A report from Fast Company. “When Zillow announced Tuesday that it was shutting down its algorithm-fueled home-flipping operation, few in Phoenix were likely surprised. Phoenix area real estate agent Greg Corbett had a hunch that the companies’ computer-assisted buying activity was playing the market by slightly different rules. Word kept coming from clients and fellow agents that the iBuyers were making offers for homes that were significantly higher than offers from non-algorithmic sources, sometimes 10% or 20% over the asking price.”
“As these anecdotes became more common, Corbett logged into the MLS and ran a search to see just how many listings were coming from iBuyers. Of the thousands of listings in Maricopa and Pinal counties, which make up most of metropolitan Phoenix, he expected iBuyers to account for maybe a few percentage points. The database showed Zillow, Offerpad, and Opendoor owning more than a tenth of listed homes. ‘To have them at 12%, 14%, that was a surprise to me,’ Corbett says.”
From Market Watch. “Zillow Group had a wealth of data, access to millions of dollars in capital and executives with the hubris to believe they could use these tools to outsmart both a volatile housing market and startups specializing in buying and selling houses. They failed, and lost more than half a billion dollars in the process. An unprecedented home-buying spree saw the internet-based real-estate-services company buy more than 14,000 homes in just six months. Only after that spree did Zillow executives realize that they had overspent, and were sitting on massive losses in the months to come.”
From Candy’s Dirt. “Veterans in the industry may well be saying, ‘I told you so.’ Jonathan Miller, CEO of Miller-Samuelson, is one of those. Last month when he and I talked, we both felt the Zillow ‘pause’ was weird. Artificial. Zillow was blaming the pause on being short-staffed. ‘This tells us that what they said last month, their story for turning off the tap, was not accurate,’ says Miller. ‘I think they were hoping to find a way out.’”
“‘The Zestimate is unreliable,’ says Miller, who is a veteran appraiser. ‘Here is the valuation methodology: 50 percent of the time it’s within 2 percent of accuracy, 50 percent it is not … and that only applies to listed properties. They used their own money, and the experiment failed.’”
The San Francisco Chronicle in California. “Zillow’s collapse, and the almost-certain collapse of iBuying in general, came as no surprise to me. I sold my house to Redfin several months ago — and watched the company get clobbered trying to flip it. It all went down in the spring when I was trying to sell my house in Los Angeles. That was when I saw an ad on Redfin that promised to ‘buy my home’ sight unseen. Never in my wildest dreams did I think I’d be the one to make a big tech company look like a sucker.”
“Redfin listed the place a few weeks after purchasing it from me for roughly the same price they bought it. And I watched and waited for a sale. And waited. And waited. And waited. The house sat. Meanwhile, the price kept dropping. It finally sold four months later. And Redfin ate a big loss. All told, the company bought the place from me for roughly 9% more than they were able to get on the open market. They also carried all the costs of fixing the place up and maintaining it while it sat.”
From Hometown Station in California. “An elderly couple, Ellen and George Elliot-Applegate, purchased a home in Verano at Aliento, a 55-year or older community on the east end of the Santa Clarita Valley in Canyon Country, to hopefully settle down in for the rest of their lives, but the couple is now at risk of losing their home to foreclosure by the hands of the same lender. When the couple first contacted Richard Szerman of Alta Realty Group in a desperate attempt to keep their home, Szerman uncovered repeated acts of fraud and unprofessionalism that had pushed the couple to the brink of foreclosure.”
“They first attempted to get a loan modification on the first mortgage, but the Elliot-Applegates did not qualify for any mortgage relief, partially because they ‘never should have qualified for the first mortgage in the first place,’ according to Szerman. ‘While this goes on, the HOA continues to go unpaid. The solar system remains unpaid. The taxes and insurance go unpaid,’ Szerman said. ‘It is only a matter of time before Fannie Mae (the first lender) is forced to foreclosure despite their willingness to work with the Elliot-Applegates to avoid exactly that outcome.’”
From Fitch Ratings. “The near-term operating outlook for Fitch-rated U.S. non-bank mortgage companies is negative, given declining origination volumes, continued pressure on gain-on-sale (GOS) margins and increasing regulatory scrutiny, Fitch Ratings says. Non-bank mortgage companies have grown rapidly since the global financial crisis and now represent eight of the top 10 mortgage lenders and servicers in the U.S. However, most have relatively short operating histories, with the pandemic the first rate/credit cycle for many issuers.”
