Today, Explained - Is Zillow really buying all the houses?

Episode Date: November 17, 2021

No. Vox's Jerusalem Demsas disproves a popular internet conspiracy theory. Today’s show was produced by Hady Mawajdeh, edited by Matt Collette, engineered by Efim Shapiro, fact-checked by Laura Bullard and hosted by Sean Rameswaram. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Get groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit superstore.ca to get started. Today explained Robin's Firm. Let me take you behind the scenes of the show for a minute. Today Explained, Rob McSperm. Let me take you behind the scenes of the show for a minute. Way back in May, we made an episode about the bonkers housing market. It was titled The Bonkers Housing Market.

And in it, we talked a bunch about the root causes of our bonkers housing market. All over the country, houses are being sold at a higher rate than we've seen in a long time, whether you're in suburban America, rural America, or urban America. But when we published it, a bunch of people wrote to us on Twitter to be like, you missed a huge driving factor here. Zillow. Zillow is buying up tons of real estate and ruining the housing market. And I was like, oh no, we missed something big. And I messaged today, explain producer Miles Bryan, and was like, Miles, did we miss something big? And Miles was like, nah, we didn't.

I asked Jerusalem about this, and she says it's way overblown. And I was like, phew. But the conspiracy theory didn't go away. My mom sends me housing market memes about companies like Zillow buying up all the real estate in American cities. There are memes on TikTok. The goal is obvious. The more homes they can buy up in a given area, the more they can control the housing price in that area, which is very location specific. On Friday, the Los Angeles City Council moved to ban companies like Zillow from purchasing

single family homes. It felt like we needed to revisit this question. Is Zillow buying all the houses and ruining the real estate market? So that's what we're going to do on the show today. Jerusalem, Dempsis, Vox, welcome back. Is Zillow really buying all the houses? No, not at all. These companies, and I think there's kind of two classes of things that we're talking about here. There are companies like Zillow and Offerpad and Opendoor, which are called iBuyers. And then there are institutional investors like BlackRock and Blackstone and other kind of private equity firms.

And both of these play an extremely small role in the housing market right now. What we know from quarter two of this year is that iBuyers make up less than 1% of home sales. When we're talking about institutional investors, recent data shows that their share of the housing market is actually decreasing. So what's going crazy in the housing market is that a lot of people want to buy houses, and that's not really have anything to do with these larger companies. Okay, well, just so we can fully help people understand what's going on here, especially those people who aren't in the housing market,

what exactly is an iBuyer? So an iBuyer is a tech company and there's this problem they're trying to solve, which is that it's really annoying to sell your house. It's really annoying to stage your house, to have it cleaned all the time, to have your kids and your dogs and cats out whenever someone wants to see it. They're going to be here in five minutes. Hide your unmentionables. Hide your bongs. It's really annoying to time that purchase with when you buy a new house and you're trying to, like, move your stuff and so you don't have to, like, you know, put all your stuff in storage or stay at a friend's house between that intermediary point. So, you know, these companies said, OK, well, why don't we take that over? We'll buy your house for you.

We'll do the replace the carpet and we'll repaint the front and we'll make sure we can sell it. And you'll just get the money right now from us. And often they use algorithms to determine what the price of your home should be. What this has meant generally is that usually the price that you're getting is a little bit less than what you might get

on the open market, but you get to avoid all of that intermediary annoyance of trying to sell your house on your own or use a realtor. And so where do we go from here's a service that helps me get my house sold and helps me deal with all the sort of business that I don't really want to deal with to these companies are buying up all the housing stock and ruining the real estate market? I think there's a few things going on here. One is that most Americans have rightly noticed that it's becoming harder and harder to buy a house. Fingers crossed. Going to look at probably our what?

50th house now? No, that's extreme. We stopped looking at houses, actually. Now we just put offers on them. You have to be richer. You have to have more cash on hand. You have to have a really good credit score. And often, even with all those things, you are entering into bidding wars with people who already bought homes. So millennials or other first-time homebuyers are noticing that it's really, really difficult to enter the housing market. And then they look around and they see that there are big companies that are somehow involved in this. They see

BlackRock or they see Zillow and they see reporting that they're buying homes as well. And to most people, this feels extremely unfair. Why are these companies able to engage in the housing market when they can't? And, you know, I think this speaks to kind of the general discomfort people have with the fact that housing is not just shelter in the United States. In the United States, housing is also a financial asset. So we have this situation where maybe a millennial is trying to get their first home so they can have a kid and a family and all that stuff, and then in swoops these companies to outbid them. What is actually happening there? So iBuyers, you know, even when we look closer at regional markets, they're still

taking up a very small amount of market share. So Phoenix is the largest place where they've been active. We have recent data from 2019 shows they had 5.5% market share. And then from quarter two of this year, it shows that at 5.7% of market share. Other cities like Atlanta or Charlotte or Raleigh also have like 5.3% or 5.0% of market share from iBuyers. Now, I want to be clear here. They're buying these homes and then they're selling them to often individuals. But that kind of enters us into your second point, which is that they can also be selling them to institutional investors and not to individuals.

