Stock

: Viral TikTok accuses Zillow and opponents of manipulating the housing market. Right here's what's actually happening.

Are companies like Zillow
ZG,
-3.40%
and Redfin
RDFN,
+ 4.57%
manipulate house prices by buying property across the country? That's what a real estate agent claims in a video that went viral on the TikTok social media platform – but real estate experts say the reality is much more complicated.

In a video with more than 2.4 million views on TikTok, real estate agent Sean Gotcher from Nevada criticizes the “iBuying” business model, in which companies buy and sell houses for a profit. In the video, he suggests that an unnamed company has a website that lots of people search for houses “when they're bored,” and he says that the same company “uses that information to enter that zip code and make purchases of houses to start ”.

In other words, he suggests that companies like Zillow use the data they glean from reviewing property listings on their websites to make decisions about which homes to buy as an iBuyer.

Gotcher later argues that the company will buy 30 houses for one price and then buy a 31st house at a higher price. "That just created a new comparison," says Gotcher, referring to comparable prices for nearby properties that the user estimates to determine the value of a home for sale. He then says the company can turn back and sell the other homes at that new, higher price.

In subsequent videos, Gotcher takes on Zillow and Redfin more directly and criticizes their respective business practices.

"I am pleased to see that the discussion that is being held at every printer in every real estate office about data storage, mixed with purchasing power and recognizable marketing, is finally taking place outside our office doors so that more people can participate in the discussion," said Gotcher, der works for Level Up Real Estate in Henderson, Nevada, MarketWatch said in an email.

The video subsequently attracted even more attention on Twitter
TWTR,
+ 0.79%,
when a person with the username Gladvillain shared it after learning that the user's mother had sold her home to Zillow. Many users claimed that Zillow bought "all houses" and planned to boycott the platform.

Both Zillow and Redfin disagreed with the video's claims. "The Internet has given millions of consumers more real estate information, visibility and tools to help them make smarter real estate decisions, many of which have been provided by Zillow for more than a decade," a Zillow spokesperson said in an email opposite MarketWatch. "Unfortunately, the Internet can sometimes be a source of misinformation and falsehoods – as in this case."

""Deliberately paying too much for home would be a terrible business model."

– RedFin spokesperson

A Redfin spokesperson added that the company "has no part in manipulating the market, and we don't feel like it, because deliberately paying too much for houses would be a terrible business model."

Real estate experts debunked many of the points made in the viral video, arguing that other forces were responsible for the country's competitive, expensive housing market.

"If you could manipulate the housing market that easily, realtors would have done it a long time ago," said Gilles Duranton, a real estate professor at the University of Pennsylvania's Wharton School.

This is what people need to know about iBuyers, today's competitive housing market and the future of real estate technology:

This is how the iBuying model works

In the past ten years, several companies have entered the so-called iBuyer business. The biggest players are Zillow, Redfin, Opendoor
OPEN MINDED,
+1.80%
and Offerpad
OPAD,
+1.36%.
(Opendoor and Offerpad did not respond to requests for comment.)

The basic concept is this: Companies use data to make a direct offer for their home to a seller. IBuyers argue that the transaction is a straightforward way for sellers to sell a property without the involvement of middlemen such as real estate agents; However, sellers have to pay fees to the iBuyer. The iBuyer may then do a light renovation on the house but will generally reverse and get it to market quickly.

"It's a very low-margin business – it's actually hard to make money in this business right now," said Tomasz Piskorski, a real estate professor at Columbia University who has published research on this emerging business model.

Typically, iBuyers buy houses at a discount, which Piskorski says is usually around 3.5%. And then they usually aim to sell the houses at a slight premium of about 1.6%, he said. Companies also collect fees from the seller, but these are roughly the same as typical real estate agent fees.

The companies themselves are open to this approach. "We're honest with sellers that they're likely to make more net worth going into the market with an agent," the Redfin spokesman said.

"Companies like Zillow and Opendoor typically buy houses at a slight discount to market value and then sell them for a small premium.

There is a main reason sellers choose this route, even if it means they are getting a lower price than they would find in the open market. “The households do this because of the speed advantage,” said Piskorski.

For example, if a New York homeowner suddenly got a job in California, he or she would theoretically have a much easier experience selling directly to one of these real estate firms than listing with a realtor. "The iBuyer will help you by essentially buying your home in five days," as opposed to two to three months, Piskorski said.

The types of homes iBuyers prefer

These companies are not interested in buying just any home. For example, according to Daren Blomquist, vice president of market economics at Auction.com, between January and May of this year, only 3% of properties that were in foreclosure or owned by banks on Auction.com were bought by iBuyers.

