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00:00From Bloomberg world headquarters in New York. I'm Caroline Hyde. I'm Romaine Bostick and I'm Sonali Basak. Taylor Riggs is off today. I mean well guys stocks yet again the record run continues but housing has also been on a record run historic run up in home values during the pandemic. The US market is at or near the peak. Well that's according to Ivy Zelman. You know that housing analyst famous on Wall Street for calling the top of the market back in 2005. So for the next half hour we're going to be focusing in on the possible warning signs and the impact on investors whether it's today's news that homeowners are cashing out. Is the tell as they pull equity from their homes. And highest volume since the financial crisis. Maybe it's the hedge funds buying spree driving prices outside the reach of primary buyers. It's called the warning sign for you. The builders are struggling to keep up with demand amid shortages or the epic rise and fall of Zillow. Is I buying a business that's got everyone fretting. We will break down the signs of trouble and want a possible correction. Could mean for the market remain. Yeah you remember the good old days when housing prices might go up by a single digit percentage. Well that really hasn't happened. And basically about a year now you're talking about double digit percentage gains here at least as measured by the Case Shiller index here. You're looking at the main CoreLogic Case Shiller a national home price index. You can see the big rise there. But more importantly it's not just that upward chart that you're looking at that line on your screen. It's really about I guess as Taylor would say that rate of change here. You're talking about 11 12 13 15 17 19 20 percent. Those are the gains month on a month to month basis that we've been seeing year all year long in the most recent month. We were something like nineteen point six six here. So we're starting to see a lot of upward pressure on these prices. And you start to wonder whether that has any impact on I guess appetite on demand. Was the buyers strike coming or not. We all thought that we'd talk about lumber prices ad nauseum. At one point. We all thought that would be the issue. But for now we're still questioning whether or not the buy strike is upon us. Ivy Zelman Zelman an associate CEO is with us to talk about well some of the worries you have in the market you saw before 2005. Are you seeing it again. Are you calling the top of the market at the moment Ivy. We are definitely cautioning people that today's market is not sustainable while demand remains very very strong and more strong in the left. Last call it 60 days as rates have started to move higher. We've seen some fence sitters jumping in but we think a lot of the demand is coming not just from primary buyers but from investors which is definitely artificially propping up overall home prices. And I think that there is a lot of sensitivity around interest rates. It is not fully appreciated. So I mean definitely raising some I'll call it yellow flags right now. Yeah. And here's the thing. All the private equity guys believe that this is partially a supply problem. These single family not homes they need to be built. There needs to be money poured into them. Are you saying that they're wrong. Well I think that what we have is a level of household demand as well as the need for replacing those homes that get demolished or excess vacancy that we believe is much lower than most other forecasters. So I think we are you know very much a contrarian that if we look at the pipeline pipeline of homes that are currently started the latest 12 month starts for single family compared to what we believe normalized demand to be for single family that pipeline would be about 20 plus percent above that normalized demand level. So I think we're starting from a very different perspective than the others that are forecasting you know millions of homes that are in a current deficit situation. So there's a ramp in supply. But one of the best parts of that backlash some Covid is that the lack of or should I say the bottleneck of getting homes delivered because of Mr. Palley delays because of getting building products like getting appliances is actually the the industry's best friend right now because it's acting as as a regulator that this supply is not ramping faster. But I think a lot of the builders are bragging about oh I'm going to add 20 percent more new communities next year or 40 percent more communities. And we've got 75 billion dollars a predominately unloved capital that is likely going to very much the same states to do a build for rent strategy. And I think we're going to be in a situation that we have a lot of shelter but not a lot of bodies. Well that's what I'm curious about too because when you look at the housing market particularly if you go out west and some of the areas up there in New Mexico and Arizona I mean you can see it. You have to be a housing expert to see some of the issues that are bubbling. I wondered are there areas that are maybe a little bit more prone or a little bit more susceptible to this type of I guess overestimation of the market. Well I think that everyone in United States through the prior 10 years household growth slowed even if it had slowed from a higher level. United States from the prior 10 years actually experienced the slowest household growth our growth on record. So if you have a market like Utah or Idaho that's growing at a double digit level of household growth. The question is Roman how how much incremental supply are you having. Is it 30 percent. And I think that's where we're seeing the concentration. It's