These institutional investors, these private equity firms, and also the growth of this kind of industry called the single family rental markets. These are single family homes, which traditionally have not had a large share of them used for rent. Usually people just buy them to live in themselves. And that potentially could be competing with individual people. So instead of it going to, you know, me who's looking to buy a house and then I go on Zillow or I go on Opendoor

and I search for their properties that are available, it could just go right away to some private equity firm instead. And the private equity firms, these institutional investors, turn single family homes into rentals? There's a couple things that they can do. One is that they can also just sell those properties. Like maybe they'll fix them up even more or they'll flip them and they'll turn them into something else and sell them. But what we're seeing increasingly is that these companies are keeping them and renting them out. Similarly to what we've seen with apartment buildings and

with other kinds of like multifamily residences where you have kind of these large actors that are managing properties across the United States. People are now entering into the single family rental business and renting those out as well. And that brings up a host of concerns. Most people are really concerned, A, because they wish that they were able to buy a house and they're concerned that they're going to be priced out by these investors. But the second thing that people are worried about is that these are going to make really bad landlords, that these people are going to be really predatory, that these large companies will have a really high asymmetry of power. But I think what's really important to understand here is that the core concern that people have is about tenant rights. It's not about who's owning the property here.

It would be equally bad if some small landlord was treating a low-income tenant badly, as it would be if Blackstone or BlackRock was doing that. All told, though, with these iBuyers and institutional investors entering the market, maybe for the first time, maybe in a way we've never seen before, are they driving up prices? In order for companies like this to drive up prices, they would need to get sort of like a really high share of the homes in an area. That means like it would take so many more times the amount of money that any company in the United States has to buy up that number of homes.

And also remember, especially when we're talking about iBuyers, we're talking about companies that are trying to sell these homes quickly. They're not holding on to these homes for long periods of time so they can build up this sort of market share. And if they did, that would be a massive risk, right? Like there's a huge risk to carrying a bunch of properties in your portfolio at one time. It would mean that if there's a hurricane, if there's any kind of local economic recession or any kind of financial hit that happens in that area, all of your homes could just devalue immediately. Then you're left holding the bag.

Yep, I'm left holding the bag. I do think that this conversation has really gotten away from the underlying facts here. Large investors, those who retained more than 100 homes, and right now I'm quoting from a report from CoreLogic, they remain steady at around 12% since 2018. And that's 12% of all investment of all home buying rates. So that's something where I think it's really important to put things into context. Because when we engage with this news, like these companies are these all seeing allful entities, we actually confuse what's going on here, which is that often these companies are flopping.

Who's flopping? Zillow, actually. Zillow. I thought Zillow was public enemy number one here. Yeah. I mean, Zillow has gotten completely out of the home buying and selling and eye buying business, essentially. It happened earlier this month. We just determined that being an iBuyer was too risky, too volatile, and ultimately addressed too few customers, too narrow. And I think it really just showcases how much of a new and small profit industry iBuying really is. If you really think about it, the profits that they're really making are just the difference between what they buy it from, from individuals

like me and you, and what they can sell it from on the open market, but minus all the costs. They have to do all the, you know, staging and have to do all the painting and replacing the carpet, replacing the carpet and all that kind of stuff. And on top of that, too, there's this fundamental problem, which some economists have mentioned to me, of when you are buying things online like this, it is likely that the majority of people who are going to say, yes, I would rather go with an iBuyer than with a realtor, especially in a hot market like this, where they think they can get into a bidding war and make more money, are going to be people who know something special about their house. They know something might be wrong. They know either it's on this weird street or the view is

occluded from something, or like there's something wrong with the underlying infrastructure or it floods a lot of the time in the winter. And obviously these iBuyers are doing some sort of due diligence here. They're not just like offering you the money right away. But it's not the level that you would do if you were an individual who's searching a house for yourself to buy on your own. And so it's a sort of like lemon problem where they might have been buying a bunch of houses which were actually overvalued by their algorithm. Zillow kept paying top dollar, over asking, over asking. So they ended up getting these houses, trying to put them back on the market, and they couldn't sell them at anything close than they bought them for. And the reason why this is important is because people were talking about

