The red-hot housing market is starting to cool this spring, after nearly two years of soaring prices and shrinking inventories.
Why it matters: Homebuyers and renters who've been struggling to find an affordable place to live will have more choices and fewer bidding wars — if only just a little.
What's happening: The supply of homes for sale is finally increasing, after being depleted over the past year and a half, Zillow reports.
More houses for sale should help slow the frenetic pace of the U.S. market, in which the median home was snatched up in just six days in April.
New home construction has also bolstered the housing supply, says Lawrence Yun, chief economist for the National Association of Realtors.
The big picture: The dynamics of the housing market are shifting in many ways, with rising mortgage rates becoming a factor for the first time in a while.
Between the lines: As inventories rise, prices soften. Redfin reports 15% of home sellers cut their asking price last month — up from 9% a year ago.
Be smart: The cooldown is not a sign of a housing crash — just an indication that we're going to return to a more balanced market, says Tucker of Zillow.
What to watch: Some overheated markets — like Charlotte, North Carolina, and Phoenix — could see a price correction over the coming year, Moody's Analytics chief economist Mark Zandi tells Fortune.
Pending home sales declined in February for the fourth month in a row, as would-be buyers grapple with fewer, pricier homes to choose from and rising interest rates. Contract signings dropped by 4.1% last month from January and were down 5.4% year over year with all four regions in the U.S. seeing a decline, according to the latest data from the National Association of Realtors. "Pending transactions diminished in February mainly due to the low number of homes for sale," said Lawrence Yun, NAR's chief economist. "Buyer demand is still intense, but it's as simple as 'one cannot buy what is not for sale.'" Yun anticipates a 7% decline in home sales this year compared to last, and forecasts that rates will hover around 4.5% to 5% for the remainder of 2022. "It is still an extremely competitive market, but fast-changing conditions regarding affordability are ahead," he said. "Consequently, home sellers cannot simply bump up prices in the upcoming months, but need to assess the changing market conditions to attract buyers."
In February, Zillow appeared so confident in its ability to use artificial intelligence to estimate the value of homes that it announced a new option: for certain homes, its so-called "Zestimate" would also represent an initial cash offer from the company to purchase the property. The move, touted by a company exec at the time as "an exciting advancement," was intended to streamline the process for homeowners considering selling to Zillow as part of its home-flipping business. Zillow promoted this option as a way to make it convenient to sell a home while minimizing interactions with others during the pandemic. Just eight months later, however, the company is shutting down that business, Zillow Offers, entirely.
The decision to shut down the program, announced last week, marks a stunning defeat for Zillow. The real estate listing company took a $304 million inventory write-down in the third quarter, which it blamed on having recently purchased homes for prices that are higher than it thinks it can sell them. The company saw its stock plunge and it now plans to cut 2,000 jobs, or 25% of its staff.
The fallout from this business venture doesn't just point to the challenges in buying and selling homes for profit, however. It also highlights how hard it is to use AI to help make expensive, real-world decisions, particularly in an ever-changing market that can be hard to predict months or even weeks out, and with prices that can be based as much on feel as on clear data points. Zillow CEO and cofounder Rich Barton explained the shuttering of Zillow Offers by citing "unpredictability in forecasting home prices" that "far exceeds" what the company had expected.
The "iBuyer" model used by Zillow and other other real estate companies entails purchasing homes directly from sellers and then re-listing them after doing minor work. For Zillow, one of the first steps in its decision to purchase any home is the "Zestimate" — a machine-learning-assisted estimate of a home's market value that is calculated by taking into account oodles of data about the property gathered from sources including tax and property records, homeowner-submitted details such as the addition of a bathroom or bedroom, and pictures of the house. Rival platforms such as Redfin have their own estimates that take similar data into account.
"The Zestimate, facts you provided, and comparable homes nearby are used to calculate an estimated sale price," Zillow explained on its Zillow Offers webpage to homeowners who may be interested in selling their property to the company. (The page now notes the company is "winding down" the service, and isn't making new offers on homes.) After that estimate, the page explained, Zillow conducts an in-person evaluation of a property, determines the amount it deems necessary for repairs before it could resell the house, and then makes a final offer. Zillow has bought tens of thousands of homes since the launch of Zillow Offers, but has sold many fewer than it snapped up: according to its quarterly results, it purchased 27,000 homes from April 2018 through September 2021, and sold nearly 17,000.
