their parameters as well.

Human/realtor appraisals are often very poor. They will take 3-4 nearby & similar homes and basically add/subtract the differences from the home they are comparing. Then they basically just average the adjusted sale prices. They might add a bit onto that price since prices go up over time.

So this has some obvious issues: * Areas without a ton of very similar houses that have also sold recently will basically have no 'comps' to use. * It's really easy to keep identifying differences (pros/cons) until the adjusted prices equal each other but it's hard to know if all of the meaningful differences have actually been identified. * It gives average homes and average buyers a huge advantage. This model assumes that the housing market is hot but not hot enough that someone will pay 10-15% more for some specific feature. Anything unique to a home/property is only going to be worth a fraction of the time & money it would cost to add. Anything super common (kitchen remodel, finished basement, etc.) can actually add 100% or more of it's cost to the houses value because the buyer is paying with 5x or more leverage so paying a bit extra to have it included. This is also why it's often better to fix a few things as the seller than give a discount on the sale price - the buyer will often pay a premium to get things move-in ready since it doesn't impact their monthly costs significantly.

A Broker Price Opinion (BPO) is typically set by appraisal, comparable sales and comparable listings. Depending on how cookie cutter the neighborhood is, there are many different levels of "appraisal" from drive by photos to a deep inspection.

lol ... this infact is the sample problem which Andrew Ng explains in his famous Machine Learning course on Coursera!

Wait, can you elaborate? I’m sincerely interested in going over that material.

should move to xgboost.

Maybe some reinforcement learning algorithm running as well, where the maximum reward is winning the bid. Hence the algorithm just goes and lays waste on other bidders. Gotta get that infinite reward!

I doubt RL is involved. That would be soooo risky.

Bidding algorithms can model the price of winning the auction, you can maximize profit without fancy RL

Madness.. Its not like such a feedback loop hasn't been encountered before in systems. I like this example: https://www.michaeleisen.org/blog/?p=358

TBF - wasn't the Phoenix metro up almost 40% in one year?

After a 14% cut, that would still be an absurd YoY increase (I think still the largest single year increase in a major metro in the US on record?).

I get that Zillow is losing 14% - but the market is not yet even back to normal appreciation - let alone "crashing".

Here is the case shiller index for Phoenix - it is absolutely wild since 2020!


One thing I don’t understand is that many people who buy houses in Phoenix believe in Global Warming getting worse in the short term (source: lived in Phoenix for a year, considered buying a house there, and spoke with many folks who just moved or were about to move).

Have you read "The Water Knife" by Paolo Bacigalupi? Mostly set in Phoenix when the water has run out.


Hot and dry is not that bad from a global warming standpoint. Evaporative cooling is very effective and efficient so it's actually less energy intensive heating in colder locations. The plentiful amount of space and days of sun makes solar energy very practical. The nights can get pretty cold so it means that certain evening hours are actually very comfortable.

Except for drought problems.

Tail end of the graph: looks like the graph approaching 2006.

14% after 3 price cuts. I wonder how long it has been on the market and if more cutting is going to happen before it sells.

If local real estate agents and developers can manage to manipulate the "Zestimate", and I'm pretty sure they are at least trying, you can imagine the payoff.

Developers could certainly do it.

A single padded first sale on a new development would be factored into offers. Classic wash trade.

I wonder how much of our economy, that alternately humming along and collapsing around us, is simply algorithms talking to eachother? How much economic movement is being generated by arbitrage ( https://www.ecomcrew.com/amazon-arbitrage/ ) ? How much online traffic is generated by advertising bots interacting with each-other? How much are housing prices being juiced by algorithms?

I think the environmental crisis is already effecting the supply chain, I don't think we humans can see it yet. Are we Soviet Russia circa 1931, pretending like everything is going swimmingly while an enormous amount of us are about to starve?

Can you elaborate on what makes you think environmental factors are affecting the supply chain?

Well, first of all, an unequal food supply chain has generated survival diets close to civilization, spreading new diseases to the entire world (hi Covid!, next door to bird flu).

Second, there are droughts popping up all around the world, our fisheries are collapsing but our supply chain might be absorbing the problems of it until suddenly it doesn't anymore.

That is my deep worry -- that we are seeing the start of a generalized system collapse.

That doesn't sound like an algorithm mistake, just like a policy to match sales nearby at the same price because of the assumption that prices will just keep going up coupled with the stupidity of not tracking what you've bought so far - yikes! Oh, on second thought, I guess it could be algo as that previously bought nearby condo could have been priced using some crazy algorithm.

