Thread by @bencasselman

In a digital world, selling a house remains stubbornly analog. Silicon Valley wants to change that.
nytimes.com/2019/05/07/bus…

Zillow, Opendoor and others want to buy your house, in cash, using theit algorithms to determine the value. Then they’ll do light repairs (the ones you would have had to do to get the home on the market) and resell it, all within 90 days.

This “instant buying” or “iBuying” is small now but growing fast. It already accounts for 6% of the Phoenix market. @zillow plans to be buying 5,000 homes per month in 3-5 years, from what amounts to a standing start.

What does the seller get? Speed, convenience (no open houses, no repairs you’ll never get to enjoy yourself), certainty (no deals that fall through in escrow.

You could always get those things of course — think of “We Buy Ugly Houses” — but at a steep cost. iBuyers claim they give you something close to the full value of your home. You get maybe 1-2% less at the end of the day (after fees, etc) than the traditional route.

If that’s true, you might ask how these companies can make money. It’s not clear they can! They basically make three arguments.

1. Technology and efficiency. Their algorithms will let them value homes more accurately. They can trim back or eliminate various stages of the process (escrow, title, etc).

I would characterize experts’ reactions to this claim as somewhere between “skeptical” and “bemused.” Real estate is physical — there’s a limit to how digitized the process can be.

2. Scale. These companies plan to buy a LOT of homes. That will let them keep contractors busy and balance out the inevitable misfires.
Obviously that only works if you’re making money on average though. The margins right now are *tight.*

Which brings us to 3. Add-on services. Zillow pretty much told us they don’t expect to make much on iBuying directly. The money is in selling mortgages (plus title, etc). “That’s why we own a mortgage company,” @SvenjaGudell told me.

It’s like the car dealer who sells you a car at a “loss” because he’s also doing the financing.

Will this work? So far iBuying is mostly in Phoenix, Vegas and other markets with lots of cookie-cutter housing stock (and mild winters). Unclear how it will fare in places where homes are harder to value. The iBuyers are betting “yes.”

The big question: What happens in a downturn? iBuyers could suddenly be holding thousands of homes that are falling in value. The smart move might be to dump them before they fall further — flooding the market.

That could easily wipe out an insufficiently capitalized iBuyer. More concerning is what it means for the housing market. Could we get a “flash crash” in housing?

To be clear, that scenario is a *long* way off at this point. Instant buying isn’t big enough to drive the national market. And iBuyers argue their model could be good in a downturn, basically greasing a sticky market.

But it's worth thinking about because housing plays a unique role in the U.S. economy. Whole structures -- the 30-year mortgage, the home equity loan, the property tax system -- are built on it being fundamentally stable. A decade ago we saw what happened when it isn't.

We complain about how hard it is to buy and sell a house -- and with good reason! It's a huge pain. There are numerous inefficiencies and choke points in the process. But that fundamental slowness is on some level a feature as well as a bug.

Anyway, lots more in my story with @ConorDougherty this morning. Have a look! It's a fascinating new industry, and we've only scratched the surface.
nytimes.com/2019/05/07/bus…