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Zillow Home-Flipping Algorithm Outbid Buyers, Now Faces Selling Houses At a Loss 180

An anonymous reader quotes a report from Bloomberg: Faced with the fastest-rising real estate prices in U.S. history, Zillow tweaked the algorithms that power its home-flipping operation to make higher offers. It ended up with so many winning bids that it had to stop making new offers on properties. Now, after buying more homes in the third quarter than it ever has before, the company is working through a backlog of houses that need to be fixed up and sold while facing an unpleasant reality: Slowing price appreciation means it will sell many homes at a loss.

Zillow put a record number of homes on the market in September, listing properties at the lowest markups since November 2018, according to research from YipitData. It also cut prices on nearly half of its U.S. listings in the third quarter, according to Yipit, signaling that its inventory was commanding prices lower than it expected. The shift has been on display in places such as Atlanta and Phoenix, two markets where home prices have been surging. Zillow's roughly 250 active listings in Phoenix are currently priced at 6% less, on average, than what the company paid for the homes. That amounts to a $29,000 discount on the typical property, according to data compiled by Mike DelPrete, a real estate tech strategist and scholar-in-residence at the University of Colorado Boulder. "Every key metric I've seen from Zillow over the past few months just doesn't make sense," DelPrete said. "It's like it's making decisions two to three months too late relative to the market."
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Zillow Home-Flipping Algorithm Outbid Buyers, Now Faces Selling Houses At a Loss

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  • by schwit1 ( 797399 ) on Friday October 29, 2021 @09:05AM (#61938511)

    Margin-Call [wikipedia.org]

  • Material cost (Score:5, Insightful)

    by Dan East ( 318230 ) on Friday October 29, 2021 @09:08AM (#61938523) Journal

    Material cost is also sky-high, so the cost of flipping is much higher right now. They may be better off sitting on them until it is more affordable to do the remodeling / flipping.

    • Re:Material cost (Score:5, Insightful)

      by AmiMoJo ( 196126 ) on Friday October 29, 2021 @09:21AM (#61938553) Homepage Journal

      Empty homes are a problem. They drag neighbourhoods down, are targets for crime and if they are empty because someone is waiting for the price to go up they deprive others of housing.

      Japan has a high tax on unoccupied homes to prevent this kind of thing. That's a good idea IMHO.

      • Re:Material cost (Score:5, Interesting)

        by DarkOx ( 621550 ) on Friday October 29, 2021 @09:48AM (#61938661) Journal

        There is already a huge "tax" on unused housing - try getting taking an insurance policy on one. Never mind all the maintenance and upkeep on them paying someone to go out do inspections, winterize etc.

        Until very recently not may individuals or business intentionally acquired residential real estate to leave vacant while they speculate on appreciations. Generally speaking the costs of ownership ate/eat any profits. There is lot of cost in the transaction too traditionally. Zillow saw a special opportunity there for themselves.

        If there is really structural legal issues to address here is rules that let banks off the hook for property taxes and reduce penalties for enforcement actions like the city has to come by and cut your three foot high grass for you. Yes I understand those legal exceptions exist to make underwriting easier by reducing the cost of ownership if the bank has to exercise their right to recover the collateral - Its a perfect example how 'helping people' by trying make home loans more affordable has unintended consequences. Rather than play tax games create more special carve outs and case - just treat ALL owners more equally.

      • by Holi ( 250190 )
        That's great but the problem is a lack of housing, not a shortage of occupants.
        • You seem to not realize that is the same problem. The lack of housing can be created by people or companies holding properties rather than selling them at market value in order to avoid the write-down. This means that that residence is not actually available.
      • by dargaud ( 518470 )
        Should residential houses / apartments be allowed to be owned by companies ? Discuss !
    • Re:Material cost (Score:5, Informative)

      by MachineShedFred ( 621896 ) on Friday October 29, 2021 @09:26AM (#61938567) Journal

      There's a cost to losing liquidity. If you have hundreds of millions tied up in real estate that takes at least 30 days to liquidate, you could end up in a real bind really fast depending on the debt structure behind those assets and assumptions made when taking on the debt, such as "we expect to have this flipped within 6 months to repay the bond, and thus have a huge balloon payment due in 6 months if we don't, that we won't be able to make without taking on more debt."