Zillow declined a request for an interview with Krishna Rao, the company's vice president of analytics. In a statement, Zillow spokesperson Viet Shelton told CNN Business the company used the Zestimate for Zillow Offers "the same way we encourage the public to use it: as a starting point. The challenge we faced in Zillow Offers was the ability to accurately forecast the future price of inventory three to six months out, in a market where there were larger and more rapid changes in home values than ever before," Shelton said.
Indeed, since Zillow entered the home-flipping business in 2018, real estate markets have changed in wildly unpredictable ways. The pandemic led to a temporary housing market freeze, followed by a supply and demand imbalance that caused an unprecedented rise in home prices. This may only have complicated the company's decision to include the Zestimate — which Zillow points out is not an appraisal, but a "computer-generated estimate of the value of the home today, given the available data" — as part of the Zillow Offers process in more than 20 cities.
Artificial intelligence can look at far more information, far more quickly, than a single human could when considering a fair price for a home, weighing factors like comparable home sales in an area, how many people are looking in a specific neighborhood and so on. Still, "you can have a real estate agent look at a house and in one second pick out one critical factor of the valuation that just doesn't exist as ones and zeroes in any database," said Mike DelPrete, a real estate technology strategist and scholar-in-residence at the University of Colorado Boulder.
A key part of Zillow
The Zestimate has been a key part of Zillow's brand since the company first launched its website in 2006. The term is featured prominently on millions of Zillow's home listings; it's trademarked by the company; and it's mentioned 61 times in its IPO paperwork from 2011.
"Three times a week, we create more than 500,000 unique valuation models, built atop 3.2 terabytes of data, to generate current Zestimates on more than 70 million US homes," the company wrote in a securities filing in 2011. More than 10 years later, the company publishes Zestimates for more than 100 million US homes.
If you're looking up homes on Zillow's website or app, the Zestimate is featured prominently in each listing, whether the home is for sale or not. If the house is currently for sale, a red dot is shown next to the words "House for sale," and the Zestimate, if it's available for that home, will appear on the same line.
Though the company points out that the Zestimate is not a home appraisal, the feature's accuracy has been called into question over the years. For example, it became the subject of a lawsuit brought by homeowners in 2017. (That suit was dismissed.)
Zillow has spent years improving the Zestimate, going so far as to run a multi-year data science competition to improve the accuracy of the algorithm behind it. The company awarded a three-person team the $1 million prize in early 2019.
The Zestimate currently has a median error rate of 1.9% for homes that are on the market, Shelton said, meaning Zillow's estimates for half the homes on the market come within 1.9% of the actual selling price. That percentage of error is much higher -- 6.9%, according to Shelton -- for off-market homes. Being off by as little as 1.9% on a property with a Zestimate of $500,000 is still nearly $10,000; that figure multiplies over many, many homes in different cities across the United States.
An art, not just a science
It's one thing to build a model on a website that's often reasonably accurate. It's another to then try to use that model in the real world to make very costly bets — and do so at scale, according to Nima Shahbazi, a member of the team that won the Zestimate algorithm competition and CEO of Mindle.AI, which helps companies use AI to make predictions. For instance, if any homes Zillow purchased had hidden problems — such as a missed crack in the foundation — the Zestimate would not be able to predict those issues, he said.
"There are many different parts between a very decent model and deploying the model into production that can go wrong," he said.
Zillow was using the Zestimate to help it make purchasing decisions for homes it hoped to make a profit off of over time. But Nikhil Malik, an assistant professor of marketing at the University of Southern California, said algorithms tend to be good at making fine-grained, short-term predictions, such as for predicting stock prices a second in advance. But there simply isn't enough data for an algorithm to learn about longer busts and booms, according to Malik, who researches algorithmic pricing and has studied the Zestimate in particular.
There are also many unquantifiable aspects of putting a price tag on a home, DelPrete noted, such as the value of living in the same neighborhood you grew up in or down the street from your parents. These can vary from person to person, which makes it even harder to outsource a home valuation process to a computer.
"It's a good tool for what it is," DelPrete said of the Zestimate, but it's a mistake to think it can be used to accurately predict house prices now or in the future. He sees it as "almost a toy," meant more for piquing your curiosity when looking up your home or your neighbor's home online.
"If you want to do iBuying and you're going to make thousands of offers every day you have to be really good at valuing homes, not only today but three to six months in the future," he said. "And that's an art and a science."