Zillow entering the housing market like, oh, this means that they're going to have this massive market share. They're going to take it all over. All this is going to happen. But in reality, they're not even able to accurately price these homes. The idea that they could have this sort of monopoly share posits that these companies are these like all-knowing masterminds, these like mega-minds of the housing market. But in reality, they're just like these companies kind of sort of flailing about trying to find their footing. And obviously, a lot of them are still in it. Opendoor is a big one. Redfin is still in there. And they're going to continue offering the service. But for them, it's like CarMax coming to your

house and buying and selling your car really quickly for cash. And that's the way that could go. Or it could go the way of what people are concerned about is that these iBuyers go around, turn around, and start selling it to institutional investors, which is what we've seen with Zillow actually recently, where Zillow, after it announced that it was no longer going to be doing any iBuying, it looks like it's selling a lot of its inventory to institutional investors rather than to individual homeowners. We got to take a quick break, but after we get back, we're going to talk about what's actually still causing the housing market to be so bonkers. It's Today Explained. I'm trying to make the best out of a bad situation.

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market, but are certainly not causing the housing market to be so bonkers. Remind people what is. It's the shortage. It's a national shortage of housing all across the United States. Freddie Mac has estimated that the shortage is at 3.8 million homes. That means 3.8 million units of housing are missing from the country that are needed by people who are, you know, young adults trying to move out. They're millennials who are maybe roommates right now, but they're trying to buy their first home. There's not enough housing available. And it's contributing to a lot of problems like increased prices, increasing rates of homelessness, and just the inability for individuals to find a place to live near their jobs, near their family, and near their friends.

So, like, as we discussed last time you were on the show, we just need to build a lot more houses, yeah? Building housing is the first and primary way to fix the problems in the housing market. I mean, I think that the simplest way to think about it is just, like, imagine me and you, Sean, are, like, trying to buy a house, and we both decide we like the same house and we want to buy it. And let's say you make more money than I do, and so you're saying, I'm going to bid $450,000 in this house and I can only bid $400,000 in this house. And there's a lot that the government can do here to try to help me. They can try to give me more money. They can say, you're a first-time home buyer. I want to help you out. Here's like an extra $50,000 or whatever it is. And then you can also try to buy this house. And so I bid again

and I go, okay, I'm also going to bid, let's say $460,000 now. And then you go, okay, but I can also do that. I can bid $460,000 or $470,000. And then you end up winning. So what's happened here, right? Not only are we in the same position where you have this house and I don't, but also the price of the house increased. And the only winner there was the person selling the house. So they sold it for now $20,000 more than they were expecting. And I still don't have a home and you have a house. I think this is a really important way to think about this is because people often think like, okay, the issue is that people just need to be given more money in order to afford the homes that exist. And it's definitely true that poverty is an issue in the country. It's definitely true that

there are a lot of people who need more money, but you could give me a ton of money. And in the end, it's likely that you would still win the home. But even if I won the home, you still don't have a house. And so it's a situation here where if you don't solve the underlying issue of the lack of housing, you're not actually going to get to a place where everyone who needs a house will get one. So how do we get to the place where everyone who needs a house gets one? So one of the big problems and the major reason why we have a housing supply shortage is because of these laws that exist at the local level. They're zoning laws.

Little boxes on the hillside. Little boxes made of ticky tacky. Little boxes on the hillside. Little boxes all the same. There are these rules that dictate what kinds of things can be built and where. So there are whether or not you can build a home within 50 feet of the sidewalk or 40 feet of the sidewalk. All of this stuff is dictated by your local housing authorities. And these rules often can sound pretty reasonable. But what they have the added effect of doing is that they make it such that the only types of homes that can get built

in most of the country are large single family homes. What we've seen over the recent decades is that the share of small starter homes, these are homes that are like around 1400 square feet. Maybe you're a first time home buyer trying to find a small single family home for you to live in. These have declined so much. And in their place, what is happening is that they were building larger and larger homes that are only affordable to wealthier individuals. And getting rid of these restrictions on the ability for people to build these smaller homes is necessary and important in order to make sure you actually can meet demand. Because we're wasting a bunch of land here where, you know, maybe people don't care about the space between their home and the next home being 50 feet or 40 feet, but that 10 feet adds up over neighborhoods to being a lot

of housing. And we get to a situation where there's just not enough housing, especially in the places where people need them. If we're talking about big cities where there's a lot of jobs and there are a lot of economic opportunity, people no longer can afford to live anywhere near there and are forced to commute several hours in order to get to work. California has a few big cities, and I believe they recently did something about single-family zoning, yeah? Yeah, they passed this bill, which essentially ended single-family zoning in California. SB9, or the California Housing Opportunity and More Efficiency, or HOME Act, lets owners build a duplex on a single-family lot or divide the property into two for a total of four units. This is a big swing because it increases the choices available to people.