"Prices will keep going up" was a key belief that triggered the 2008 real estate crash. They keep going up until they don't, and then the house-flippers who weren't careful enough and the lenders that approved "liar loans" get burned badly.

> the lenders that approved "liar loans" get burned badly.

the lenders "knew" of the bad loans, but because these lenders are going to on-sell the loan to some other investor, they didn't care as they profit off the sale, rather than the loan repayments. It's a moral hazard.

The loans were also bundled into opaque securities and the “low-risk” tranches were rated and priced for a typical rate of uncorrelated defaults, not a widespread crash.

The rating agencies would rate just about everything https://www.cnbc.com/id/27321998

Official #1: Btw (by the way) that deal is ridiculous. Official #2: I know right...model def (definitely) does not capture half the risk. Official #1: We should not be rating it. Official #2: We rate every deal. It could be structured by cows and we would rate it.

And the parts that were so junky they couldn't be rated got remixed into another deal to get rated.

It stems from the idea that multiple junk bonds can be combined together to form a higher quality bond than otherwise. This is actually not true, but was the unquestioned underlying assumption.

Its definitely wrong to make this assumption, but the people who got paid are all incentivized to turn a blind eye.

> multiple junk bonds can be combined together to form a higher quality bond than otherwise.

Well it's obviously true. Take your good bond to get paid first from 1000 junk bonds. Then your 999 worse bonds get paid last. Even during the mortgage crisis, not all of the junk bonds returned zero. So there is some number of junk bonds that can be combined into a good bond and worse bonds.

The problem is that people estimated that number to be lower than it actually was. It was a quantitative failure.

They keep going up until they don't, and then the Fed quantitatively eases the losses. Sounds like Zillow's problem was they didn't sink enough money into their scheme.

> Opendoor matches Zillow who matches Opendoor and that's how you get ever increasing offers.

Or Opendoor buys a house from themselves at way over market to trick Zillow into bankrupting itelf.

I've been noticing lots of "new lower price" emails from Zillow; I think the market has cooled off - but how much of it being hot was this investor competition?

price reductions are seasonal in real estate. Peak new listings are around Super Bowl Sunday and Labor Day. There are very few price reductions in that period. The best quality homes at attractive prices sell first. By late October, the total number of listings on the market starts to decline, and price reductions become common.

It's also the last rush of sales before things slow down for the holidays. There's also a chance that interest rates will be higher next year. That would bring home prices down.

A lot of people were jumping in with their rundown old houses asking rediculous (lose your ass) prices and I'm seeing them all revise as of late. This was seen mostly in rural areas--Im looking for a farm.

I saw quite a few houses that sold a few years prior for much lower prices. The disparity in estimated values and previous sales versus the list price was astronomical in most cases. The banks will happily give you a loan for whatever price so there is no check on the runaway prices except for your own personal knowledge of the historical market demand in an area.

I'm not sure I follow your logic; if you're concerned with buying a house now, then prices from years ago are irrelevant. You can speculate that prices have risen too quickly and that they'll revert back to their earlier level, but that's ultimately just speculation. Comparable sale prices from the past few months are the thing to look at, to determine an offer that's likely to be accepted.

One thing to keep in mind about list prices: if the sellers do a good job of estimating the current market price, then the house will sell quickly. If you're checking listings infrequently, there's going to be some sampling bias in the listings you see; overpriced houses that aren't selling will be disproportionately represented in active listings.

Gee, what could go wrong with over fitting incompressible models?

You think Zillow would have one person take 15 minutes to do a quick look at the offer prices first!

They could have charged a review fee to have an appraiser visit & make accurate price estimates & then let the homeowner keep the Zillow certified valuation label if they don't sell it to Zillow.

this is yahoo 2: electric marketing dot com bust.

it was purely about marketing driving up its own value via poorly considered metrics that invariably included positive reenforcement loops. eg, yahoo sells an ad for a company which sells ads on yahoo.

Some of those were even formally recognized as revenue trading agreements to show growth.

It's hard to tell if this is "tHe MaRkEt Is CoLlApSiNg" or just a Knight Capital 2.0. Leaning towards the latter.

Is Opendoor an MLS/appraiser that also got into the flipping market? It looks like they are just another MLS service but the article states "It will be interesting to see how Opendoor reacts."

