What’s up everyone?
Last week’s video was about how Glenn Kelman, the CEO of Redfin, was manipulating the housing market by trying to sell off his properties at a discounted rate. Well, since then, Kelman has announced he is shutting down the Redfin iBuyer program completely due to the changing housing market. Kelman says that he expects the downturn will last into 2023 and wants to minimize his losses.
So, what’s the real story? Is this simply a smart business decision or is Kelman admitting complete failure? And how will this affect the housing market?
Let’s dive right in
In a recent blog post by Glenn Kelman, he said that “iBuying is a staggering amount of money and risk for a now-uncertain benefit. We’ve tied up hundreds of millions of dollars in houses that you yourself wouldn’t want to own right now.”
So what will happen to all of these houses that we wouldn’t want to own? And what’s wrong with them?
Kelman also said in his “lay off email” that Redfin is laying off 862 brilliant, loyal people. He said his reasoning is because the housing market in 2023 is likely to be 30% smaller than it was in 2021.
“The June layoff was a response to our expectation that we’d sell fewer houses in 2022; this layoff assumes the downturn will last at least through 2023.”
He goes on to apologize to the departing employees and admits they simply don’t have enough sales to keep paying them.
Redfin’s iBuying program was particularly popular in housing markets like Phoenix and Las Vegas according to Lance Lambert’s article in Fortune magazine titled “These bubbly housing markets look like busts—and they just sank Redfin’s flipping business”
Lambert differentiates the iBuyer programs from normal flippers because Instead of creating value through renovating homes, they use algorithms to make speedy offers directly to sellers, the service being that it reduces the hassle for sellers.
As long as iBuyers can quickly resell the home, things should go smoothly. However, if home prices begin to fall, things can go south very fast.
Well, we are in the middle of home prices starting to fall all over our county, so it makes sense that Redfin is getting out.
As we talked about last week, Kelman stated that they are sitting on $350 million worth of homes for sale that they bought with their own money, or worse bought with borrowed money.
In his words, “we always told investors is that we would protect our balance sheet by acting quickly. We don’t have hope as a strategy. We immediately started marking down things”
Lambert writes that By the end of January 2023, Redfin expects to reduce its portfolio of homes down to $85 million. And by the end of the second quarter of 2023, all of its homes should be sold off.
So if Redfin expects to offload all of their inventory in the next 6-7 months at a discounted price, that will accelerate the home price correction dramatically where they own a lot of houses.
Whenever you have a large influx of reduced priced homes coming on the market at the same time, it creates the feeling of a crash- like what happened in 2008 with all of the foreclosures and short sales.
“These iBuyers adjust [home] prices almost like clockwork if a home doesn’t sell. So in submarkets where they have a presence they are also price setters in a faster way than past cycles,” Rick Palacios Jr., head of research at John Burns Real Estate Consulting, tells Fortune.
Kelman agrees that iBuyers, along with other investors who piled into the market during the boom, are helping to drive home prices down faster this time around.
He already admitted that he would price his homes 2% lower than the lowest sale and if it doesn’t sell in the first weekend, he would reduce it again.
Like I said last week, this is good and bad news. It’s good news for buyers because it creates more inventory at a reduced price. It’s bad news for homeowners and sellers because these homes will create new comps that bring values down much quicker and more agressively than if we just had normal sellers coming on the market one at a time.
The iBuyer programs run off an algorithm that wants out first, and they are not afraid to cut prices aggressively to do so.
Lambert writes that As of October, inventory levels are up 33% on a year-over-year basis. 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 173% on a year-over-year basis; markets like Austin and Salt Lake City are up 136% and 117%, respectively.
He gives an example of a 3 bedroom home in Las Vegas that Redfin bought for $600,000 in April. Just weeks later, Redfin listed it for sale in at $624,900. But it was too late: The Las Vegas housing market had already moved into correction mode. Fast-forward to November, and the listing just got taken off the market after a series of price cuts brought its list price to $524,900.
That’s a 100k price cut that a normal seller would most likely not withstand unless they absolutely had to sell. And this house in this example still hadn’t sold at the time of this article on November 10th.
I don’t know about you guys, but I don’t feel sorry for Redfin or any of these companies. They were out buying so many houses that could have gone to buyers that were out there fighting to get a home.
Lambert writes that Even after all these aggressive price cuts, iBuyers still have a tremendous amount of inventory to offload in bubbly markets. In Phoenix alone, Parcl Labs estimates, iBuyers still own around $1 billion worth of units.
“Their [iBuyers] sales transactions alone accounted for nearly 10% of all Phoenix sales activity in September. As more pressure builds for them to exit their positions, they will likely become more aggressive in their pricing; this will continue a downward spiral until prices reach a point where demand enters to stabilize it,” Jason Lewris, cofounder of Parcl Labs, tells Fortune. “All of the conditions are there for a crash [in Phoenix].”
So maybe those buyers that were priced out of the market over the last 2 years will have a chance to buy a home once prices are low enough for buyers to afford them with the increased interest rates.
I guess we are going to have to wait and see what happens in the overvalued markets first like Phoenix and Las Vegas to see how low prices will go since it looks like they will decelerate the fastest where iBuyers have the biggest presence.
Let’s take a look at the latest housing market update from Redfin to see the latest data regarding the housing market. This was published on November 10th.
- For the week ending November 10, 30-year mortgage rates increased to 7.08%.
I have seen rates lower than 7% this week but they change every day so we’ll have to see what happens.
- Fewer people searched for “homes for sale” on Google than this time in 2021. Searches during the week ending November 5 were down 28% from a year earlier, but ticked up a point from the previous week.
- Pending home sales were down 34% year over year, the largest decline since at least January 2015, as far back as this data goes.
So definitely less homes going under contract which makes sense with the higher interest rates.
- New listings of homes for sale were down 17% from a year earlier. So much less homes coming on the market. Since we are entering the holiday season, I expect this number to continue to go down until the beginning of next year. You can see it happened in both 2020 and 2021.
- Active listings (the number of homes listed for sale at any point during the period) were up 10% from a year earlier.
- Homes that sold were on the market for a median of 35 days, up more than a week from 27 days a year earlier and up from the record low of 17 days set in May and early June.
And • Months of supply—a measure of the balance between supply and demand, calculated by dividing the number of active listings by closed sales—was 3.3 months, the highest level since June 2020.
So clearly homes are staying on the market longer which means sellers still need to adjust their prices.
- On average, a record 7.9% of homes for sale each week had a price drop, up from 3.6% a year earlier.
So although this number has doubled from a year ago, it’s still clearly not a big enough number of homes that are dropping their prices for this to change into a buyers market.
- The average sale-to-list price ratio, which measures how close homes are selling to their final asking prices, fell to 98.7% from 100.4% a year earlier. This was the lowest level since July 2020.
So if only 8% of the homes are reducing their prices and homes are still selling at 98.7% of the final list price, what that tells me is either sellers are starting to price their homes with more realistic prices or there simply isn’t enough inventory to create a significant price drop.
It will be interesting to see if Redfin’s offloading of their $350 million worth of homes for sale will affect these numbers and data in the coming months.
What’s happening where you live? Do you see a lot of Redfin listings? Price drops? Multiple offers?
Comment below and let us know what’s happening in your neck of the woods.