Pandemic housing crisis rattles bubbling markets like Phoenix

On Wednesday, Redfin told shareholders it plans to end its home-buying program. In doing so, it will lay off 862 employees, or 13% of its workforce.

What’s going on? While the ongoing real estate correction has affected the entire country, it is particularly strong in hot real estate markets like Phoenix and Las Vegas. These contracts are made directly from Pandemic real estate boom at Pandemic Housing Bust. These are also where iBuyers like Redfin and Opendoor have significant exposure.

These so called iBuyer programs do not work like normal pinball machines. Instead of creating value by renovating homes, they instead use algorithms to make quick offers directly to sellers. The service being that it reduces the hassle for sellers. As long as iBuyers can resell the house quickly, things can go smoothly. However, if house prices start to drop, things can go south very quickly.

This negative scenario, of course, is here.

“We immediately notice fewer people visiting our website and signing up for tours… We’re sitting on $350 million worth of homes for sale that we bought with our own money, or worse bought with borrowed money. And what we have 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 grading things,” Redfin CEO Glenn Kelman said recently. Fortune.

By the end of January 2023, Redfin plans to reduce its portfolio of homes to $85 million. And by the end of the second quarter of 2023, all his houses should be sold off.

Nationally, the lagged Case-Shiller index shows U.S. home prices fell 1.3% between June and August. However, in pandemic boom towns, this house price correction is much larger. According to the Burns Home Value Index, Phoenix home values ​​have already fallen 10% from their 2022 peak.

On the one hand, iBuyers are getting pinched by real estate meltdowns in markets like Phoenix. On the other hand, iBuyers are also helping to accelerate real estate meltdowns in markets like Phoenix.

“These iBuyers fit [home] price almost like clockwork if a house doesn’t sell. So in the sub-markets where they are present, they are also pricing faster than previous cycles,” Rick Palacios Jr.head of research at John Burns Real Estate Consulting, says Fortune.

Redfin CEO Glenn Kelman agrees that iBuyers, along with other investors who crowded into the market during the boom, are helping to drive home prices down faster this time around.

“When the shiitake mushrooms hit the fan, you [investors] want to go out first. The way to do this is to determine where the lowest sale is and be 2% below. And if it don’t sell the first weekend, turn it down [again]”, Kelman said recently Fortune. “My view is that because builders and iBuyers represent more inventory, it leads to a faster fix.”

Shortly after the Federal Reserve shifted into inflation-fighting mode, unsold home inventories began to climb across the country. In October, inventory levels were up 33% year over year. However, in the bubbling markets where iBuyers are exposed, inventory growth is much more pronounced. In Phoenix, active listings for sale on realtor.com are up 173% year over year. While markets like Austin and Salt Lake City are on the rise 136% and 117%respectively.

For most sellers, there is a psychological aspect to home prices: they don’t want to lower their price unless the economy forces their hand. That’s just not how algorithm-driven iBuyer programs work. They want to get out first, and they’re not afraid to cut aggressively to do so.

Look no further than this three bedroom home in Las Vegas. In April, Redfin bought the house for $600,000. A few weeks later, Redfin listed it for sale at $624,900. But it was too late: the Las Vegas real estate market had already taken hold edit mode. Fast forward to November, and the listing was just pulled from the market after a series of price drops brought its list price to $524,900.

Even after all these aggressive price cuts, iBuyers still have a huge amount of inventory to unload in bubbling markets. In Phoenix alone, Parcl Labs estimates that 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 the 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 Lewisco-founder of Parcl Labs, tells Fortune. “All the conditions are met for a crash [in Phoenix].”

Why are markets like Phoenix and Las Vegas spinning so fast? Moody’s Analytics chief economist Mark Zandi points to detached fundamentals. Nationally, Moody’s calculates that the typical US housing market is “overvalued” by about 23%. However, the firm says markets like Phoenix and Las Vegas are “overvalued” by more than 50%. For comparison, Phoenix and Las Vegas were “overvalued” by 51% and 54%, respectively, just when the housing bubble peaked in 2006.

Going forward, Zandi expects U.S. home prices to decline about 10% from peak to trough. But in “significantly overvalued” markets like Phoenix, he estimates prices will fall between 15% and 20%. And if a recession hits, he says, that drop in “significantly overvalued” markets could be between 25% and 30%. (You can find Moody’s forecasts for 322 real estate markets here).

Ironically, Redfin’s iBuyer woes could make Zillow executives feel smart, or at least lucky.

In November, Zillow announced it would end its failed iBuyer program — which notoriously overpaid for homes — and sell its remaining homes through early 2022. It turns out Zillow sold its homes at most strong from the pandemic real estate boom. While Zillow lost a lot of money, it could have lost a lot more.

Want more housing data? Follow me on Twitter at @NewsLambert.

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