I think it’s a bit like when Amazon bots would occasionally drive up the cost of some random book into the millions, except they managed to fool each other into actually buying the damned thing.

In addition to back testing models like this, it’s always worth running forward simulations of what would happen if some/most/all agents in the simulation shared your new strategy.

reminds me of some bots on amazon someone pointed out a while back. Basically the only two sellers of some obscure book are two bots with competing algorithms that keep slowly increasing the price.

Oh the new REITs playing the algro game. This is cute.

> ‘We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,’ CEO tells investors.

That's quite a statement. The head of a company with a privileged view of the US residential real estate sector says that the market is "unpredictable." Not the good kind of unpredictable where you can't figure out how heavy the money bags that get dropped at your door will be. No, it's the bad kind of unpredictability where you can... lose money.

Reading between the lines, I conclude that Zillow sees a major shakeout in real estate on the horizon. They've already been hit with losses and see a lot more where that came from. In an effort to get ahead of whatever is approaching, the company is making an abrupt exit from the home flipping business.

Zillow was founded in 2006, as the last US housing market bubble was furiously inflating. It has seen a complete cycle of boom/bust. If anybody knows the US residential real estate sector, it is Zillow.

Other commenters on this and the previous thread pointed out, sometimes with first-hand experience, that Zillow would vastly overpay them for their home. I think this is less to do with the housing market in general and more to do with their tech.

Zillow's iBuyer program hit the scene like a bull in a china shop. The real story is that they rushed into this space, had underdeveloped algorithms, overpaid for homes, and now the chickens are coming home to roost.

The housing market may or may not take a turn. But this Zillow story is about incompetency. It smells of some non tech person pitching an AI solution. No need to inspect these homes and neighborhoods, the AI will figure it out.

That sounds like one of the AI people I work with. Like, I know the signal I just fed to our data is a negative signal, why do we need to wait 6mo for the AI to “figure it out?”

(The negative signal was equivalent to an email hard bounce for an email marketing AI. Like, if that signal is there, the customer is gone forever)

This reliance on AI magically figuring things out is pretty annoying.

I say we give up on thriving for a better economic balance and just leave it to the faulty AI redistribute the dumb money sloshing around.

Overpaying for a house is not a problem in an appreciating housing market. If you overpaid for a house, just wait for its actual market value to catch up and voila, no loss.

The reason you fire-sale that house at loss, is because you believe market value is unlikely to catch up.

> Overpaying for a house is not a problem in an appreciating housing market. If you overpaid for a house, just wait for its actual market value to catch up and voila, no loss.

The price you pay when entering the housing market is substantial. It corresponds inversely to the capital you'll have later to do other things. If you pay $900k for the same house your neighbor paid $600k for, your neighbor has an extra $300k to work with over 30 years, which is significant.

But inflation being as high as it is today...that $300k will be worth much less over time, and you aren't saving it all at once if the down payments are the same.

That isn't even to mention selling at a loss or close to it if you have a pressing need, which will hurt your chances of getting into the next house.

Nitpick but the reason you fire-sale that house at loss is because you don't believe the market will catch up in your beneficial timeline. The housing market historically has a pretty slow appreciation rate, but one that is fairly predictable. Maybe Z sees the incoming rate hikes as a high volatility event?

Holding onto inventory is death. In auto and housing sales if you’re a dealership you’re leveraged in order to hold that inventory (paying interest on it, less friendly interest than you get as a government backed mortgage borrower) and you’re paying insurance and maintenance on that inventory. Vacant houses depreciate very quickly.

Yes, you validated my observation with that assessment. But my point was more towards the private consumer. I think we see a lot of speculation in the housing market now and historically it has been a long term hold investment.

> The reason you fire-sale that house at loss, is because you believe market value is unlikely to catch up.

it's a bit tautological - because the expectation of value not catching up is the definition of overpaying!

I’d be more inclined to believe this if it wasn’t painfully obvious how much Z was overpaying for homes in the last half year, especially when all the other iBuyers saw the market slow down and reduced their offers accordingly. Seems much more likely that we can take them at face value and Zillow’s forecasts were just bad.

Zillow hasn’t ever bought and sold homes (until now). That’s not their business.

Like 25 years ago I was writing software for financial traders back when trading was mostly done in open-outcry pits. What we had was very skilled human experts, so our systems were all basically supportive. Some larger rival, famous for their technology, thought they could do better by giving traders Newton-esque handheld computers that would receive new information via infrared networking. Then you didn't need smart traders, just monkeys who would do what the computer told them. Everybody was very impressed with all this high-tech gadgetry.

