Makings of a Burst?
An incredible amount of new real estate firms were birthed from the housing collapse of the late 00’. In the mid 10’s others got into the game following various models to fix and flip or buy and hold as rental of single family homes. A dramatic burst fueled by speculation building and lending was followed by something new that has the potential to burst.
On the fix and flip side, Zillow got in the game. And now are exiting as many articles have been written on the subject. Zillow’s in bad shape after gorging on single family homes. They have assets that no longer make sense for them, but at a discount, do others — Read this https://www.wsj.com/articles/single-family-rental-firms-eye-zillows-housing-stock-11636134368.
Is this just a story of an algorithm company getting into the game of hard asset buying and failing? Or the start of the next great tumble in residential real estate?
In many parts of the country, rents and home prices have spiraled up. Cheap money, pent up demand, and personal credit risk taking are underpinnings of this. Much out there about the COVID-19 Pandemic fueling some of the recent (last 18 months) up spiral as folks have left certain areas (LA, Bay Area, New York) for “cheaper” (Arizona, Florida and Texas just a few) making the locales they arrive in now much more pricey than they were (but Austin, Phoenix and others were already on fire).
What else has fueled the escalation of residential real estate rents?
I include mortgage backed home purchases in the definition of rents because the buyer is effectively renting the house from the note holder until the notes paid and they have clear title with no interest by another party in the property.
Operations like Zillow’s buy and flip arm are many. They mostly use investment funds to purchase an inventory of homes for one of two profit centers (fix and flip or just flip). These funds also give them access to unique credit facilities to leverage acquisitions as needed or pencils better. They use speed and the ability to bid up price (if needed) as tools to build these positions — it’s muscle that Joe or Jenny family home buyer don’t have. A fine strategy as long as you can continue to trade out of these purchases in an ever escalating market place. The buy and hold rental firms aren’t doing things much different; they just have a different rent collection model (over a leased period versus a one time fee collection), and a few other exit strategies. I’m assuming that Zillow did not have a strategy to rent out overpriced assets they can’t sell without taking a loss, but may at least produce a slim margin if they rent assets in tight markets.
Assuming that mass acquisition of homes has at least in part driven escalation of home prices and contract rents. Won’t they equally back slide once a saturation point has been reached, and people simply stop buying at scale?
The assumption is that residential rents have no limit because people always need a place to live. This has been the folly realized in every residential real estate bubble that bursts. There’s always a limit. Especially when you have a large scale of buyers that can’t crack the barriers of entry — or there is no real rational reason to do so after they consider other options (get a roommate, move in with their parents, move to the next pioneering and to be hot market).
I believe that’s part of Zillow’s story. They, at some level, hit an escalation ceiling. They gobbled up stuff they can’t sell and can’t sustain a business at a profitable level. They placed to high of a bet, and have to fold so they don’t kill the whole company, or at least can keep a sinking ship afloat a little longer.
I don’t see this as just a story of a company executing poorly and having to exit a market because they did so, so dramatically they have no choice (not even a restructure, not a merger can save the business unit).
I see this as one of many stories as the roaring market begins to fade. The fires not going out quickly, but the supply of fuel is starting to run short.