Zillow Quits | The Truth about the Housing Market Danger.

hey everyone kevin here i've been

getting a lot of questions about why the

heck zillow is getting out of real

estate flipping why have they stopped

their i buyer purchases a lot of madness

is going on a lot of speculation is

going on around why this is happening

especially since today housing starts

fell let's talk about some of these

numbers break them down and see what's

really happening quick note if you're

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below okay folks let's get started so

housing starts did fall in september

driven by a pullback specifically in

multi-family construction we saw a

decline of 7.7 percent in permits for

multifamily that's a big decline

residential fell about 1.6 percent

relatively flat and when we look at

these numbers alone at the same time and

just the day after zillow is stopping

its purchases

of real estate properties to flip it

kind of makes us wonder is this a signal

that zillow thinks we're at the top of

the market

we're going to analyze this

but let's understand the numbers i'm not

just going to give you a 7.7 decline in

multi-family housing starts and a 1.6

decline in residential without giving

you some relativity total housing starts

right now on average and building

permits are up between 5

to 15

comparing now to the pre-pandemic months

so if you go back and you look at the

pre-pandemic summer of 2019 the winter

of 2019 the january essentially of 2020

right before the pandemic really struck

we are up from those levels right now so

even though we're seeing a small little

edge down in multifamily starts and a

single family starts we're up from those

levels that's very very important to

compare to because there are a lot of

click bait articles and videos

circulating right now about how for

example foreclosures jumped 32 in the

second quarter and that they're 67

higher than they were in the third

quarter of 2020 and so you've got these

click bait videos essentially that are

circulating suggesting that oh my gosh

we're going into a foreclosure crisis

the real estate crisis is starting and

the reality is what we should be getting

is information like this from adam

solutions that shows us that the

foreclosure activity is actually at one

of the lowest levels that we have been

in in 16 years now this goes through

2022 but the fact that we're going up

from this level where we had a mortgage

a forbearance program in place in other

words where people were not getting

foreclosed on because they did not have

to make their mortgage payments and

foreclosures in many cases were halted

for not making a payment the fact that

we're up from 2022 i'm sorry from 2020

levels is not a surprise you would

expect that the broader trend though is

still pretty accurate in fact right now

we're only at about

25

000 foreclosure processes starting if

you multiply 25 000 by 12 25 000 divided

or times 12 you're going to get 300 000

foreclosures on an annualized rate right

well take a look at the foreclosure rate

in 2019 there are almost 500 000

foreclosures now 300 divided by 500

means that we're only at about 60

of the foreclosure level where we were

in 2019 we're way lower yeah we're going

to be a little up from there but we're

still going to be on this massive

downtrend of foreclosure activity i've

seen other

misleading articles and videos refer us

back to this big growth in foreclosures

that we had between 2006 and 2007 and

then try to imply to folks that the

great recession is ahead of us but wait

a minute

this was an increasing trend this is a

substantially decreasing trend and yeah

we're popping up but that's only because

this bar here shouldn't even really be

here we're going to continue a trend

line because this was an artificial

manipulation by essentially government

saying foreclosures are not allowed to

happen right so these are very very

important pieces of data to remember

it's the same thing with active

forbearances being down but just because

somebody's in forbearance doesn't mean

that somebody's going to sell their

house in fact less than 15 percent of

forbearances are actually turning into

house sales and yeah court filings for

evictions are up but in many cases

they're half the pre-pandemic eviction

rate in some cases at best or i suppose

you could say at worst they match the

eviction rate of what we had

pre-pandemic so folks when we look at

the actual data the same thing with the

housing starts data that we got today is

the same thing that's going on with

foreclosures and evictions and these

other issues we're not really seeing big

data point issues suggesting that a big

market crash is coming but then why

would zillow

stop doing housing flips why would

zillow take something that is the core

to their business and say we're not

going to do this anymore to the benefit

of a company like open door or

potentially redfin these two companies

competing obviously with zillow in the i

buyer world well zillow writes in their

10k quote our zillow offers business

relies on local and national third party

contractors vendors and service

providers to make upgrades to and

perform maintenance on homes prior to

resale and we can provide no assurances

regarding the quality of their work and

that we will have uninterrupted or

unlimited access to their services and

this is actually really really important

because for the same reason that we saw

housing starts decline which was blamed

on supply shortages for products for

homes especially multi-family homes but

also labor shortages not enough people

to build homes by the way we're seeing

big labor shortages in part because of

the child tax credit a lot of folks

becoming entrepreneurs and we're

starting to see some

two working parent households turn into

one working parent households for

households or families with children or

potentially even without children

because folks savings and their their

earnings have gone up so much in the

pandemic or during the pandemic over the

last 18 months which is crazy but the

household savings rate is at record high

so it kind of makes sense that we're

seeing not only this job shortage but

supply shortage affecting home building

and construction this makes a lot of

sense to me now zillow's stock was down

9.24 yesterday and

take a look at some of the numbers here

in quarter two of 2021 they acquired 3

800 homes

in last uh in 2020 in total they

acquired

4162 homes that means in one quarter of

