Your November Newsletter from CALCAP!

CALCAP CONNECTIONS

November 2021

PRINCIPAL'S CORNER

When Algorithms Fail

Zillow announced earlier this month that it was shuttering its home flipping business known as Zillow Offers. Zillow had entered the hot instant buyer or “iBuyer” space in December of 2019. In less than two years the firm pulled the plug on its failed business. The concept of iBuying is that a company makes an offer for a home sight unseen, based on what an algorithm, (in this case the Zestimate), that determines the value. By accepting the offer, the seller is able to streamline or eliminate the lengthy listing, inspection, appraisal, and loan processes typically involved in a home sale. In Q3, Zillow bought 9,680 houses and sold only 3,032 of them, after having purchased 3,805 houses in Q2, and selling only 2,086 of them. Its inventory of unsold houses ballooned to $3.8 billion, up from $491 million in December 2020. According to the Zillow press release, the company expects to write down around $550 million in Q3 and Q4 of this year after purchasing or agreeing to purchase homes “at higher prices than the company’s current estimates of future selling price.” This is a nice way of saying they overpaid for too many homes.

Zillow currently holds an inventory of around 9,800 homes across the U.S., with 8,200 under contract, according to the Wall Street Journal. Zillow agreed to sell around 2,000 of these homes to Pretium Partners out of New York. Pretium currently owns over 70,000 rental homes making them the 2^nd largest single-family landlord.

The COO blamed “an operational backlog for renovations and closings” on the houses it had iBought and hoped to flip for a profit. A dearth of contractors to renovate all these homes was probably a factor but not the whole story. Now Zillow has acknowledged that the company simply could not predict accurately how rapidly home prices would change: “We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,” the CEO, Rich Barton, said in a statement to shareholders. Shutting the division down eliminates 25% of its workforce.

Interesting that this happened to the company that has become synonymous with estimating the value of homes! At CALCAP we always say that an algorithm is never a substitute for “boots on the ground.” It looks like Zillow has learned this lesson.

Edward M. Aloe

Founder and CEO

626-229-9057

Latest Headlines...

Investors spent a record $63B to buy homes in Q3

In total, they acquired 90,215 homes, an 80.2% increase year-over-year, Redfin analysis found

According to the report, it has been challenging for many individual homebuyers to compete with cash-rich real estate investors. In the third quarter, investors purchased more than three-quarters of homes with all cash.

But the expectation is that the situation may be better for non-investors homebuyers as the housing market has started to cool down. “Bidding wars are on the decline, and if home-price growth continues to ease, we may see investors slow their roll,” said Bokhari.

In total, real estate investors represented 18.2% of the U.S. homes purchased in the third quarter, seven basis points higher than a year earlier, Redfin’s analysis found.

But their share increased to 32% in Atlanta (GA), 31.7% in Phoenix (AZ), and 31.5% in Charlotte (NC). However, in Providence (RI), they represented just 5.4% of the homes sold in the third quarter, a lower share than any other metro area included in Redfin’s report.

View Article Here

Single-family rents soar in tight housing market

Florida saw the largest rent hikes during the pandemic

Yet again Phoenix recorded the highest year-over-year home price increase at 33.3%. This is up from a 32.4% increase in July. San Diego again was second with a 26.2% increase and Tampa was third with a 25.9% increase.

Overall, eight of the 20 cities reported higher price increases in the year ending in August 2021 than in the year ending in July 2021 and all 20 cities saw month-over-month increases before and after seasonal adjustments. The U.S. national index posted a 1.4% month-over-month increase after seasonal adjustment.

“As has been the case for the last several months, prices were strongest in the Southwest (+24.1%), but every region logged double-digit gains,” Lazzara said in a statement.

View Article Here

Momentum Behind ‘Renting as a Lifestyle Choice’ Continues to Build

Migration trends are accelerating with more than a quarter of people moving since the pandemic.

The COVID-19 pandemic set off one the largest waves of domestic migration in recent memory, and the emerging housing trends that have followed are vital to understanding how to succeed in multifamily. Consumer behavior and expectations continue to shift and advance through the pandemic, and there’s no indication that it will let up as the country emerges from this health crisis.

Despite much of the focus being on the scorching hot home sales market, the momentum behind “renting as a lifestyle choice” continues to build. Current and prospective renters are both looking—and moving—more than ever, and their apartment search experience is changing as they find new innovative tools to accommodate them.

View Article Here

On the lighter side....

About CALCAP Advisors

About CALCAP

California Capital Real Estate Advisors, Inc., and its affiliate entities (CALCAP Asset Management, CALCAP Properties, CALCAP Lending, CALCAP Senior Healthcare and CALCAP Strategic Opportunities, collectively known as “CALCAP”), is a California based investment company founded and 2008 and headquartered in Pasadena, California. The Company sponsors alternative real estate investment opportunities focused on demographically driven housing. CALCAP has been able to consistently provide both individual and institutional investors with outstanding returns over the last 12 years. The Company uses a highly selective and disciplined investment approach, focused on delivering superior risk-adjusted returns. CALCAP currently has over $400mm in Assets Under Management. To learn more visit www.calcapadvisors.com.

Social Mission

CALCAP CARES is a 501(c)(3) private foundation organized to encourage employees to find a way to give back to the neighborhoods where we invest. CALCAP has created "GiveTime4Autism" as its initial program which will allow employees the ability to donate unused vacation and sick days for a very worthy cause.