      This is how real estate developers find themselves leveraged out the ass.

      • by thaylin ( 555395 )

        I hope this does not affect my zillows 360 payment where they give me another 2% back after 60 days of closing on my house 60k over what everyone else offered me for it lol.

    • Re:Material cost (Score:5, Insightful)

      by e3m4n ( 947977 ) on Friday October 29, 2021 @09:35AM (#61938609)
      true but that is far from the reason for the rapid appreciation of home prices. Rising home costs is a very hidden and very real cause of poverty among the 50+ age groups. Among the 65+ is a very real danger. Governments love rising property values because they gain so much more tax revenue that way. However, unlike cars which depreciate, there is no limit to how bad property taxes can fuck over someone on a fixed income. Within 2 years time, houses on my street/neighborhood suddenly started selling for $100,000 more than they did 2 years ago. The PVA took these 10 sales, out of 321 homes, and decided to re-adjust everyones property nearly $100,000 higher. Thats a HUGE increase in monthly payments. For those in the 50+ age a few things are going on. 1) retirement is now approaching so people really need to squirrel away cash for that. 2) kids are now heading off to college so again, you are squirreling away for that as well. 3) Those in the 50+ age group are also more likely to be locked into their job/income in part because of reasons 1 & 2, but also because statistics show they are often overlooked for promotions or job hiring. This usually means your only increase in earnings, for the average w-2 employee, is static with the possible 1.2% annual pay increase for a 'cost of living' adjustment.

      In a perfect world, by the time you reach 65 your mortgage is paid off, and SS in conjunction with what you squirreled away will let you retire and live comfortably until you die. Two things threaten this like no other. 1) Inflation: When your spending power starts depleting because of rising cost of goods this grand plan comes under threat. 2) Rising property values outpacing inflation 50:1 threatens property taxes so extreme that by the time the mortgage is paid off the tax bill will be nearly that of the original mortgage, something not able to account for in a fixed income. The result? Mass homelessness among those now too old to re-enter the job market.

      Congratulations America, you've created the dystopian society Logan's Run whereby old people are killed off for the crime of being old.
      • by ranton ( 36917 )

        The result [of home prices and property taxes rising drastically]? Mass homelessness among those now too old to re-enter the job market.

        No, the result is someone selling their house for far more than it was worth when property taxes were lower. Then using that money to either buy or rent in a lower cost area, and pocketing the difference. It still isn't great that they cannot continue to live in the house where they built memories, but they aren't going to be homeless because of the issues you list.

        The homeowner only gets into trouble if they stay in their home too long and deplete their savings paying for increasing property taxes which do

    • Re:Material cost (Score:4, Insightful)

      by known_coward_69 ( 4151743 ) on Friday October 29, 2021 @10:10AM (#61938737)

      holding real estate is not like holding stocks. zillow has to pay property taxes and insurance on those homes along with maintenance costs

      in some towns the local code people might use this as an opportunity to force a property to have more work done to fully comply with codes or they won't allow the deed to be transferred

      • You're correct. And unlike stocks, houses rarely go to zero value.

        In fact, one of the interesting bits of homeowner insurance is that it should never cover the entire fair market value of the home. Much of that value, often is in the land it sits on. And the land rarely burns away, requires substantial repairs, nor is stolen, except by fraud.

        Yeah, if your house burns flat, the now-empty lot is still there. Waiting for a new home. And could be sold all by itself, if you wanted to move on.

        • Homeowner insurance should cover a lot more than the rebuild/replacement value of a home. Granted, not a lot can make land unbuildable but a sink hole in the right spot, landslide, etc. could maybe do it.