this year they've pretty much bought as

many homes as they did in 2020 combined

all quarters combined that's crazy and

in the last quarter so far they've

already purchased over 4 000 properties

these folks are capped out there's no

way they can scale this way and the last

thing you want to do is scale a

construction related business too

quickly because you'll go bankrupt and i

know because i scale the construction

business too quickly i've been there as

a licensed contractor and it's horrible

but consider this on top and this is

where some market headwinds come in

potentially let's say you have a four

hundred thousand dollar house the

average house that zillow sold last

quarter was about three hundred seventy

thousand dollars but let's just round it

to a four hundred thousand dollar house

and let's say just to just on holding

costs you're going to pay around eight

thousand dollars a year just to hold the

property not even to mention your

opportunity costs or other issues you're

just going to hold

that that particular property what

happens next well the next thing that

happens is every single month you have a

headwind of somewhere around 650 666

bucks a month and if your average profit

on a deal at zillow is somewhere around

36 to 37 000 during a really strong

market

then hey holding a property for six

months isn't really that big of a deal

right you hold a property you make

thirty six thousand dollars but it takes

you an extra let's say six months to

actually get it down at six hundred

fifty bucks that's going to take your

thirty six thousand dollars and turn it

into something much more like thirty two

thousand dollars it's a hit but you're

still profitable right

sure but depending on how you actually

look at the numbers for how zillow does

their business see zillow has a problem

when zillow says in the last quarter

they made 777 million dollars of revenue

uh and they those those revenues for

home sales cost them 707 million dollars

in other words about a 9.8 profit margin

when they say this they're not including

in that the marketing costs that it took

to actually acquire these homes see

zillow is marketing like crazy they are

spending or at least last quarter they

spent

229 million

dollars

to not only acquire real estate leads

but also acquire these properties let's

just say for giggles that sixty percent

of this 229 million dollars is to find

homes and that they advertise the other

money on other things that's

137.4 million dollars if you include

that in to the 707

cost of revenue that zillow has that

means zillow's home project costs them

844 million dollars and they only

brought in 777.

that's a loss of about eight percent per

home a loss of eight percent per home on

a 370 thousand dollar home is about 30

thousand dollars

per home that you're losing right now so

zillow's not profitable on these home

purchases right now and the last thing

that they need is to be even more

unprofitable because of additional

holding costs or worse

interest rates going up which guess what

folks the federal reserve just told us

that interest rates are expected to

start bumping up about a quarter of a

percent of the federal reserve

at the second half of 2022 and that we

could expect two rate increases in 2023

and three rate increases in 2024. these

are going to be little quarter

percentage point increases in the fed

funds rate which can have the effect of

pushing up interest rates in mortgages

and in the real estate sector and

unfortunately that is a headwind that

zillow is suggesting hey

this is not something that we want to be

up against we don't want to be in a

situation where we're losing more money

running an unprofitable business

waiting longer for contractors aka

losing more money at the same time as

potentially running into the interest

rate increase that we're potentially

going to see next summer maybe even

earlier if their continued inflationary

concerns because see that would be the

double-edged sword inflation gets worse

let's just say inflation gets worse the

fed has to raise rates sooner and zillow

overwhelms themselves with more homes

while not having enough contractors to

even get them off the shelves it's a

potential recipe literally

for bankruptcy

the last thing you want is to be overly

indebted and in projects while you are

investing in real estate this is very

very dangerous now the good news for now

though is zillow is pretty dang well

capitalized so i'm not horribly worried

about zillow going bankrupt but i'm

actually not really worried at all about

solo going bankrupt i think more zillow

doesn't want their profit margins to

look even uglier than they kind of

already do okay home flipping is not a

really

easy profit business so the ones who

make money do a lot of them to offset

some of their losses with other profits

and they hope to do so in an

appreciating market last thing you want

to do is be flipping homes in a

depreciating market you get screwed

because the margins are very thin it's

because it's expensive to sell real

estate but the good news for zillow is

as of the last quarter of uh or last

quarter that they reported ending june

30th they had 3.7 billion dollars in

cash and equivalents

and they had current liabilities of 1.6

billion or less than half so they've got

plenty of cash they're well capitalized

they're not going bankrupt they're not

going anywhere they're just running an

unprofitable business and i don't think

what they're doing is marking a top to

the real estate market it's just being

prudent that the last thing you want to

do is bury yourself in thousands of

homes that you can't even manage

to get renovated while at the same time

potentially having some headwinds coming

to the real estate market like interest

rates going up let's say even a half

percent interest rates go up half

percent that's a potential five percent

headwind to real estate prices and

that's another five percent of losses

for zillow and that is not what you want

as a ceo on your earnings reports so now

you have the full story

in my opinion of course as to why zillow

stopped buying homes and quit real

estate for now don't worry they'll be

back i expect

in the meantime if you want to learn

more of my perspective in real estate or

stocks or investing take a look at the

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to have you there and we will see you

very soon thanks so much bye

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