According to the calendar, daylight savings is in our rear view mirror and Thanksgiving is less than two weeks away, but the 60 degree November temperatures sure have us confused. Let’s all keep our fingers crossed for a good winter that reduces our drought concerns heading into next year. In this month’s update we will investigate the local housing market, discuss inflationary pressures in rental real estate, unpack the reasons behind real estate giant Zillow’s fall from grace, and peek inside the newly signed infrastructure bill. But first, the headlines.
October Jobs Report - The U.S. Economy added 531,000 jobs in October, representing a sharp uptick from September’s disappointing numbers, while the unemployment rate fell to a new pandemic-era low of 4.6%. Both numbers exceeded analyst expectations and marked signs of encouragement for an economy that’s been hit hard by labor shortages and inflation over the past year. Critically, the beaten down leisure and hospitality sectors led the way with 2.4 million of the jobs lost reclaimed in 2021. Let’s hope the recovery continues as we head into the holiday season.
Weekly Jobless Claims - Weekly jobless claim numbers were released a day early this week due to Veterans Day, and with that report came renewed enthusiasm for a recovering labor market. Weekly claims totaled 267,000, and despite being slightly higher than expected, represented an improvement over the prior week and a new pandemic-era low. Continuing claims came in at 2.16 million, which was up slightly, but well below the 2.24 million we saw just a few weeks ago. Locally, we saw 1,214 new filings which represents a modest increase over last week’s figures, but are roughly half of the totals we experienced at this time last year. We remain over 4 million jobs below our pre-pandemic levels, but things continue to improve.
Infrastructure Bill Passes - Last Friday, congress passed a $1.2 trillion dollar infrastructure package. The bipartisan plan includes $110 billion for roads and bridges, $39 billion to modernize public transit, $65 billion to improve the country’s broadband infrastructure, $42 billion to support airports and seaports, $120 billion to rebuild the electrical grid and water infrastructure, and nearly $30 billion for environmental remediation and electric vehicles among other things. While rebuilding infrastructure is clearly a win for all Americans, this package shouldn’t be confused with President Biden’s “Build Back Better Plan”. That $1.75 trillion proposal contains several housing initiatives including investments in affordable housing, down payment assistance, and doesn’t increase capital gains or eliminate 1031 exchanges. Our friends at the NAR are keeping a close eye on that legislation and we will keep you posted on any developments.
Zillow’s Ends iBuyer Program
Back in 2018, when real estate data giant Zillow announced they would begin buying homes, the real estate industry took notice. More recently, we’ve seen concerns from industry professionals regarding how the company plans to use their treasure trove of consumer and market data to make their iBuyer business work. Fast forward to last week and everyone is confused because “Zillow Offers” is no more.
On October 18th, 2021, Zillow announced that they were pressing pause on future home purchases. At the time it made some sense. After a meteoric rise in home prices, perhaps their data was warning them about a possible pullback in U.S. home values? Well, it appears the problems ran deeper than that because just two turbulent weeks later, they pulled the plug on the entire operation and announced plans to sell off roughly 7,000 homes and to lay off 25% of their workforce. That is quite the shift in a very short period of time, so what happened?
Forecasting isn’t easy
In a call with shareholders, CEO Rich Burton indicated that the company was “fundamentally unable to predict the future pricing of homes to a level of accuracy that makes this a safe business to be in” adding that “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.”
Those statements certainly appear accurate as an analysis by Business Insider uncovered that of the nearly 1,000 homes currently listed by Zillow, a whopping 64% were listed below the price Zillow paid to purchase them. In Phoenix, 93% of Zillow owned listings were underwater. In other major markets like Houston, Dallas and Minneapolis-St Paul, they stand to lose money on a majority of their listings. Evidently their algorithms were unable to account for the complex array of variables required to model something as complex as buy-sell decisions in the U.S. housing market.