          But aside from rebuild costs, house insurance also covers the costs of everything inside - your clothes, appliances, etc. Some things insurance companies give fixed values to - a buddy lost maybe half of his house due to a fire, and computers were valued at $500 each w/o receipts/documentation, saltwate

        • by ranton ( 36917 )

          In fact, one of the interesting bits of homeowner insurance is that it should never cover the entire fair market value of the home. Much of that value, often is in the land it sits on. And the land rarely burns away, requires substantial repairs, nor is stolen, except by fraud.

          In most areas of the country, you still get homeowner insurance for a value similar to the resell value. This is because the cost to build a new home is generally higher than its resell value (not too different than a car). And in most of the country your lot value is less than a quarter of your home's value, so the resell price of the lot + home is close enough to just the replacement cost of the home.

          But if you live in an area where you have a $500k home on a $500k lot of land, you probably only need $600

    • They canâ(TM)t. They have cash tied up in the houses that they need

    • by quall ( 1441799 )

      It depends on taxes though. Spending 3k-4k/year on taxes is going to add up. They may pay more for materials, but if they just sit on a house then they might end up paying even more. If you are in the Snowbelt, then you are also probably paying for heating costs to prevent bursting pipes. I'd think it's unlikely that they've winterized each home.

  • by Retired Chemist ( 5039029 ) on Friday October 29, 2021 @09:11AM (#61938531)
    What this shows is that you can blame algorithms for your faults as much as you want, but the true control still lies with the people who tweak the parameters. All those social media companies should be held responsible for the actions, they control the algorithms that make the decisions. Not only GIGO, but also BIBO - bias in bias out.
  • by Joe_Dragon ( 2206452 ) on Friday October 29, 2021 @09:16AM (#61938539)

    the big speculation people needs to see an big loss from time to time.

    • by ranton ( 36917 ) on Friday October 29, 2021 @10:03AM (#61938713)

      Yes, this was absolutely a feel good story for me. Here you have one of the companies taking advantage of easy money from low interest rates to make homes less affordable, and actually paying a penalty for it. I'd bet these losses are really just slightly lowered profit from their overall behavior over the past couple years, but it's still good to see a little justice.

      • I'd bet these losses are really just slightly lowered profit from their overall behavior over the past couple years, but it's still good to see a little justice.

        6% loss is nothing compared to the gains in popular markets, even just this year alone.

  • by Freischutz ( 4776131 ) on Friday October 29, 2021 @09:19AM (#61938543)
    Well that serves them right. I always feel a surge of schadenfreude when the market jumps up and bites of these bid sniping algorithm traders in the nuts.
  • by monkeyxpress ( 4016725 ) on Friday October 29, 2021 @09:23AM (#61938557)

    I hope they end up holding the bag on this. Houses should be shelter, not a get rich quick scheme for leveraged speculators and people farmers. I don't stick money I can't lose into the share market/crypto, nor into investments that support modern slavery, but thanks to the banksters, I have no choice but to put the bulk of my income into their global leveraged housing ponzi rentier scheme.

    If some of the hordes of institutions/investors get their fingers burnt from the covid bubble, it might shake some of them out of the market and leave it to those who actually need houses to, you know, live in.

    • by NormalVisual ( 565491 ) on Friday October 29, 2021 @09:29AM (#61938579)

      I kinda hope they do as well. For me personally, the bubble has worked out well. We bought our house in late 2019, right before the bubble started getting out of hand, and our place has appreciated more than $100K since then. That made it trivially easy to refinance at a lower interest rate (from an already ridiculously low rate) and to get out from under the PMI on our loan. I have no interest in selling my home right now, but I will happily take the $400 cut in my mortgage that the refi got me as a result of all the instant imaginary equity I got in the last year and a half.

      • Except you wouldn't have been paying the extra $400 in the first place if housing hadn't become so unaffordable. That's the thing, they've tricked you into thinking the ponzi is a good thing by giving back part of what they've taken away.

        Also you're now screwed if you need/want to move to a bigger house (children etc), because the relative gap has increased significantly.

        The real beneficiaries are those who own multiple houses. But why should they get a special wealth infusion because a pandemic turns up? D

        • Except you wouldn't have been paying the extra $400 in the first place if housing hadn't become so unaffordable.