really in the states that are more affordable that are more tax favorable for consumers and there's stronger job growth but the investors are all going to the same market. So Phoenix right now is a number one market that we think is at risk of being oversupplied and also seeing home prices correct because investors are prevalent both in the existing home market as well as significantly supporting more pipeline and for sale and for rent. While the investors who will give me hothead Ivy is the big investors. Blackstone's main going so much into the world of real estate or is it the smaller asset that the people of maybe buy one two or three homes at being a smaller landlord. Well I think you know the latter Carolyn is if you think about it you know individuals today that are trying to diversify from the stock market and looking at residential real estate is a good place to allocate their their wealth. I think that if you're buying right now there is no question there is a risk that you'll see home prices come under pressure. The good news is the mortgage industry is extremely sound. Ever since Dodd-Frank legislated the Dodd-Frank legislation in 2014 for the ability to repay it repay or better known as Q M has actually been a real regulator as well. So we don't have the same mortgage problems that we had in the last crisis. Nor do we think there will be something on anywhere near the same level of the GFC. But I do think that investors will see that home prices will come under pressure especially in those markets where we're seeing a tremendous amount of new supply coming and it's very concentrated. So I think the little guy gets hurt. I think the big got the big ISE though they may be they might disappoint their investors where they've raised a tremendous amount of capital and they won't hit the returns that they said they will. But that will be the likely worst case for them. They're very well capitalized. In 30 seconds or so do you think that there is a problem with so much of the mortgage activity going outside of the banking system. Not necessarily so much of a problem again you know recognizing that many of the mortgage entities that are non banks like Rocket Mortgage and UW. These are these are companies that are providing the American dream to many homeowners and providing the ability for people to refinance and capture a low mortgage rate. I think that their balance sheets I can't say if they're able to withstand a substantial downturn but I do believe that because they're not regulated there's a perceived more there's a perception of more risk. But I can't give you with emphatically. If we see anything that would suggest a red flag today. But certainly there's GSE. Fannie Freddie FHA V.A. government lending that's really the majority of what's being funded which is not retained by those lenders which is sold into the secondary market. I was. Alan is such a joy to have you on. Thank you for helping us based our entire show on this conversation because we had you on course I examined. We thank you all about the housing market and we're going to stick with it because of course we could talk about the fallout from Zillow is home flipping experiment. Remember that. We got a key take for you from the royalties perspective. Courtney Donohoe is going to meet the co-founder of course Bagley Real Estate Florida. What she sees order. Yeah. Wow. Yeah. Well. Be digging into the highs and the lows of what I was up to in I buying that. All right today we're focused on the possible warning signs in the housing market of course our previous guest had actually had a prescient call back in 2005 about the potential bubble that was booming there in that market. And now here we are today and everyone's focus on Zillow. Zillow offers of course that algorithm fueled house buying technology which apparently unravelled because of a big overestimation of some of the prices there. Let's bring in Patrick Clark who covers this for us and wrote a great story really about sort of what went wrong over at Zillow. And let's start off with the algorithm because a lot of people are talking about that. I mean anyone who's done these estimates I mean there was always a joke years ago that these things were always inflated because you would look up the price of your house. You've seen anything you like. There's no way anyone's buying my house for that. But at some point they came to believe that their algorithms or the technology behind that was accurate or least accurate enough to build a business around it. At the very least that they had expertise and understanding what home values were. Home prices should be. That would allow them to get into this business. I think in in the fallout from the decision to pull the plug on it one of the things that has sort of emerged is to say well we're very good at knowing what a house is worth right now at a static point in time. But we obviously struggle to figure out what the home would be worth six months from now. And I think that that may be a charitable take from Zillow perspective. But nonetheless it does get out. What the problem really was is you got to know what the house is going to be worth when you need to sell it. Right. Because they are effectively holding onto this asset for a certain period of time as they try to flip it. And that was that was at the disconnect. Yeah. Exactly. I mean the home prices moved on them right. I mean they were expecting home price appreciation of X and they got X minus something. And all of a sudden they went to sell homes. They put him on the market. Well they can't get what they thought they were going to be able to get. Sit on the market longer and all sorts of bad things started. And now