> Because they would outbid people who actually want to live in those homes
If they outbid everyone who actually wanted to live there, who were they planning to sell to? :P
Buying things you think are underpriced and reselling them is not frontrunning. (Ever since GME, a lot of people learned the word frontrunning and started using it in every possible situation.)
Zillow's plan was to act as a market maker. Market makers make a profit by buying things and then reselling them for slightly more. The difference is called the spread, and it's how market makers make money. Another example of a market makers is used car dealerships. Despite maybe seeming like a useless middleman, the reason market makers can exist is because they provide a valuable service to the buyer and the seller. They provide liquidity: you can go to a used car dealership and buy or sell a car today, instead of having to find someone to trade with directly. (If finding someone without a middleman were just as easy, the buyer and the seller would both benefit from just trading with each other directly. But they don't, which indicates that used car dealerships are actually providing a useful service.)
Zillow wanted to be a market maker for homes. They have a lot of data and thought they could use it to find homes that were underpriced, make a cash offer (benefiting the purchaser by giving them more liquidity via the faster sale), then quickly resell it. Their pricing algorithm didn't work, though, and they lost money. C'est la vie.
The key is that market makers are doing large volumes at very small margins. The market maker just needs to guess the market movement direction for the next interval of time (stocks would be sub second timescale, homes could be daily/weekly, etc.) then they can adjust what they buy and sell very slightly to profit from this spread.
If the spread is a large percentage of the assets value then it doesn't work as well and public perception is more negative. The housing market is much more difficult to properly become a market maker in because the transaction costs are high. The seller's realtor is going to want their >=3% commission. There's other costs like title transfer fee/cost, inspections, etc.
Also scalping is typically more of product's that are impossible to otherwise obtain and are sold at a huge premium.
I think Zillow frequently tried to make the seller cover these costs (whether directly or via a lower offer amount) but it seems they didn't do this successfully. It's also possible that the seller's who accepted Zillow's offer tended to have some X factor that would make their house more difficult to sell but properly handling every possible X factor is very difficult.
But the whole point is that the entertainer doesn't want liquidity, they want illiquidity, for two reasons:
1. The marketing value of a ticket being impossible to obtain. The best way to do this is to sell the ticket below the market clearing price. Then you get rows of people sleeping before the day they go on sale, etc. A lot of people want that image as they believe long term the marketing will generate more revenue.
2. They want fanatical fans rather than rich fans. They may feed off the worship or cheering and want those who go through a lot of hoops to get the tickets, rather than a salesman using the company expense account to wine some client who might not throw their bras on the stage or paint their face green and scream for their team. In this sense, you can think of the money the entertainer gives up by selling below market as the purchase price of audience enthusiasm.
Now if the scalper steps in, and instead of having the underwear tosser you get the businessman, then many entertainers/performers would be pretty upset as the scalper took for themselves the enthusiasm payment and left the entertainer with the market-rate fans.
Scalpers provide liquidity to producers of goods in markets that don't need additional liquidity. For the consumers, he does not provide any liquidity at all. So effectively, scalpers do not provide any "effective" liquidity.
Scalpers always buy stuff where there is already high organic demand from actual end users, because scalping only works if demand outstrips supply. This demand is the liquidity the producer of the stuff needs, and it's already sufficient for them to sell all their inventory quickly, so the scalper obviously does not provide any useful service to the producer.
For the buyers, they act as a seller, but for each item they offer, the original producer has one less to offer, as the scalper has bought it from the original producer. Therefore, they provide exactly no additional liquidity for the end user.
The only thing they do is ratchet up prices and reduce customer service levels (the original producer or an actual, professional reseller will most likely offer better customer services than some random guy on eBay), which are both net negatives for everyone but the scalper.
Aha, I was thinking of scalpers like the guy outside the stadium buying and selling tickets from fans, creating a secondary market. I can see how a scalper who swoops in and buys up the original tickets is not doing that.
I don't know how to frame this in economic terms, but here's an observation. It's no easier buying a GPU from a scalper on eBay than it is buying that GPU from Bestbuy. In fact, it's probably harder. So, they seem to be making it harder to obtain the item.
>If they outbid everyone who actually wanted to live there, who were they planning to sell to? :P
The same set of people who would move their price points up after a few months and get larger mortgages. This worked for all of 2020 and most of 2021 and only the past quarter did it fail as a strategy.
>Buying things you think are underpriced and reselling them is not frontrunning. (Ever since GME, a lot of people learned the word frontrunning and started using it in every possible situation.)
You're missing that this is Zillow, not a neutral market actor. They have unique information about demand for houses and even get to influence prices upward through Zestimates.
> They have unique information about demand for houses and even get to influence prices upward through Zestimates.
And that's the same shit booking.com tried to pull, that got them in trouble with the EU market authority. (If I remember correctly.)
The trading department should be separate from the affiliate department. Otherwise it's LIBOR scandal all over again. :|
> The same set of people who would move their price points up after a few months and get larger mortgages. This worked for all of 2020 and most of 2021 and only the past quarter did it fail as a strategy.
If they have a few months. Sitting on empty houses is not free.
Though the whole problem with Zillow seems to be that they disrupt the local markets, because due to their sheer volume they effectively corner each local market where they operate, which makes them able to set prices.
(But then why have they stopped? Probably they realized they'd need more money to do that effectively, or that they'd get a huge asswhoop eventually. Or that they were unable to hedge their risks.)
> If they outbid everyone who actually wanted to live there, who were they planning to sell to? :P
I mean, exactly - they lost $550 million. Didn't stop them from burning massive capital reserves to outbid tons of people and fuck up the market a bit for them on a bad bet.
