POSTED ON November 2, 2021 BY Chris Vermeulen
Watching Zillow (ZG) move from over $200 per share to recent levels below $90, reflecting a more than 55% collapse in price, while the housing market continues to rally may be an indication that traders/investors have already discounted the future peak in the U.S. capital markets and Real Estate assets related to the current market environment. Zillow is not the only symbol experiencing this broad price decline. Redfin (RDFN) has also declined more than 54% over the past 7+ months.
Is the peak in real estate flippers prices sending a strong warning for traders/investors?
The peak in these stocks happened near February 16-22, 2021. This date, interestingly enough, aligns with a peak in global capital markets using my proprietary Smart Cash Index and a very clear peak in the Chinese Hang Seng Index.
Watching Zillow (ZG) move from over $200 per share to recent levels below $90, reflecting a more than 55% collapse in price, while the housing market continues to rally may be an indication that traders/investors have already discounted the future peak in the U.S. capital markets and Real Estate assets related to the current market environment. Zillow is not the only symbol experiencing this broad price decline. Redfin (RDFN) has also declined more than 54% over the past 7+ months.
Is the peak in real estate flippers prices sending a strong warning for traders/investors?
The peak in these stocks happened near February 16-22, 2021. This date, interestingly enough, aligns with a peak in global capital markets using my proprietary Smart Cash Index and a very clear peak in the Chinese Hang Seng Index.
Recent news that Zillow halted the purchases of homes using its "Zestimate" and Ibuyer programs, which act as a purchase, renovate, flip-type of market service allowing home sellers to get an almost instant purchase offer from Zillow has raised questions in my mind related to the potential risks involved in owning large quantities of real estate assets in a shifting market.
This news article suggests Zillow has over 2800 US homes available for sale. We are not aware of how many homes have been purchased and are waiting for completed repairs/inspections before they go on the market.
This article also suggests other flipping companies are still actively engaging in this risky activity. Opendoor peaked at share price near the same February dates this year but has continued to acquire and flip more homes than Zillow over the past 5+ years. Redfin, yet another flipper company, also continues to engage in buying, renovating, and flipping real estate in hot U.S. markets.
My thinking is the rally in Real Estate prices, in some cases, more than 35%, which started near the end of 2020 and carried into the first two quarters of 2021, may have prompted a very risky race to acquire and flip hot market real estate at a time when labor shortages and commodity price rallies pushed the costs of "flipping" even higher may have put extended pressures on these firms to "flip for profits."
Then add into this mix the Chinese/Asian Real Estate market concerns and the potential that Chinese/foreign market buyers may have moved away from the super-heated U.S. Real Estate market recently while U.S. consumers are starting waiting for the U.S. Fed to potentially raise interest rates and we have a very interesting storm on the horizon.
These Flipper firms are holding large quantities of Real Estate assets where their purchase price likely reflects the dramatic increases in selling prices over the past 15+ months and is further complicated by supply-side costs for raw materials, labor, and equipment to complete the refurnished property while consumers may be starting to shift away from the "buy it at any cost" type of mentality.
Could the collapse in Zillow, Redfin, and OpenDoor reflect the underlying risks of an overly aggressive buying/flipping algorithm event?
Zillow's daily chart clearly reflects investor sentiment compared to U.S. major indexes.
This Daily Zillow Group chart clearly shows the extended price decline that has taken place over the past 7+ months. What is interesting is that the U.S. major indexes continue to push higher, and Real Estate prices continue to push higher while traders/investors are obviously not sharing the same bullish enthusiasm in Zillow, Redfin, and Opendoor.
A price collapse of over 50% is a big downside price trend for these types of companies. Consider the fact that they are buying thousands of homes across the U.S., which likely suggests they are taking on close to a $500m to $1b+ in assets/risk while attempting to quickly flip these properties for moderate profits. In a hot Real Estate market with strong buyer activity, one would think owning these hot assets would push traders/investors to believe "future profits are almost certain." Yet, that is clearly not the case on this chart.
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This news article suggests Zillow has over 2800 US homes available for sale. We are not aware of how many homes have been purchased and are waiting for completed repairs/inspections before they go on the market.
This article also suggests other flipping companies are still actively engaging in this risky activity. Opendoor peaked at share price near the same February dates this year but has continued to acquire and flip more homes than Zillow over the past 5+ years. Redfin, yet another flipper company, also continues to engage in buying, renovating, and flipping real estate in hot U.S. markets.
My thinking is the rally in Real Estate prices, in some cases, more than 35%, which started near the end of 2020 and carried into the first two quarters of 2021, may have prompted a very risky race to acquire and flip hot market real estate at a time when labor shortages and commodity price rallies pushed the costs of "flipping" even higher may have put extended pressures on these firms to "flip for profits."
Then add into this mix the Chinese/Asian Real Estate market concerns and the potential that Chinese/foreign market buyers may have moved away from the super-heated U.S. Real Estate market recently while U.S. consumers are starting waiting for the U.S. Fed to potentially raise interest rates and we have a very interesting storm on the horizon.
These Flipper firms are holding large quantities of Real Estate assets where their purchase price likely reflects the dramatic increases in selling prices over the past 15+ months and is further complicated by supply-side costs for raw materials, labor, and equipment to complete the refurnished property while consumers may be starting to shift away from the "buy it at any cost" type of mentality.
Could the collapse in Zillow, Redfin, and OpenDoor reflect the underlying risks of an overly aggressive buying/flipping algorithm event?
Zillow's daily chart clearly reflects investor sentiment compared to U.S. major indexes.
This Daily Zillow Group chart clearly shows the extended price decline that has taken place over the past 7+ months. What is interesting is that the U.S. major indexes continue to push higher, and Real Estate prices continue to push higher while traders/investors are obviously not sharing the same bullish enthusiasm in Zillow, Redfin, and Opendoor.
A price collapse of over 50% is a big downside price trend for these types of companies. Consider the fact that they are buying thousands of homes across the U.S., which likely suggests they are taking on close to a $500m to $1b+ in assets/risk while attempting to quickly flip these properties for moderate profits. In a hot Real Estate market with strong buyer activity, one would think owning these hot assets would push traders/investors to believe "future profits are almost certain." Yet, that is clearly not the case on this chart.
Continue Reading This Post...