Computerized House Flippers and Conflicting Interests

New Orleans       It was bad enough when Wall Street sharpies like Blackstone started buying tranches of foreclosed houses in the suburbs to paint, rent, and then cash out.  Now, algorithms are being deployed for house flippers.  What could go right or wrong with this picture?

A story in the Wall Street Journal claimed that metro Phoenix is ground zero for the future of home purchases.  More than 5% of the home sales in 2018 involving 5000 properties were made by companies launching computer driven, algorithm powered approaches to the market.  Opendoor, a San Francisco startup, Zillow, the listing and area pricing web giant, and Offerpad are breaking this ground.

The Journal walked the reader through the new world:

“At the edge of the city’s stucco sprawl, a beige, three-bedroom house with a gravel yard sold last month for $240,000.  The seller, Opendoor Labs, Inc. paid $215,000 for the house in January, replaced carpet and repainted, and put it back on the market.  A computer told the company what to offer and how much to ask.  There was no need to schedule a showing with a real-estate agent.  Prospective buyers of Opendoor homes can download an app to unlock the door.”

Wham, bam, thank you Alexa, Siri, or whatever they call their thing!

What is it about Phoenix?  The city can’t catch a break.  First, the sketchy boom and then the bust over a decade ago, and just as things begin to even out again, here come the techies.

Sadly, real estate agents and realtors are a bit like taxi drivers in the love-hate relationship they maintain with consumers.  There are over two-millions of them and 1.3 million are actually licensed realtors with access to multi-listings and supposedly a code of ethics.  Even if you like your person, you know she only gets her slice if you buy or sell, so her self-interest and yours are always in conflict, and her advice always comes with many grains of salt.

Many consumers would be delighted to bring the Airbnb model to home buying, although that’s sobering for more than just the loss of jobs.  Airbnb now slants its algorithm to favor listings at its demand price and destinations.   What is there to keep Zillow from favoring the houses it owns on its listings compared to the rest of the field?  Nothing!

Add to the mayhem this disruption will bring is the fact that algorithms will undoubtedly not be limited to purchase and sales prices, but also to rents, which is surely what Blackstone is doing for its 80,000 properties.  Tell me that won’t accelerate gentrification and community mayhem.  Is there a better argument for rent controls? I can’t think of anything else off hand that will stop predatory practices.

Looking at the Uber model, we would have to predict that it would just be a matter of time before the fixed agent price of 7% or whatever would fall like a house of cards.  The companies win and base their business model on volume, which almost always favors price cutting, and that’s the easiest piece to cut.

Hey, you might say, it can’t happen here.  Opendoor is now in 23 cities and is targeting another 27 by next year.  Zillow claims it will be buying 5000 houses per month. Think again!

We need to get ahead of the e-world coming to home and apartment purchase and rental or the consequences could be huge.

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Houses aren’t Homes for the Flippers

New Orleans       No matter how much sugar they put in your coffee, be very prepared to be worried about an additional trend in corporate housing speculation:  flipping is back, bad and hard!

In a contradictory, “what me worry,” “how can this be bad” story in the Wall Street Journal the reporter noted that the in the last quarter of last year the level of house flipping, defined as properties owned less than two years before being sold, is up to almost the same level as they were leading into the housing meltdown at 10.6% in 2018 of total sales now compared to 11.3% in 2006.  Gulp!  The sugar liberally applied then argued that the profits were twice as high on flipping this time around, the flippers were more “professional,” and the homes were averaging ten years older.

I’m still worried, aren’t you?  We’re supposed to not be as worried because the margins are better for the pros, because in reporter Laura Kusisto’s florid, superficial and prejudicial analysis, “Flipping has evolved from the days when cocktail waitresses and cabdrivers lined up to purchase lots in new subdivisions in places like Las Vegas and Phoenix.”  Her comment is a flashing red light of not only class and geographical bias, but a reveal that the reporter has read virtually nothing about the housing market or the ins-and-outs of the crash, which had nothing to do with cocktail waitresses and cabdrivers.

What panics me about the “new flipping” is exactly what the Journal finds reassuring.  Kusisto reports that “Corelogic notes that the flipping market has become more institutionalized.  Corporate sellers made up more than 40% of the flippers in the fourth quarter of 2018, the highest level in CoreLogic’s data and nearly three times the share of the market they had during the last boom.”  Recent articles even in the Journal have pointed out the emerging force of corporate ownership, including huge private equity and hedge funds, in many markets, and this is now crystal clear evidence of their role in unsettling home markets and jacking prices, which is how profits double. Duh!  How can it not be the case that these are profits directly attributable to foreclosures of family homes that were then auctioned off in tranches by Fannie Mae and Freddie Mac to many of these gluttonous operations?

Another clear signal is the fact that ground zero is Memphis, where this kind of corporate ownership has become epidemic.  Memphis is now “the second most popular market for flipping…behind only Birmingham.”  The Journal underscores a Tennessee-based company called Memphis Invest which is buying “a 1000 properties a year in Tennessee, Texas, Missouri, Arkansas, and Oklahoma,”  Their business model is to renovate, rent, and then resell as rental properties to absentee landlords in “expensive markets” like the Bay Area “who can’t afford to buy a home where they live and want an investment property instead.”

What new hell is this?!?  How can we not be worried to the bone about a business model that corporatizes homes into rental units for inexperienced, absentee landlords, forced to jack up the rents on tenants in order to profit from their investment?  This won’t end well for families, cities, or anybody other than a couple of greedy companies and a few of their investors.   The Journal may be right in saying that this is not the same as what helped trigger the Great Recession.  It may be worse.

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