two thousand jobs are at stake. Right. What does this mean for Zillow moving forward in terms of the company and how it moves on from something like this. And does the damage continue to spread to its competitors. Yeah. Two great questions. I think Dillard's got a big hole in the middle of its business. It spent the last three years really gearing up around this. I buy in business. What do they do now to replace it. Is is a big question. I mean I will still go to Zillow to see to look at houses. Right. And it'll still be probably the best place for a real estate agent to find me and try to get me to hire them as a client. But that takes you back to a much smaller business than what they were aiming for with Zillow offers. So far the indications are that the other buy I buyers have basically gotten things right. I mean we'll see both the open door and offer pad to publicly traded companies will report on Wednesday. We'll get a better sense of where things are at. But as of now it doesn't look like anyone else has had the same problems. Was it. I mean literally so my husband does to unwind is to look at Zillow at night and sort of make up stories about why you can buy a way you couldn't. But what are you finding in terms of which part of the market it was best that you know was it. I love it. There are shots of Zillow. Always seem to show 88 million dollar homes because the house that they were they were flipping I mean like everywhere they did they'd been flipping 30 million dollar condos penthouse as they would really be in trouble. It wouldn't have been a five hundred seventy million dollar write down. It would've been much greater. You know they specialize in the same kind of 19 million. Good. Is that good. No. I mean it's the same houses that the same types of markets. I was just talking about the Phoenix Dallas Atlanta Raleigh places that are relatively new. And so the housing stock is kind of commoditization. You know theoretically you should have a better ability to sort of current prices from one street to the next because the houses aren't that different. Patrick really great to have your inside track. He did a great piece on all of it. If you want to get up to speed what happened in the boom and bust of Z ISE buying and read his stuff. Patrick CAC thank you. Let's talk to a realtor now. Who. Well kind of saw it coming. Apparently Corning policies a co-founder of Acme Real Estate Florida broker owner or Acme of Acme Real Estate as well. So really great to have you on with us because you've been talking about this lecturing about it and trying to have people take on your perspective that you kind of saw this crash coming. Right. I did. I mean we are a design renovation firm in Los Angeles. I got my start renovation resale. And let me tell you flipping is not for the faint of heart. In reality it takes a local specialist to understand what buyers really want. So when you're acquiring property it's a careful estimate of how much work is going to be needed. Layout changes design fit and finish the whole lipstick on a pig thing doesn't work. So it takes a real estate specialist with local knowledge to actually be able to accomplish that thoughtfully for their clients. Whereas Zillow made a huge mistake I think is relying on algorithms to do that kind of work. So you know there's no replacement for specialist. That's that's in here isn't it. We've been under this theory the data in our real estate markets for quite some time. Well I'm well happy. Well this is definitely your time to crow here. Courtney I am curious about the algorithms and is really the broader technology that not only Zillow used but you have other companies also trying to use similar technology. Just kind of get a read here maybe an aggregate of what a home should be worth in a certain community and then make a extrapolation as to whether it's worth buying and trying to flip here. And maybe it didn't work for Zillow here. But do you see that there's any sort of potential that maybe that technology can improve enough where it could work maybe not nationwide maybe not in really crazy markets like in L.A. or New York but in markets that are maybe a little bit more staid that maybe there could be some success with it. I think the problem is that it tries to democratize real estate values it doesn't take into account citing views unique features charm emotional components. They just cannot be addressed by an algorithm. So you know maybe in a suburban development where all the houses look exactly alike. Right. Have better results. Well that's what I mean. I mean I was trying to be nice about it but I mean we've all had as cookie cutter neighborhoods where one house is basically the same as all the other hundred houses. You go into a neighborhood like New York where block by block things can really change. A house on one corner can be vastly different from the house down the street even though they might be the exact same size and and layout here. So I guess what I'm saying is and you know forgive me for saying this but are realtors and certain a real real estate agents and certain communities are they potentially replaceable by this type of technology. No they're not. Especially when it comes to flipping for example it's the uniqueness of a home that gives it value. So if you take any designer in Los Angeles and let them add their value to an otherwise lipstick on a pig flip it's going to sell for more money. So the challenge in suburban communities for investors who want to do renovation resale is to bring something unique enough that it exceeds what the highest most recent sale is. I mean I don't see a lot of people flipping 90s houses but at the end of the day I think that