And I think often when people hear the end of single-family zoning, they think this is the end of single-family housing. But what it really is is it's the end of restrictions on what you can do with your own property. I think often people get frustrated when they think of homeowners associations and things like that, telling them that you can't paint your house a certain color. But that's what these zoning laws are. They're just this government-sanctioned form of the homeowners association telling you that you can't build a mother-in-law suite for your grandmother to help come take care of your kids. It's a law saying that you can't convert your garage into an apartment for your kid to come live in after college because they can't afford housing in their city. I mean, these kinds of laws are restricting the ability for Americans to do what they want with their own homes.

And the new law in California will now give them more options. Are other states going to follow California's lead or is this more of a California thing? Well, Oregon actually already did this. So they were first. They don't get enough attention. Sorry, Oregon. Oregon actually beat California. They love that when people give California more attention than them.

Nobody likes me. I don't know why. I cry, I cry, I cry. But, you know, Oregon's done this already. There's statewide action in other places on a smaller scale. Connecticut this year also pursued policies that would allow for those kinds of basement apartments slash garage conversions or mother-in-law suites to exist. There's more attention being paid to this on a national scale as people are recognizing just how bad the shortage has gotten and how much it's impacting the entirety of the United States' economy. What about federal attention on this issue? I know President Biden's still working on a huge sort of care infrastructure

package, Build Back Better. Is that going to address the housing shortage? So the housing portion of the Build Back Better bill is mostly full of things that will not address the housing shortage. There's one part of it that the White House is trying to push is going to make a dent in housing supply. And that is a low income housing tax credit. And these are tax credits, essentially, that go to developers and developers are able to sell those to different investors. And then they can use that money to build affordable housing. And that's really great. I mean, it's a fix. Making sure that there's enough financing available for developers to build affordable housing is awesome. And the low income housing tax credit program

is the largest federal source of building new affordable housing. But the real problem is this, is that if it's illegal to build the housing, which it is because of these zoning laws, no matter how much money you put behind it, you can only get so far. I think a really instructive place to look is Los Angeles. Los Angeles has this proposition Triple H, which they passed, which is a billion dollars, a billion dollars five years ago to build affordable housing. Regardless of what happens, every time they try to build a new home and the developer tries to use that money to build a house, these zoning laws standing in the way, there are local individuals standing in the way and not allowing them to build it anyway. So I think that really underscores that, you know, it's important to make sure the financing

is available. It's important to make sure the money is available. And the Build Back Better bill does that. But it doesn't actually attack the fundamental problem here, which is that it's illegal in most places of this country to build affordable housing. And that's really the first step that needs to be addressed before we can actually get to the money part. And in the meantime, while inflation continues to tick up and the Build Back Better Act potentially doesn't do enough to address these issues and housing stock isn't going to dramatically change in the near future, what's someone to do if they want to own a house in this country? Does everyone just have to move to Kansas? Well, I mean, are things crazy in Kansas, Jerusalem? I don't even know.

Things are crazy everywhere. Things are crazy in Kansas as well, actually. All over the country, home prices are increasing, even in rural parts of the country. You know, I think people are doing what they always try to do, which is just like try to figure out a way for them to find a housing option that works for their family. And it means that they're going to have to compromise on something. I think often people are compromising on space, they're compromising on location, they're compromising on amenities or the age of the house or a bunch of different things. They're compromising on closing costs and they might even be compromising on their financial future by spending a lot more money than they intended on these homes. I think one of the

things that I would say here, a piece of advice that I get a lot from when I'm talking to realtors and housing specialists is that people often really underrate how harmful a commute can really be for their well-being. They'll often say like, okay, I'm not going to compromise on having a lawn, so I'm willing to live 45 minutes away from my job in order to make sure that I have this nice large backyard. That's a reasonable choice you can make. But people often really underestimate how bad it is to sit in traffic for 45 minutes. What it does to your mental health alone is really bad. But also like you're spending all this time away from your family, away from your friends. You don't get that leisure time. It means your work essentially owns every single thing from Monday through Friday. So when you're making these decisions and you're having to

compromise a lot more on price, I would recommend that people try really hard not to have the longest commute possible and that maybe some other amenities are worth giving up first. Jerusalem Dempsis, she's a policy reporter for Vox and also the co-host of our podcast, The Weeds. This episode was produced by Hadi Mawagdi. He's trying to buy a house in Texas right now, if anyone has some hot tips. All went to the university where they were put in boxes and they came out all the same. And there's doctors and lawyers and business executives. And they're all made out of ticky tacky. And they all look just the same.