"This supports one of the claims in the Tiktok – that most properties iBuyers buy don't need major renovations," Blomquist said. "Most of the distressed properties sold on our platform are in need of a significant renovation and it appears that the iBuyers are by and large not focusing on the distressed market."

Blomquist's analysis also found that iBuyers target newer homes than other cash buyers. But these companies do not buy mega-villas either. They are very much focused in the middle of the market where there is more liquidity, Piskorski said.

""IBuyers certainly don't have enough market share to wield the kind of pricing power the video describes."

– Daren Blomquist, Auction.com

And no, they are not aimed at raising prices too much. “That would be short-sighted. If house prices keep going up like crazy, they will eventually collapse, ”Duranton said, adding that companies like Opendoor are taking a long-term approach to the model.

Even if these companies tried to manipulate home prices, they wouldn't find much capacity to do it. A recent report by Zillow found that the four largest iBuyers – Zillow Offers, RedfinNow, Offerpad, and Opendoor – accounted for only 1% of all home purchases nationwide. And that was a record high.

It is true that there are higher concentrations in certain markets. In four markets – Atlanta; Phoenix; Charlotte, NC .; and Raleigh, N.C. – iBuyers' market share is at or above 5%.

"Buyers certainly don't have enough market share to wield the kind of pricing power the video describes," said Blomquist. "Certainly there are higher concentrations in some areas, but a real scenario like the one described in the video is difficult to imagine – and I did not see that in the data."

Why are home prices rising?

The fact that the video hit such a nerve probably speaks to the concern of many Americans about the rising cost of renting or buying a home.

But the cause of the housing crisis is much bigger than the business of companies like Zillow. Simply put, the country has a huge housing shortage. A recent report from Realtor.com estimates the deficit at more than 5.2 million households. (Realtor.com and MarketWatch publisher Dow Jones are News Corp.
NWSA,
+1.50%

NWS,
+ 1.77%
Properties.)

The main reason for this is the financial crisis of 2008. In the wake of the subprime mortgage crisis, building owners have significantly scaled back their activities. At the time, many had built speculatively and created entire neighborhoods before a single property was sold. When the housing market collapsed, there were suddenly millions of vacant homes across the country.

"The country is facing a shortage of around 5.2 million homes, according to a recent report by Realtor.com

It took many years for builders to start growing their businesses again, and in the meantime people were still getting married, had children, or otherwise reached the home-buying stage. Then came the COVID-19 pandemic, which caused many people to either completely rethink their homes or put the clock forward for a move planned for the future. With lots of people suddenly flocking to buy houses, there wasn't much to do, resulting in competition that drove up prices.

Builders have responded to rising demand but are faced with a shortage of building materials and labor, which is slowing the pace of construction.

Amid it all, cash buyers, including iBuyers, have likely played a role in driving prices even higher. The percentage of pure cash buyers in the market is now at its highest level since 2013, Blomquist said. "Cash buyers must pay a premium above the estimated market value to be the first to secure the limited inventory available," said Blomquist.

“This speculative behavior contributes to the rapid rise in prices, but it would not be possible without the severe imbalance between supply and demand in the housing market,” he added.

The arms race to become the Amazon of real estate

While iBuyers have not yet reached the size necessary to have a profound impact on the market, it is not impossible to envision such a scenario for the future.

"There is currently an arms race over who will become the Amazon of real estate," said Piskorski. "That's why all these companies like Zillow or Redfin want to have everything in-house."

In fact, iBuying is part of a broader trend of technology-based businesses seeking to streamline and turn the traditional home buying process on its head. In addition to setting up these home purchase divisions, Zillow and Redfin have also attempted to set up mortgage loans, as well as property and fiduciary businesses. Nor are you alone as the home finance services company Rocket
RKT,
+ 0.59%
and others have tried to diversify in similar ways.

If either of these companies were to succeed and gain a large enough market share, it would also face the kind of scrutiny that tech giants like Amazon do. Not only because of concerns about consumer choice and the negative effects of a real estate monopoly, but also because of the impact on financial stability. Many of these companies have had to take out loans to finance their home purchases – which could be a greater risk if the market collapsed.

It is not yet clear whether one of these companies can successfully scale their business models in the long term. "The business model wasn't really tested in a recession," said Piskorski. Last year iBuyers temporarily shut down operations at the start of the pandemic, but they are back online as the real estate market quickly recovered.

"There will be a lot of audits for consumer finance reasons," Piskorski said.

Related Articles