          Meh, not so much in our case. When we bought the place, we paid $235K for 4BR/2BA, about 2300 square feet with a brand-new steel roof, no HOA, and in a great neighborhood, so not particularly unaffordable for the size in this part of Florida. The current appraised value is an insane $340K+. The extra $400 we were paying came as a result of the PMI on the loan and the jump in property taxes (a

      • There is no profits in the home you live in, your house is a lifestyle expense. If you transact the house sometime in the future and it was net UP, the next home you buy is likely net UP and its a zero sum game. So unless you live on the street, or downsize, its a fake dream to profit off the house you live in. The only real cash benefit you got is the lower mortgage payment, or if you could, lower the mortgage duration (30->20yr etc) and keep the same monthly. Lowering the duration is the biggest sa
        • by ceoyoyo ( 59147 )

          Ah, but that fake dream is a powerful drug. Almost everybody I know insists they have to buy a house as quick as they can so they can "start paying their own mortgage instead of the landlord's." The bank is happy to approve enormous low interest loans, so there are bidding wars and inflating prices.

          I'll almost feel bad when interest rates rise and everyone defaults.

          • Im not sure what you mean by "I'll almost feel bad when interest rates rise and everyone defaults." - Its irrelevant where the rates go for a consumer, once you lock in your mortgage, its locked unless you foolish enough to use an ARM. As for the banks, once a mortgage is locked in, they dont hold that debt and serviced for 30/20/15yrs etc, mortgages are packed up like bundles of paper and sold off, ultimately being owned and backed by the US government through the Fannies. The fannies use the mortgage se
        • There is no profits in the home you live in, your house is a lifestyle expense.

          That depends on whether property values in your area are rising fast enough that the increase is greater than the cost of maintenance, which is in turn the product of a large number of factors. Lots of people complain about how rising property values have increased their taxes, those people can sell their house at a profit and move someplace more like the neighborhood they live in was when they moved into it.

    • Houses should be shelter, not a get rich quick scheme for leveraged speculators and people farmers.

      No disagreement that people should focus on buying houses for shelter. Investment gain, IMHO, should be second priority.

      On the other hand, there's value to what Zillow is doing. One of the biggest pains in buying a house is contingent sales: I'll by your house but I have to sell my house first. It totally gums up the works. It's worth a lot to have someone come in with a bunch of capital to buffer the transaction and eliminate contingent sales.

      I can also imagine it's a lot more efficient to have a company h

      • by endus ( 698588 )

        Whether having a company or professional flippers "clean up and refrubish" is "efficient" or not depends greatly on your definition of efficiency.

        If efficiency is defined as the speed at which the property gets refurbished then, yes, its efficient.

        If efficiency is defined as having even the most tangential relationship to providing quality housing to people at fair prices, it is the opposite of efficiency.

        My parents live in what has become a *highly* desirable suburb of Boston. The town is now a machine de

    • What will be required is a willingness to LET BUSINESSES FAIL.

      Capitalism, like evolution, benefits by weeding out the failures. Promoting concepts like "too big to fail"* is asinine political kick-the-can...sending it down the road for the future to deal with.
      Yes, letting the investment firms fail would have been agony, and true financial ruin for lots of people who didn't deserve it. But like forest fires, the more you postpone them, the worse they're ultimately going to get.
      Now we're 14 years down the

    • Historically, there have been two quite different activities called "flipping":
      1) buying distressed properties to fix up and resell, and
      2) buying because the market is going up.

      The first is socially and economically valuable, while the second is simply gambling, with the last flipper getting flopped. It's a manifestation of the "Greater Fool" theory, and the banks buying in caused the bubble fifteen years ago. [ok, they were forced to dip their toes in by the Clinton DOJ which threatened to prosecute them

  • by toddz ( 697874 ) on Friday October 29, 2021 @09:24AM (#61938563)
    Zillow should have never been allowed into the home buying business. They contributed nothing except driving up home prices.
    • Zillow should have never been allowed into the home buying business. They contributed nothing except driving up home prices.