Dallas-Fort Worth new home sales and median prices are running at record levels, but a disrupted material supply chain and limited construction labor pool are causing it to take longer to get houses built and closed. North Texas homebuilders initiated housing starts on 14,216 units in the most recent quarter, eclipsing the third-quarter 2020 pace by 1,277 units and up 9.9% year over year, according to statistics released today by Dallas-based Residential Strategies Inc. The annual start rate, which includes the fourth quarter of 2020 through third-quarter 2021, has now climbed to 58,625 units — up 35% year over year, according to the housing market analyst.
"Even with higher prices there continues to be solid demand for new houses," said Ted Wilson, principal with Residential Strategies. "The biggest challenge for builders today is that, with limited construction labor and a disrupted material supply chain, it is taking much longer to get houses built and closed." Despite the delays, builders set a record for closings in the most recent quarter at 11,985 units, up 3.5% year-over-year. The annual closing rate stands at 45,574 units, up 13.7% year over year.
The cost and shortage of construction labor has been problematic for builders, said Cassie Gibson, Residential Strategies' senior vice president. Lumber future prices peaked in May 2021 and have subsided since, but supply chain issues persist for many other components used in housing construction, causing higher prices to persist for builders as they determine their true input costs, Gibson said.
New home demand in North Texas has soared over the last year and a half because of a shortage of existing homes and surplus of people moving to the area.
The number of homes listed for sale with North Texas real estate agents has risen by about 15% this year. But they aren't in the price range most buyers want. "The inventory is increasing at the upper end — $750,000 and above," Dr. James Gaines, chief economist with the Real Estate Center at Texas A&M University said. "If you have a well-located $300,000 house, you can sell it tomorrow. We are seeing evidence of price fatigue in the market." D-FW home prices are up only about 3% so far in 2019 — nothing like the double-digit percentage home price gains of a couple of years ago. "The recent spike in mortgage rates did expose how price sensitive the market is," said Paige Shipp, regional director with housing analyst MetroStudy Inc. "Things are not quite as rosy as they seem in terms of what people can afford." Many home sellers haven't gotten the message, she said. "They want to list their house for more than their neighbors sold for and sell it overnight." D-FW has an undersupply of homes priced below $250.000.
Baldwin County Association of Realtors in Alabama will offer group health, dental and vision insurance to its 2,300 members. Other Realtor groups expected to follow suit nationwide
Earlier this month, the National Association of Realtors announced there was no national solution to affordable health care coverage for the trade group's nearly 1.4 million members. But that hasn't stopped a local Realtor association in Southern Alabama from coming up with its own solution. The Baldwin County Association of Realtors says it's the first in the nation to offer group health, dental and vision insurance to its 2,300 members. From Nov. 15 through Dec. 28, Baldwin Realtors will be able to sign up for coverage starting Feb, 1, 2019 through Blue Cross and Blue Shield of Alabama.
"Being able to offer health, dental, and vision insurance to our membership is one of the most defining accomplishments of my career," said Sheila Dodson, the association's CEO, in a statement. "Knowing that independent contractors are not able to provide for their families or themselves in this vital way has always been a difficult problem for the Realtor industry. It is great to partner with Blue Cross and Blue Shield to offer premium coverage for our members, affiliates, and their staffs."
Health insurance is a top concern for many in the real estate industry. Approximately 86 percent of Realtors in the United States are independent contractors, according to NAR, meaning that, in a land where employer-based health insurance reigns, most agents are left to fend for themselves finding health care in the open market.
According to NAR's 2018 Member Profile, 21 percent of Realtors are uninsured, 45 percent of Realtors pay for health insurance out of pocket and 30 percent are covered by a spouse or partner. Only 4 percent (salaried agents) receive health coverage through their firm.
According to Troy Wilson, 2018 president of the Baldwin County association, members had long been asking for group health insurance plans, but "until recently it was never even an option."
That changed in June, when the U.S. Department of Labor announced health care reform to modify the legal definition of "employer" to include "working owners" — i.e., self-employed individuals with no employees — and to allow small businesses and independent contractors, such as real estate agents and Realtors, to band together based on location or industry to strengthen their buying power into association health plans.
"The size of the pool was key to getting the great benefit, which needed to be 2,000 or more," Wilson said in a phone interview. The Baldwin County association did not consider teaming up with another trade association, local Realtor association, the state Realtor association or NAR on this due to the logistics that would be involved, according to Wilson.