So they basically gave $550 million to UMC homeowners by overpaying for houses, while making it slightly harder for other UMC wanna-be homeowners to buy homes for a couple months. Not the worst outcome I can imagine
Framing Zillow v residential buyers as some efficient market where Zillow is
competing like anyone else and not only that, providing critical liquidity via DMM capabilities (designated market maker) is absurd on multiple levels.
DMMs operate on exchanges with membership licenses and a galaxy of exchange regulations, especially around price moves. Zillow and the open real estate market has none of that. Similarly, a DMM would not outbid and market capture the way Zillow does. Another one you wouldn’t see on an exchange with DMMs is the army of debt financing behind Zillow vs what’s behind retail purchasers. Explaining beyond that how framing Zillow as a DMM is a cherrypicked approach with no basis in real estate market reality is not worth the time. It’s really a nothingburger of an approach that comes off as a quote from a Rand book.
At its core, a DMM provides liquidity. Zillow buying real estate, taking it off the market for a month to renovate and flip at a higher price, is not that.
> Despite maybe seeming like a useless middleman, the reason market makers can exist is because they provide a valuable service to the buyer and the seller.
Well, and also because it's illegal in some states to buy directly from a car manufacturer, so you're forced to go to a dealership whether they provide value or not.
Would eBay and Amazon be considered market makers, as they pair up buyers and sellers?
I don't think so. Market makers normally buy before having a specific seller in mind. I think eBay and Amazon's 3rd party sellers transact directly to customers, and just pay those sites a cut of each sale. eBay only is able to charge that fee (really, it's an economic rent) due to a monopoly enforced by network effects. A classic market failure. (I'm not as sure about Amazon but I wouldn't be surprised if a similar effect was at play.)
New car dealerships really don't many any sense and regulated into existence haha. I was referring to used car dealerships
You're not forced to buy a car from a dealer; manufacturers are forced to sell new cars through dealers in order to guarantee owners have somewhere to go for service and parts.
Back in the early days of the auto industry car companies sometimes existed just long enough to sell some crappy cars and fold before angry customers with defective cars came calling.
That's why the laws around manufacturers having dealers exist, no matter what Elon Musk tells you.
Ever notice that bodywork, parts, and repairs for Teslas are very expensive and difficult to come by? Plenty of Teslas with relatively minor body damage end up in limbo for months or more even though the insurance company is ready to pay for repairs. Why? Tesla's bodyshops have long backlogs because there are no parts, because Musk is desperate to get as many cars out of his factory as he can.
Lots of Teslas also get totaled because Tesla charges outrageous pricing for replacement parts. Musk is exploiting the insurance industry.
Insult to injury is that Tesla can decide one day that your vehicle is too damaged for their tastes, and refuse to sell you parts. No other manufacturer does that, not even Ferrari, and that's really saying something.
How would forcing new car sales to go through dealerships prevent Tesla from making its parts rare and expensive? Wouldn't all Tesla parts come from Tesla anyways, and just go through the chain Tesla->dealership->consumer, instead of Tesla->consumer?
(In case it's not clear, I'm legitimately curious and know basically nothing about dealerships.)
>If they outbid everyone who actually wanted to live there, who were they planning to sell to?
other investors. housing is only "underpriced" because it's become a commodity market that investors play in. the people who want to live in the houses have no hope of affording them when they have to compete with all the various capital funds that are buying houses and hoping to flip them to other capital funds using a slightly different algorithm to calculate value.
Your thinking is that there is a hierarchy of capital funds, each one willing to pay more than the last for the same house? And they all hold the houses, pay property tax, etc. despite the houses never generating any revenue due to no one living in them? That doesn't seem like a very realistic perspective on the housing market
Why would other investors buy an overpriced home? They are also looking for the deals that Zillow is hoping to find. Owners wanting to live in a home are the ones willing to buy a turnkey home above asking.
So if the previous owners moved out and then repainted the house and sold it for 20% additional value, would they be villains too? Or is it okay because they're "middle class" and Zillow's shareholders presumably are just yacht-owning billionaires?
I think there’s a difference between a company with enormous amounts of capital buying a bunch of houses to flip, intentionally trying to drive a trend of increasing home prices to profit, and a single homeowner improving a single house and profiting primarily because of the improvements and not because he’s driving the market up massively..
Zillow wasn’t fixing them up, though. They were putting minimal-effort, superficial changes with zero care or actual investment, and then resisting for a higher price.
People who flip houses don't put in more money than they need to, that's a tautology. It still adds value to the market.
"Scalping" makes zero sense in this context. Scalping exploits ticket mispricing and asymmetrical access to the market (waiting in line). Houses are bought at auction; you can't "scalp" at an auction. Try it at Christie's sometime.
To further your auction analogy, Zillow was doing the equivalent of offering Buy it Now prices above asking and owners were selling immediately. They had asymmetrical access to the market because they had asymmetrical capital.
They were literally scalping properties. And, like a scalper who has too much inventory, they’re now selling at a loss.
The first part of this is correct; the second part isn't. Rather than earning a profit, Zillow's current situation is the result of the invisible hand of the market correcting its economically-irrational behavior.
Real pain would be buying an overpriced house that was bid up by Zillow or other similar companies and then needing to move. Missing out on that overpriced sale would actually be great!
Which is going to be a lot better for the middle class in the area then the situation pre-Zillow iBuyer (given the massive discounts). Zillow was a net-positive at least for the Phoenix market.