      I disagree. If you've ever been involved in a contingent sale you know how stressful they are. Having a third party front the cash for a few months is incredibly valuable.

      I'd also be willing to pay something to have a company handle the clean up and renovate part, essentially being the general contractor and financer. I don't do that often enough to be very good at it and it's much easier to do when no one is living in the house. Having Zillow finance the operation makes life easier for the buyer and seller

  • Should be illegal (Score:5, Insightful)

    by sinij ( 911942 ) on Friday October 29, 2021 @09:30AM (#61938587)
    Speculation in a housing market should be illegal - it drives costs up for actual humans wanting housing.
    • Speculation in a housing market should be illegal - it drives costs up for actual humans wanting housing.

      The worst part is that normal owner occupiers must dump a huge proportion of their wealth (usually all of it) into this single 'asset class' and are further risk concentrated on a single house (i.e no market diversification). Its like an investor who just dump's their entire life earnings into shares in one company - with 10x leverage!

      But unlike Zillow and Blackrock, owner occupiers have no choice but to make this crazy bet because prices are so absurd.

    • Zillow was trying to do something other than speculation, which might have had some level of value-add maybe.

      I have ended up with a second condo in my building that sits vacant now because quotes for a remodel came in at double what I had budgeted. Our plan was to upgrade the new unit, move into it, finish some repairs on our unit that need to be done with it vacant, and sell it. I expected the process to take a year, but it looks like I will have two units or at least three years at the current pace.

      What I

      • I understand that materials cost pandemic spike has gone back down. But you might do what zillow could do - become a landlord and rent out the unused property. (probably pre-remodel, or be real strict on damage)

    • Speculation in a housing market should be illegal.

      Cool. What's the clear, objective difference between speculation and acting as a market maker (where you temporarily own the asset so you can decouple buyers from sellers and keep the market liquid)?

      Here's the thing: this is a good news story for everyone but Zillow investors. Net net, investors made a bet, lost, and now a bunch of people are buying houses subsidized by the investors. What a gift! And what it's going to do is teach the investors to be a bit more cautious as they discover the true value of t

  • people overbid everything to death buying it above even retail prices.
  • by rsilvergun ( 571051 ) on Friday October 29, 2021 @09:52AM (#61938675)
    Is why they were doing it. What they were doing was buying 10 homes with the last home being bought for 10 or 20% over market value so that the price of the remaining 9 homes would shoot up in response to the high price of the 10th home. There's a real estate agent who talked about it on tiktok because he's mad he can't get any inventory to sell. So Zillow uses the data from all the searching on their website figure out where to buy houses and then uses that to jack up home prices across the board.

    They're parasites. Soaking up money without providing any actual service or value. You can't have a free market when individual players have so much money they can directly manipulate the prices in the market like this.
    • Market manipulation is illegal in the securities markets (in theory), so why is it allowed in the homeowner market where, you know, people need homes for basic living?

      This is just Scalping in another form. Another self inserting middleman in it for money and no actual use otherwise.
    • They were doing it because they have more data and higher quality data on houses, historical home prices, and local taxes than just about any other company in the US and were hoping to leverage that advantage into the buying of selling of houses.

  • Zillow, and every other vulture capitalist entity, can bleed out until dead. That would benefit far more people.
  • I was listening to a Marketplace podcast the other morning, and apparently Zillow did not even have enough contractors lined up to make repairs on the houses that needed them. I'm trying to understand how OUTBIDDING other bidders and buying a house at $X and then immediately relisting it at $X + $Y even makes sense. In what real estate market to you think you can OUTBID everyone else and then magically find buyers to pay an even higher price than the inflated price you paid? I wish I had a job with gobs of

    • In what real estate market to you think you can OUTBID everyone else and then magically find buyers to pay an even higher price than the inflated price you paid?

      Home prices are increasing, due to increasing scarcity. And buying up all the available homes and then sitting on them increases it further. And paying above market value for some properties can increase the value of other properties near it. So it's not impossible to make money this way, it's merely a risk... one which I hope destroys them, since the consequences of this business model for literally everyone else are negative.