you can not rely on a computer to do the kind of quarterly real estate agent with a brain who is in the market or six here out here though. So while this might be good for the real estate agent what does it mean for the buyers at the end of the day. Was there some element of these eye buyers. If the price is wrong it was wrong on the low end for that. So can people be facing higher prices to some degree because that online layer might be taken away. Well let's talk about who you're talking about. It might have been great for the people selling their houses to Zillow for more than what Zillow can resell them for. Those are the sellers for buyers who are being duped into agency buying not by Zillow using real estate listing you know photos and that kind of thing and trying to market for buyer clients. How do we know that the buyers wouldn't have overpaid for those properties. Zillow has a conflict of interest. It's acting as a brokerage. It's setting expectations of value for buyers and sellers with no transparency. And then if you know what I'm saying like you are acting buyer seller agent and Euro Zone is selling now. Absolutely. There was certainly a conflict of interest there. Courtney I am curious. So when it when Zillow first started doing this and a couple other companies came by part of the proposition that it was more than just price it was at the sort of the traditional real real estate agent network. It was much more of a slower process. It was a little bit more cumbersome. And the idea is that Zillow gave people these people wanting to sell a much quicker way out even if that meant that maybe they had to give up a couple of thousand bucks on the price. How do we know it was a couple of thousand bucks in my opinion zilla wouldn't make you an offer unless they thought they were gonna be able to make money on it. So a good real estate agent can make the sales process seamless. And in an appreciating market it is not difficult to get multiple offers and sell your house for well above what you listed for for example. So the idea that Zillow is doing something magic by making a cash offer. Well guess what. In L.A. we get cash offers on our listings all the time. If it's priced right it's gonna sell. But the question is who's making up that money that's on the table. And I think Zillow is banking on the fact that they were going to take that. And so I don't think it's smart for the seller. Test the market use a real estate agent who can make the process seamless for you and enjoy the fruits of your home ownership. Yeah. Connie how do you think in general we feel that any part of the real estate market isn't in some way rigged against us. Because I think that that's sometimes what people wanted with the transparency of online was they felt that they were getting you know someone who was not on one side or the other which you sort of get with the one on one relationship as well. How do you feel. What would be a good odds that you think in the marriage of technology which is coming no matter what and what not to do which is the art form of it too that makes a buyer or seller feel like they're being acted for in good faith. OK. I'd like to take apart a few things that you're saying right now. There is no presumption that Zillow didn't have an idea in mind about how it could make money off the process. That's why they turned into a brokerage. That's why they've made a lot of their profit from real estate agents. For example the idea of transparency should come from where they're getting their data from but we don't have access to that. So where are their estimates coming from. That's not transparent at all. So this idea that somehow that's more transparent than working with a real estate agent I think is flawed. Where technology helps us is in delivering listings to buyers in marketing. And I think Zillow has done a great job of creating a very usable search platform. And I think that's where it really is working. Its better looking than a lot of MLS platforms and it's where consumers would like to say so. Yay. You did it. Now can you please click let go. This idea that it's a one stop shop and you want to wait all the people who've been paying your bills out of jobs. All right. Moving forward. All right Courtney we have to leave it there up against a commercial break here. But really appreciate you getting your perspective here. Definitely a much different perspective than what we've gotten from some other folks here. Courtney Polis. Happy out there everybody. We'll be back in a moment. All right. We had a great show today. Of course it was all about basic I guess effectively how to price a home and how to do it I guess accurately. When you bought your penthouse overlooking Central Park did you use them. Yes I bought one in the 98 million dollar. And where it was it accurate. It was same idea. And then I flipped it for way more than ISE New York. Martin as you know a lot of money along the way. In all seriousness. So I mean this is really kind of become in the future. And why now. While Zillow might have gotten it wrong we've heard from a lot of analysts basically saying the open door in some of these other companies algorithms work a little bit better. We'll see how that analysis goes. That's it from What'd You Miss?.

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Bloomberg Markets: What'd You Miss? (11/08/2021)

Caroline Hyde, Romaine Bostick & Sonali Basak bring the news and analysis you may have missed after the closing bell on Wall Street. Today's show tackles the warning signs of a housing crash Guests Today: Ivy Zelman of Zelman & Associates, Courtney Poulous of ACME Real Estate

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