Home Real Estate These bubbly housing markets look like busts—and they just sank Redfin’s flipping business

These bubbly housing markets look like busts—and they just sank Redfin’s flipping business

by Ozva Admin

Redfin is throwing in the towel.

On Wednesday, Redfin told shareholders that you plan to close your home purchase program. In doing so, it will lay off 862 employees, or 13% of its workforce.

What’s going on? Weather housing correction in progress has hit the whole country, it is particularly strong in bubbling real estate markets like Phoenix and Las Vegas. Those markets have gone straight from the pandemic real estate boom to the pandemic real estate bust. They are also the places where iBuyers like Redfin and Opendoor have significant exposure.

These so-called iBuyer programs do not work like normal flippers. Instead of creating value through home renovations, they use algorithms to make quick offers directly to sellers, as the service reduces hassle for sellers. As long as iBuyers can quickly resell the house, everything should be fine. However, if home prices start to fall, things can get worse very quickly.

That downstage scenarioof course, it’s here.

“We notice right away when there are fewer people on our website and fewer people signing up for tours… We’re sitting on $350 million in homes for sale that we bought with our own money, or worse yet, bought with borrowed money. And what we always told investors is that we would protect our balance sheet by acting quickly. We do not have hope as a strategy. We immediately started marking things up.” Redfin CEO Glenn Kelman recently said Fortune.

By the end of January 2023, Redfin expects to reduce its housing portfolio to $85 million. And by the end of the second quarter of 2023, all of your houses should be sold.

Nationally, the lagged Case-Shiller index shows that US home prices fell 1.3% between June and August. However, in the prosperous cities of the pandemic, that house price correction is much larger according to the Burns home value indexhome values ​​in Phoenix have already fallen 10% from their 2022 peak.

For one thing, iBuyers are affected by housing busts in markets like Phoenix. On the other hand, iBuyers are also helping to accelerate real estate busts in markets like Phoenix.

“These iBuyers adjust [home] prices are almost like clockwork if a house doesn’t sell. So, in the submarkets where they have a presence, they also set prices faster than in previous cycles,” Rick Palacios Jr.head of research at John Burns Real Estate Consulting, tells Fortune.

Redfin CEO Glenn Kelman agrees that iBuyers, along with other investors who entered the market during the boom, they’re helping home prices fall faster this time.

“When the shiitake mushrooms hit the fan, [investors] wants to go out first. The way to do this is to find out where the lowest sale is and be 2% below that. And if it doesn’t sell in the first weekend, move it down [again]Kelman recently said. Fortune. “My view is that because builders and iBuyers account for more inventory, that leads to a faster correction.”

not long after the The Federal Reserve entered inflation-fighting mode, the inventory of unsold homes began to rise across the country. As of October, inventory levels are up to 33% year over year base. However, in bubbly markets where iBuyers are exposed, inventory growth is much more pronounced. In Phoenix, active listings for sale on realtor.com are up to 173% year over year; markets like Austin and Salt Lake City are on the rise 136% Y 117%respectively.

For most sellers, there’s a psychological aspect to home prices: They don’t want to lower their asking price unless the economy forces them to. This is not how algorithmically executed iBuyer programs work. They want to get out first and aren’t afraid to cut aggressively to do so.

look no further than this three bedroom house in las vegas. In April, Redfin bought the house for $600,000. Just a few weeks later, Redfin put it up for sale at $624,900. But it was too late: the Las Vegas real estate market had already moved correction mode. Fast-forward to November, and the listing has just been pulled from the market after a series of price cuts that brought its listing price to $524,900.

Even after all these aggressive price cuts, iBuyers still have a lot of inventory to unload in bubbling markets. Only in Phoenix Laboratories Park estimates, iBuyers still own about $1 billion worth of units.

“Their [iBuyers] Sales transactions alone accounted for nearly 10% of all Phoenix sales activity in September. As pressure builds for them to exit their positions, they are likely to become more aggressive in their pricing; this will continue a downward spiral until prices reach a point where demand comes in to stabilize it,” jason lewrisco-founder of Parcl Labs, has Fortune. “All the conditions are there for a clash [in Phoenix].”

Why are markets like Phoenix and Las Vegas moving so fast? Moody’s Analytics Chief Economist Mark Zandi notes separate fundamentals. Nationally, Moody’s calculates, the typical US housing market is “overvalued” by about 23%. However, the firm says that markets such as Phoenix and Las Vegas are “overvalued” by more than 50%. For comparison, Phoenix and Las Vegas were “overvalued” by 51% and 54% respectively, just as the housing bubble peaked in 2006.

Heading forward Zandi expects US house prices to decline about 10% from peak to trough. But in Markets “significantly overvalued” like Phoenix, he estimates that prices will fall between 15% and 20%. And if a recession hits, he says, that drop in “significantly overvalued” markets could be between 25% and 30%. (You can find Moody’s forecast for 322 housing markets here.)

Ironically, Redfin’s iBuyer issues could do Zillow executives feel smart, or at least lucky.

Back in November Zillow announced it would stop its failed iBuyer program— which was notoriously overpaying for homes — and sell its remaining homes through early 2022. Turns out, Zillow sold its homes at the peak of the Pandemic real estate boom. Weather Zillow lost a lot of moneyI could have lost a lot more.

Hungry for more housing data? Follow me on Twitter at @NewsLambert.

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