But one day we hit a period with high volatility, lots of price crashing and spiking. The handheld systems and the servers that drove them were too laggy to keep up, so the monkeys would get taken advantage of both on the way up and on the way down. It was a very expensive lesson for the execs who put too much reliance on the tech and not enough on the expert humans.

It seems so wild to me that not only are people making the same mistake, but at a much, much larger scale. Half a billion dollars lost. So far!

Won't be the last time

According to Forbes, Zillow has been buying homes since 2018:

> In April 2018, the company entered the fledgling on-demand home buying market (often referred to as ibuying) with a service called Zillow Offers. Prospective sellers in 11 markets (and growing) can go to the Zillow listing for their own home and ask for an offer. Within two days they’ll be sent a price derived from the Zestimate and other algorithms. Two local experts also provide input on each house, and if the seller likes the initial offer, a Zillow employee comes to inspect the property. (If a home is in poor condition the offer may be withdrawn or lowered.)


A counterpoint to your last statement is that if Zillow really knew residential real estate they wouldn’t have had such large losses this quarter.

It really calls into question their pricing algorithm, but I give them credit for actually trying to get into buying and selling properties.

When I use Zillow and check the Zestimate, for various properties, it seems to be super far off. If they used it for speculative property purchases, I can imagine that would go terribly wrong.

If you're interested in the method they use to calculate the Zestimate, one of their data scientists did an interview back in 2017 (before the home buying started) that talked about the factors involved.


I keep an eye on the real estate market around me, and the Zestimate is easily 50% too high a lot of the time.

Recently had an appraisal for refinance. The appraiser's estimate was <5% increase from the 16 months earlier when we purchased even though we bought during March 2020 at the height of uncertainty and at a substantial discount.

The reason? No comparable homes that were recently sold AND available via MLS (private sales are ignored). The rules for appraisals breakdown when there is no liquidity. At least Zillow still considered private sales. The Zestimate was much more correct than the "expert" appraiser.

It's unclear to me how much visibility Zillow really had, since, AFAIK, they don't have access to MLSs in the areas where they buy and sell.

I don't know the exact percentage of properties not in Zillow but in the MLS, but it is a very small amount. Zillow changed the game when it came to us non-Realtors(R) having access to housing price data. So much so, that some housing economist types have noted what appear to be permanent changes in months of active inventory (eg https://www.piggington.com, who analyzes San Diego's market)

I don't think it's hyperbole to say Zillow has more data on residential real estate than any other company in the US.

About that last point, Redfin has access to the regional MLSs. I imagine they have a more complete dataset.

My understanding is that Zillow relies on realtors to add their listings, so that means, maybe-it-happens, maybe-it-doesn't, entry errors, maybe-it's-updated, maybe-it's not...

Redfin also seems to have dramatically better pricing models, a better presentation, and an altogether better product.

Hard to believe they don’t have MLS access. The listings on Zillow go up essentially at the same time my realtor has gotten them through the MLS, so they must have an automated way of pulling the info…

Only realtors have access to the MLS but they can share those credentials with software products.

Source: worked on MLS ingesting software.

I question the wisdom of corporations house flipping. How can they evaluate an individual property and make the series of educated guesses about the co ability in various regions? How do they find and predict all the remodelling issues before they happen? How do they know that a particular house is worth messing with? I only know a few counties in Ohio where I would even attempt it because I know the areas very well.

If you could statistically trade houses people would have been doing it before we were born.

Your last sentence is really ironic given the article it is replying to. If Zillow really new the market so well, they wouldn't be in this position in the first place.

They were overpaying. Everyone knew it. Just outrageous quotes compared to even the other online companies buying up houses.

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.

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.

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.

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?

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

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.

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.


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.

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.

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.

A friend of mine had a really bizarre experience with Zillow’s ibuy. First, he sold right his condo through them right before the pandemic (Jan. 2020), but then, literally a week before his 90 day closing period was up, they pulled out, blaming public health orders [1] even though they would never be in his house and it was literally a matter of paperwork. They did this as a way to get out of their contracts and hedge their bets.