“Non-bank mortgage originators reported record profitability in 2020 and 1Q21, driven by GOS margin expansion reflecting mortgage industry capacity constraints, increased MBS purchases by the Fed and elevated origination volumes as people refinanced in a low-rate environment. Volumes were strong in 2Q21, but profitability was abruptly and negatively affected as higher rates emerged, with increased competition and narrowing of spreads leading to compression of GOS margins.”
“GOS margins will remain under pressure, with 2H21 originations expected to fall 20%-30% YoY per the Mortgage Bankers Association (MBA). The competitive environment is not expected to abate in the near term, with industry overcapacity stemming from capital raised through IPOs, equity and high-yield debt issuances and robust 2020 earnings. The effect of lower volume and GOS pressure on profitability, while negative for all rated issuers, is most adverse for wholesale originators such as United Wholesale Mortgage, Home Point Financial and Provident Funding, which saw outsized margin compression relative to others.”
“Total delinquencies for single-family mortgage loans were 5.5% at Aug. 21 (as per the MBA National Delinquency Survey), down 275 bps YoY, although 90+ day delinquencies remain three times higher than pre-pandemic levels. The government foreclosure moratorium was lifted in July, and as COVID-19 hardship forbearance programs roll off, a growing number of borrowers are exiting forbearances in a delinquent status, which is expected to increase loss mitigation and foreclosure activity.”
The Sydney Morning Herald in Australia. “The huge level of debt taken on by home buyers through the COVID pandemic will stop the Reserve Bank from driving up interest rates with experts warning even a small lift in borrowing costs could drive the country back into recession. The RBA will face challenges dealing with any future economic downturn as home buyers deal with a $130 billion increase in extra mortgage lending taken up during the pandemic.”
“Bank governor Philip Lowe, rejecting market expectations of a rate rise next year, said any increase in lending rates would pack more punch because of the level of debt now carried by most Australians. ‘The fact that debt levels are quite high at the moment means that interest rate increases will be quite effective,’ he said in a press conference on Tuesday. ‘People have more debt. So the cash flow channel is more effective when people have more debt.’”
“AMP Capital chief economist Shane Oliver said the large amount carried by Australians meant the RBA could only incrementally increase interest rates. ‘If the Reserve Bank increased interest rates by 100 basis points in a year, it would drive the country back into recession,’ he said.”
“Australian Bureau of Statistics’ lending data shows the average new mortgage in NSW has now reached an all-time high of $685,000, an increase of $120,000 over the past 12 months. In Victoria, the average has climbed by $116,000 to a record $558,000.”
From Bloomberg. “The selloff in China’s stressed property developers resumed on Thursday, amid signs of contagion spreading to the onshore market. Kaisa Group Holdings Ltd.’s bonds and shares tumbled after a wealth-management product guaranteed by the company missed a payment deadline. China’s dollar high-yield debt fell for the 10th day in 11 after yields climbed above 21%. Trading was halted in two yuan bonds from other real estate firms after they plunged more than 20%.”
“Spiking borrowing costs are making it all but impossible for developers to refinance debt, while property market curbs are weighing on home sales. At least four firms in the industry defaulted last month and others sought to delay near-term bond payments. Credit assessors are downgrading real estate companies at the fastest pace on record.”
“An Evergrande financing company pledged mortgages it provided to about 100 flats in a Hong Kong residential project as collateral for a loan, HK01 reported. Apartment owners’ combined mortgages in the Evergrande project totaled as much as HK$400 million ($51 million), according to the report, which didn’t give the size of the loan Evergrande received. Some of the mortgages were pledged in June 2020, it said.”
“Junk-rated Chinese debt was one of the most profitable trades in global credit for nearly a decade. Now such bonds are sliding from boom to bust in spectacular fashion. A developer-packed index of the country’s junk-rated dollar bonds has lost about 26% since the end of May, the steepest decline in a decade. New issuance from builders has dwindled to the lowest level in 18 months, and even some investment-grade property giants are facing sharply higher borrowing costs. High-profile Chinese bond funds managed by Fidelity and Value Partners are headed for record annual losses.”