Outside factors are impacting house flipping
It appears that Zillow was also not immune to many of the issues facing the U.S. economy as a whole. Jeremy Wacksman, Zillow’s chief operating officer said “We’re operating within a labor and supply constrained economy inside a competitive real estate market, especially in the construction, renovation and closing spaces....We have not been exempt from these market and capacity issues and we now have an operations backlog for renovations and closings.”
This also rings true as even the small time house flipper has watched inflationary pressures erode their margins over the past year. After all, the same cost pressures impacting homebuilders exist for renovation projects. Ultimately, it appears the company has been a victim of its own ambitious growth after conceding it had been overpaying for homes and estimating it’s losses near $1 billion.
What happens now?
The company has already started to offload their inventory, announcing the sale of 2,000 homes in 20 markets to New York based investment firm Pretium Partners, LLC on Wednesday. Meanwhile, Zillow Group shares (Class A) have fallen off a cliff since eclipsing the $200/share mark in mid February and currently trade in the low $60s. The company certainly has a profitable business model overall and isn’t without other streams of revenue, but they will definitely need to reassess their future after unwinding their iBuying mess.
Is this the end of iBuying?
Not likely. In the immediate aftermath, former iBuying competitors such as Redfin, Offerpad and Opendoor all reaffirmed their commitment to the business model. However, not everyone is convinced those companies should be so optimistic. Independent real estate analyst Mike Delprete claims all iBuyers were paying over market value in 2021. That is not great news for a tight margin business that faces potential pitfalls in the form of rising interest rates or cooling demand for housing. The future is of course unknown, but we will watch closely as those companies either expand their market share or we discover that the problems at Zillow were just the tip of the iceberg.
Utah Real Estate Market
If you look at a graph of median sold prices for single family homes in Salt Lake, Utah, and Davis counties, you’ll need to look all the way back to April/May of 2020 to find a significant decline. During the pandemic induced hysteria of early 2020, the median sold price fell about $7500 over a two month period. This month, values again declined, but by a paltry 0.4% and those results can more likely be attributed to the general slowdown we see in the winter months as opposed to a market at its peak. Overall, economists do not see this market as a bubble, and despite a declining number of transactions, home values are still hitting records in several submarkets. Time will tell what impact rising interest rates will have, but for now, the status quo remains.
Median Sold Price
Monthly Change: Down 0.4%
Monthly Change: Down 3.9%
Average # of Active Listings
Monthly Change: Down 9.9%
* all graphs/data are for single family homes in Salt Lake, Utah and Davis Counties.
Inflation in Real Estate - If you follow this newsletter (or economic news in general) then you’ve probably heard about the impacts of inflation and labor shortages. Unfortunately, rental real estate isn’t immune to these pressures and everything from appliances and capital improvements (including parts and supplies) to vendor hourly rates is getting more expensive. It’s understandable as vendors must pay more to hire workers due to the labor shortage and respond with higher rates as their costs for parts and materials climb due to increased transportation costs on items manufactured overseas. Our response to this will be to avoid turnover (your biggest bill) when possible and to aggressively increase rents to market rates at renewal. We will watch things closely, but anticipate everything from insurance to property taxes to become more expensive in the new year.
Slow Moving Rental Assistance - According to the U.S. Department of Treasury, under 25% of the $46.5 billion in rental assistance authorized by Congress, has moved through the state's coffers and into the hands of struggling landlords and tenants. With as many as 8.4 million tenants behind on rent (3.6 million of which are likely to face eviction within two months), let’s hope rapid progress can be made. Fortunately, Utah has their act together for the most part but this is simply a problem that shouldn’t exist.
Multifamily Construction Boom - A research brief from investment brokerage Marcus and Millichap shows multifamily construction is surging. Permits to build apartment buildings soared 15% in August to the highest levels since 2015 as cities add density to combat housing shortages. In 2022, multifamily completions are set to hit a 40-year high and will supply housing for those individuals who are priced out of homeownership by surging single family home values.