Zillow released its Q1 2022 iBuyer Report in early June, revealing that iBuyers resold record-high numbers of properties over the period.
But what does the activity of some of real estate’s biggest, most institutional players tell us about the current state of the housing market, perhaps we can get an insight into whether there’s a crash coming.
Let’s look at the report’s findings and the relationship between iBuying activity and the rest of the housing market.
Background to iBuyers
Real estate is big business, and gone are the days when buying and selling in the housing market was just about people wanting a place to live (if that was ever the case in the first place).
Flipping houses is more popular than ever, and technology has made it easier than ever to do it efficiently — anyone can access relevant data and information. iBuying takes things one step further.
iBuyers are companies that use technology and algorithms to estimate how much listed properties could reach in the future and what price they’d need to buy them for to secure a profit.
Then, they make instant cash offers at this price and complete the process online, without any of the usual hassles. It’s this “instant” aspect that gives iBuyers their name.
Since iBuyers are large institutions, they have the capital needed to carry out the process on a large scale, meaning they don’t need a considerable profit margin each time.
They look for homes already in good condition so they can sell them on fast, allowing them to do their job in volume rather than taking the time to obsess over maximizing the profits in flipping a single property.
It can be beneficial for home sellers to work with iBuyers because it allows them to skip many of the most cumbersome parts of selling a home and secure a quick sale.
Opendoor and Offerpad are among the most popular services (previously, there was also Zillow Offer, but that’s now been discontinued).
iBuying has seen something of a boom in recent times — but will it continue to retain its edge?
What the Report Shows
Zillow’s report found a record number of iBuying resales in Q1, with 26,537 properties resold using the practice.
However, fewer properties were sold by (standard) buyers through iBuying in Q1 2022 compared to the previous quarter.
The median house price sold through iBuying was $347,000, compared to $364,900 in the previous quarter.
The decline is despite median house prices rising over the same period for the US house market in general.
The iBuyer share of home sales is still 1.3%, with 12,652 homes sold through the service in Q1 2022 — this is an impressive number, although slightly lower than the 1.7% recorded in Q4 2021.
Plus, the average markup for homes resold through the service was 14% — that’s the highest figure ever recorded for an iBuying markup, so despite the decline in sales, profitability isn’t a problem.
The margin is also much higher than the previous quarter, at just 4.6%.
Overall, the consensus seems to be that iBuying remains successful and profitable for those who do it, although it has experienced a decline in some areas.
There’s also some regional variation to consider, which makes the iBuying market different from figures of the US housing market.
Atlanta, Houston, Dallas-Fort Worth, and Charlotte favored iBuying more than other cities. This is unchanged compared to the top markets of the past quarter.
What Does it Mean?
It will come as alarming news to many prospective homebuyers to consider that iBuying may be becoming more prominent.
After all, over the last few years, it’s been hard enough for most buyers to secure the home of their dreams in today’s competitive environment without having to contend with institutional companies.
But what do the numbers really tell us about the current state of the housing market?
First of all, the decline in properties sold through iBuying and the reduced market share of the practice is primarily down to two factors: The slowdown in the housing market overall and the fact that Zillow Offers is being discontinued.
Although the values of house prices are still rising, the number of house sales in the US is declining, making the number of iBuying resales particularly impressive.
The decline is especially true considering we’ve been in a strong seller’s market for a while now, meaning house sellers have less need to seek out the ease and convenience of instant selling.
If the housing market continues to decline and we head into a buyer’s market, could we expect even more iBuying? Maybe.
The discussion about the housing market tends to center around conventional buyers and sellers.
Still, with iBuying now making up a significant percentage of the market and seeing an impressive markup, it’s time to start paying attention.
iBuying: Worthy of Consideration
The iBuying segment produced mixed results in Q1 of 2022, with its market share and average sales price declining yet the number of resales rising.
The fact that iBuying has been so successful in a seller’s market says something, so chances are that this practice isn’t going anywhere soon and shouldn’t be ignored.
What do you think?
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
Tim Thomas has investments in real estate.
Featured image credit: Unsplash.