  • I bet if they did, they wouldn't have this problem. Wait, big data also.
  • Flippers should be penalized. All they do is drive up costs without providing any benefit. Their work is shoddy and will inevitably lead to the owners having to spend thousands to correct issues.

    The same with companies like Zillow which buy homes and deliberately keep them off the market to drive up costs.

    There should be a law which says all homes must be listed within 30 days of acquisition by a realtor or similar entity. No holding to keep inventory low.

  • So the relevance to Slashdot is that they used an algorithm to buy houses automatically?

    Yes?

    That's it?

    Really?

    Everything uses an algorithm these days, from the coffee machine that makes your mocha latte, to the company that manages your retirement account. From the battery management system that determines how much current to send to the motor in your Tesla, to the machines that sort your Amazon packages. From the sawmill that cuts the lumber for the extension you recently put in your house, to the machine

  • And likely quite a bit of non-artificial cluelessness in addition.

  • by jenningsthecat ( 1525947 ) on Friday October 29, 2021 @10:37AM (#61938815)

    I hope Zillow dies a hard death, along with all the other large rapacious companies that are making it impossible for both current and future generations to actually own homes. This 'great reset' mantra of "you will own nothing and you will be happy" needs a bullet through the brain, a stake through the heart, and a funeral pyre. Enough of this rental-only-leading-back-to-feudal-serfdom bullshit. If the elites want medieval, let's give them medieval - on our terms.

    • Patience! Another 30 to 50 years of this type of behavior and we'll all be fed up enough to do what we have to do.
  • How is this legal? (Score:5, Interesting)

    by thereddaikon ( 5795246 ) on Friday October 29, 2021 @11:04AM (#61938927)

    If TDameritrade did that to stocks the FTC would be on them in a minute. How can Zillow, who has an unfair information advantage on the market both facilitate the transactions but also bid themselves. It gives them outsized power in manipulating housing prices.

  • I've been saying for a bunch of years that zillow's sole purpose is for house-flippers, not people who want to buy a home (redfin works for that). They overvalue houses (using historical data, I looked at what they claimed my house in Chicago was worth when I had to sell it in '03, and they LIED, claiming it was worth 20% more (it wasn't, my real estate agent had done her due dilligence), and it claims the house I own now is 25% larger than the deed says it is.

    I'm *so* sorry that they're losing money, after

  • It's realty, so it doesn't take that-sophisticated a mind to realize that "slowing growth" is not the same as "prices falling". When price increases go from 1.5% monthly to 1.3%, that's slowing growth. It's not taking a bath though.

    And what are Zillow's total sale prices, not asking? Across all sales, not just those in one single city? One city does not tell the story of Zillow's balance sheet.

    I'm even surprised to see Bloomberg published this article at all, it's not only inaccurate, it's also poorly researched.

  • I hope this whole trend of corporations scooping up single-family homes dies and goes away. It's rent-seeking behavior at it's worst and needs to stop.
  • These jackasses want to the the Ticketmaster Scalpers of people's homes. Fuck 'em. I hope they descend into bankruptcy and then somebody pees on their dinner.

  • by NicknamesAreStupid ( 1040118 ) on Friday October 29, 2021 @02:26PM (#61939549)
    This Zillow news is just an example of how homeownership is diverging from owner occupancy. More properties are being owned by people who do not reside in them. Some of this comes from wealthy people who own multiple homes and seldom reside in any. Mostly, there are people, often 'foreigners', who buy homes through investment vehicles like Section 8 properties, which rent out the homes. Traditionally, rental properties are undesirable in a neighborhood because renters do not invest in their upkeep, and landlords minimize maintenance costs. Some homeowners' associates prohibit them. A single-family home is not like an apartment building, where standard configurations, higher densities, and common resources make maintenance more cost-effective. While buying single-family homes on speculation may not cause a bubble, it will expand the gap between halves and have-nots. Eventually, most of the country becomes owned by people who do not live there. That is the essence of dystopia.

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