Flash forward eight or nine months, the housing market explodes and they triple down on their iBuys. My friend sells his home again, again with Zillow (I couldn’t believe he chose them either), and they offer him more than they did in Jan. 2020 (he sold sometime in 2021). Even with the extra mortgage payments he had to make, he still ended up making some money on the deal. Clearly, these companies were in over their heads, making bad decisions on algorithms and not doing real due diligence. The fact that they had an out 18 months ago and stopped doing this, only to triple down and lose $550m in a quarter is just staggering.

[1]: https://www.forbes.com/sites/brendarichardson/2020/03/28/zil...

I don't get Zillow's play here.

They were for a long time the de facto neutral party everyone used to look at houses. Great. Then they got into doing contracts apparently, still OK.

Then they started competing against people and overbidding everyone, at the height of what appears to be the biggest housing boom of my lifetime. This was not only apparently financially dangerous, but an act that puts them in a bad light, publicity wise.

I cannot think of how anyone thought this was an OK idea.

I think Zillow saw the numbers going up in the housing market and got FOMO.

It's crazy to think an institution like this would get FOMO, but I think what happened is in 2020 they saw housing prices go through the roof, thought to themselves "hey we have all of this data, we can make a quick buck here" and piled in only to now get burned.

They started ZO back in 2018. I think the bigger concern was the amount of growth and threat Opendoor presented them. There was a vision that they will fundamentally change the sector and make Zillow an equivalent of what the White Pages is to Google.

So yes it was FOMO, but not based on quickly appreciating real estate.

This is 100% it.

It makes sense there could have been internal shareholder/executive pressure to continue expanding into other aspects of housing markets to further entrench their positions against competitors, but hedging their bets backfired in some areas, and now is the retrospective time to cut their losses and refocus on their strengths.

> I cannot think of how anyone thought this was an OK idea.

I guess they assumed flipping houses would have more revenue and profits.

> I cannot think of how anyone thought this was an OK idea.

I imagine they felt the only way to prove how good their Zestimates are was to start acting on them.

And it's entirely possible that the problem is they have spent the last 10 years tweaking their Zestimate algos to make listing agents happy, increasing prices. Like, nobody sues you when your estimate is too high, but when you get it too low, get your legal counsel prepped: https://www.marketwatch.com/story/do-zillow-zestimates-misle...

All of the 'Owned by Zillow' listings here in the Miami area are _really_ shabby flips. They'll basically redo the kitchen and leave the rest of the property looking like garbage and then ask for a 15% markup.

Also they prioritize those listings now, with no way to filter them out, so when looking at houses I end up just scrolling past several pages to get to other listings that I actually want to see.

It's amazing that this whole scheme has made their traditional user experience worse at the same time.

I can't imagine having Zillow's financial resources and losing money in the Miami market, of all places. Dear god that place is hot (real estate and weather!).

We recently went through buying a Zillow owned house in Phoenix AZ and response and attitude from the selling agent and zillow was pathetic. They took 3 full days to send the signed contract after they told us we our offer was accepted.

Couldn't get the inspection done within first 9 days(inspection contingency is 10 days) of signing the contract and only got a response when we said we were going to cancel escrow. Got the inspection complete on the 10th day and there were so many issues with the house and repairs done that we felt it was not worth the negotiation to sort it out with Zillow and decided to back out. Not sure if this is a general trend but my agent was fed up and he said he will never deal with Zillow again. This was 3 weeks ago.

You get what you pay for.

I tried using a discount broker back in the day, my experience was similar to yours.

My agent was traditional and would get a standard 2.5% commission if I went through with the purchase.

Was the agent a Zillow employee?

The seller agent was a Zillow employee since the home is owned by Zillow. My agent was not a Zillow employee.

"The surprising exit, announced with pedestrian quarterly profits, thrashed shares in another rough trading session Tuesday, a day after an analyst said two-thirds of the homes it bought are underwater."


The fed chart shows almost hockey stick growth in housing prices this year. How can the Zillow properties be underwater, did they just massively overpay up-front?

Yes, yes they did. The vertical part of the hockey stick is EVERYWHERE. Homework: go on zillow and find the most depressing row house in urban Detroit/Cleveland/wherever with enough pricing history to have a graph. You will see that exact same line shape. Literally everything has doubled since around 2014. Completely bombed out crackhouses were a 300-500% ROI in that period. You couldn't lose money even if you set the structure on fire. The past year has eclipsed that though. Everything has gone up massively and for seemingly no reason.

For comparison, since 2014 the US population has increased 4%.

