Redfin throws in the towel.
On Wednesday, Redfin told shareholders it plans to close its home-buying program. When it does, it will lay off 862 employees—or 13% of its workforce.
What’s going on? While the ongoing housing correction has hit the entire country, it is particularly acute in booming housing markets like Phoenix and Las Vegas. Those markets were eliminated directly The Pandemic Housing Boom to Pandemic Housing Bust. They are also places where iBuyers like Redfin and Opendoor have significant exposure.
These so-called iBuyer programs do not work like normal scams. Instead of creating value by renovating homes, they instead use algorithms to make quick offers directly to sellers. The advantage is that it reduces the stress of the sellers. As long as iBuyers can resell the property quickly, things can go smoothly. However, if house prices start to rise, things can go south very quickly.
That’s the downside scenario, of course, here.
“We notice immediately when fewer people are on our site and fewer are signing up for tours… We’re sitting on $350 million worth of homes for sale that we bought with our own money, or worse, borrowed money. And what we have always told investors is that we will move quickly to protect our balance sheet. We don’t have hope as a strategy. We immediately started targeting things,” Redfin CEO Glenn Kelman said recently Existence.
By the end of January 2023, Redfin hopes to increase its real estate portfolio to $85 million. And by the end of the second quarter of 2023, all of its properties should be sold.
Nationally, the lagged Case-Shiller Index shows that US home prices fell 1.3% between June and August. However, in large pandemic cities, that house price correction is much larger. According to the Burns Home Value Index, Phoenix home values are down 10 percent from their 2022 peak.
On the one hand, iBuyers are surrounded by real estate in markets like Phoenix. On the other hand, iBuyers are also helping to expedite housing in markets like Phoenix.
“These iBuyers are adjusting [home] If the house doesn’t sell, prices run almost like clockwork. So in the submarkets where they have a presence, they also tend to appreciate much faster than previous cycles.” Rick Palacios Jr.head of research at John Burns Real Estate Consulting, says Existence.
Redfin CEO Glenn Kelman agrees that iBuyers, along with other investors who flocked to the market during the boom, are helping to push home prices down faster this time.
“When the shiitake mushrooms hit the fan, you [investors] want to leave first. The way to do it is to figure out where the lowest sales are, and be 2% below. And if it doesn’t sell by the end of next week, take it down [again]Kelman said last Existence. “My guess is that because builders and iBuyers account for more inventory, it leads to a faster adjustment.”
Not long after the Federal Reserve went into inflation-fighting mode, the inventory of unsold homes began to rise across the country. As of October, inventory levels are up 33 percent year-over-year. However, in the booming markets where iBuyers are exposed, inventory growth is much more pronounced. In Phoenix, there are active listings for sale on realtor.com It was up 173% on a year-over-year basis. While markets like Austin and Salt Lake City are booming System efficiency 136% and System efficiency 117%respectively.
For most sellers, there’s a psychological aspect to home prices: They don’t want to lower their value unless the economy forces them to. Not so with iBuyer’s algorithm-driven programs. They want to get out first, and they’re not afraid to cut back hard to do that.
Look no further than this three-bedroom home in Las Vegas. In April, Redfin bought the property for $600,000. Just weeks later, Redfin listed it for sale at $624,900. But it was too late: The Las Vegas housing market had already caved in correction mode. Fast forward to November, and the listing just came off the market after a series of price cuts brought its listing price down to $524,900.
Even after all these brutal price cuts, iBuyers still have a large amount of inventory to unload in crowded markets. In Phoenix alone, Parcl Labs estimates that iBuyers still own $1 billion worth of units.
“It’s hers [iBuyers] Sales transactions accounted for only about 10% of all sales activity in Phoenix in September. As more pressure is put on them to exit their positions, they will become more aggressive in pricing, which will continue downward until the price reaches a point where demand falls to stabilize it.” Jason Lewisco-founder of Parcl Labs, says Existence. “All conditions are there for an accident [in Phoenix].”
Why are markets like Phoenix and Las Vegas moving so quickly? Moody’s Analytics chief economist Mark Zandi focuses on the underlying fundamentals. Nationally, Moody’s considers the U.S. housing market to be about 23% “overvalued.” However, the company says markets like Phoenix and Las Vegas are “overvalued” by 50%. By comparison, Phoenix and Las Vegas were “overpriced” by 51% and 54%, respectively, just as the housing boom peaked in 2006.
Going forward, Zandi expects US home prices to decline by 10%. But in “significantly overvalued” markets like Phoenix, he expects prices to drop between 15% and 20%. And if a recession occurs, he says, that decline in “significantly overvalued” markets could be between 25% and 30%. (You can see Moody’s forecast for 322 housing markets here).
Ironically, Redfin iBuyer’s woes may make Zillow executives feel smart — or at least happy.
In November, Zillow announced that it would end its failed iBuyer program—which pays too much for homes—and sell its remaining properties in early 2022. Turns out, Zillow sold homes at the peak of the Pandemic Housing Boom. While Zillow lost a lot of money, it could have lost a lot more.
Hungry for more real estate data? Follow me on Twitter @NewsLambert.
Register for yourself Features of Fortune email list so you don’t miss our biggest features, interviews and special inquiries.