Also, people aren't moving from somewhere to fill up your town, go on a random city subreddit and you'll see a different local mythology to explain the prices. It's happening everywhere though. There's literally no significant area that's seeing an exodus with decreasing prices. Not California, not libruhl lockdown states, not Texas, it's happening everywhere.

> Everything has gone up massively and for seemingly no reason.

The reason is quite obvious. Just like bond values and yields are inversely correlated, mortgage rates and home values are inversely correlated. Here is a chart of the 30Y mortgage rate, it should explain everything.


Yes but it's a little more complicated than just rates. It's a multitude of factors including perceived worth, available cash, financing rules, supply, new construction costs, etc.

People need to be willing to sign their lives away to pay off houses, otherwise rates would also be strongly tied to the price of everything from cars to toothpaste (they are very loosely, but those things don't cost 3x what they did in 2014).

I wonder if Black Rock will fare better than Zillow. My understanding is that they are not planning to sell/flip, rather rent then and hold on them forever.

BlackRock entered the market as a landlord all the way back in 2011. They are fine. Not only that, they have real investment knowledge. Zillow and OpenDoor are a bunch of amateurs that thought they could turn "data scientists" into quant traders.

I am not an analyst but this is my armchair understanding of the market:

1. The construction of new homes was limited in late 2019 early 2020. This was due to covid and labor shortages and supply lines being blocked.

2. Demand for homes rose to an all time high. The people in big cities said: "Why quarantine with nothing to do in my Manhattan apartment when I can buy a house and sell it when the pandemic is over. House prices always go up so I'll make money"

3. Zillow, banks, etc saw the fed start printing money which was going to lead us into an all-time high inflation rate. Their inflation hedge was simple: shift all liquids into long term stable solid assets. For most of human history this has been housing (single family and rental properties). Zillow specifically got a massive credit line via taking advantage of "zero risk" money from the fed via their bank.

4. Zillow + banks + the middle and upper class families start buying homes at a record high. This compounds with the lack of new supply.

5. Foreign speculators move in and see the increase in property value. The common wisdom of "prices only go up for homes" has encouraged them to invest in these properties. I know some people who have been doing this. Foreign speculators are concentrating on some limited markets (USA, Canada, and Australia).

Now that most of our liquid assets have shifted into properties any fluctuation in property value would have interesting implications so there will now be a large interest in keeping home prices high.

The core problem: properties are only worth what people are willing to pay for them. Regardless of what has been going on with inflation or how much money you have put into flipping it. If no one will buy the home for 200k over assessment then you have to lower the price. This is slowly causing a large reversal in the market. I've been seeing homes steadily creep back to what inflation would account for in price delta.

Yes, Real Estate can be a really flawed inflation hedge, and the relationship between rental yields and interest rates can also deviate sharply from conventional wisdom. Here in Brazil, although inflation is typically in the 4-10% range per year, and although all the rental contracts are tied to inflation indices, you look at homebuilders, REITs, physical real-estate, and nothing has kept up for the last decade. And for as long as I remember, gross rental yields have been lower than the real yields on NTN-Bs - our equivalent of TIPS - which on the face of it doesn't make any sense.

>I've been seeing homes steadily creep back to what inflation would account for in price delta.

Do you have any data or more info about this? I think many of us young 'uns would just like some hope right about now.

Nothing scientific, just observing ~20 listings by my apartment (that I would love to live in some day).

I would however offer that if anyone can give me unfettered access the data of multiple MLSs I could generate some visualizations. I really really really want this data.

Just to pile on, I also would like access to that data.

That is a good chart, but this one answers your question:


Supply is going up.

Similarly housing starts are increasing drastically now that lumber has stabilized


Thanks. Definitely paints a contrast to 2009 when a lot more property was on the market.

> did they just massively overpay up-front?

That's the only possibility available as far as I can see. I recall seeing the housing stock they favored were all in the hottest US markets, so they're exposed to small fluctuations at the extreme end of the histogram. Otherwise the US median home price curve still looks like a boost phase ballistic missile track as of Q3 2021.

Zillow only got into this flipping game in 2018. They've never seen anything but rapid price growth. I will not be surprised when we learn the place was off the hook with buyers snapping up properties with no adults at the table.

There is always someone caught way over extended when markets move. This time one of them is named 'Zillow.' Expect a bunch of tedious 'insider' stories from Wired et al; wrecked hotel suites and orgies and $2e6 super cars. All the usual.

Well with only dos commas at least we know which way the doors will open on the super cars.

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