It was a "high priority" for the Baldwin association to be able to offer an AHP to its members for the beginning of the year and if the association tried to grow its pool, "we knew it would take longer," he said. "It's no different than a consideration of a new software system. It's not like anything like this exists anywhere out there. Someone needed to organize it," Wilson said.
"We would be open to other options like this in the future," he added. "Our assumption is that others are probably working on it too."
Asked whether Baldwin Realtors' was indeed the first Realtor association to offer group health insurance and whether there were any updates to a possible national solution, NAR spokesperson Jane Dollinger said in an emailed statement:
"NAR has long been advocating for health insurance solutions for real estate professionals, including association health plans. Legal uncertainty brought on by the pending lawsuit filed by a dozen attorneys general across the country, combined with varying state regulatory requirements currently makes it difficult to find and develop a national insurance option because of how such plans may be implemented and treated in each state," she said.
"However, this means there has been broader success by state and local associations, such as through small group market options, association health plans or other insurance solutions. More success at the state and local levels will set the example for others to follow and lay the foundation for a potential national solution down the road."
Under the reform, association health plans are to be governed by the same rules as private employer policies, not Affordable Care Act (a.k.a. Obamacare) rules, which means potentially cheaper coverage than what's available in the ACA marketplace, but also potentially weaker protections. This is why a dozen state attorneys general have sued the Trump administration in an effort to block the reform. They are afraid the cheaper, leaner plans will siphon off younger, healthier consumers from the ACA markets and that the new rule will lead to a spike in insurance fraud and insolvencies, according to Modern Healthcare.
The plans available to Baldwin Realtors, however, are ACA-compliant and cover the essential health benefits under the ACA, including prescription drugs, maternity care, and mental health and drug treatment. Members will also not be barred or charged more for pre-existing conditions, Wilson said. "It is compliant. It covers everything. It offers the same coverage as if someone were to do open enrollment through Blue Cross [and] Blue Shield. All we're doing is facilitating the group," Wilson said.
The association's health plans are potentially better for some members than individual or small group plans available through ACA exchanges because they may be cheaper overall and age won't be a factor in cost, according to Wilson. "The only condition to be allowed in the group coverage is you have to be a member of the association in good standing. There's no health screening or anything like that. Everyone is charged the exact same," regardless of age, gender, location, or job title, Wilson said. Affiliate members of the association — i.e. members who are not real estate licensees, such as mortgage brokers — are also eligible to participate, Wilson added.
Tim Hudnall, district account representative at Blue Cross and Blue Shield of Alabama, confirmed that Baldwin's AHP was ACA compliant and that all essential benefits are covered. "That's all we sell," he said. Asked whether the Baldwin association had to go through the state to create the AHP, Wilson said no, but that the trade group did hire a third-party vendor — Lockard & Williams Insurance Services Inc. — to supply a secure portal for enrollment and handle billing. "That way the member is never compromised on any personal information and the association never has access to any information," Wilson said.
What are the costs?
The Baldwin association offers two health plans, one with a $3,000 deductible annually that starts at $437 per month for an individual and one with a $500 deductible annually that starts at $525 per month for an individual.
Each of the two plans offer four coverage options: individual, individual and spouse, individual and a dependent, or full family coverage. For family coverage the deductibles go up to $6,000 and $1,000 respectively. The deductible does not apply to office visits, annual wellness exams or prescriptions. Vision and dental coverage can be purchased separately. "If you're only covering one person, it's $525 for one person, if you and a spouse it's maybe $100 more and then if a full family it's probably like $1,100. But there's no differentiation between member to member," Wilson said.
The association is not subsidizing any of the plans and both are under Blue Cross and Blue Shield of Alabama. "The other real benefit in group coverage is with a larger group you tend to have a more sustained premium year over year. You typically don't get as much fluctuation in the premiums," Wilson said.
The association is not sure how many of its members are uninsured. Nonetheless, Wilson believes the AHP will offer "a large portion of the association" a better option than what they have now. "There are some people that have group coverage through a spouse or through another employer. For them those other options are going to be better," Wilson said.
"But for roughly 40 or 45 percent of the association, this would be a better plan for them. Most importantly, it's going to allow coverage for some people that never had an option before from an affordability standpoint."
He knows of one member who has said the AHP will save him nearly $12,000 a year with better coverage. In his own case, Wilson currently has a Blue Cross and Blue Shield family plan and said he will save $2,340 annually on the new AHP plan and his deductible will be lower. Providing group health insurance benefits is going to be life changing for many of our members and their families," Wilson said in a statement. "This type of benefit, when utilized, can deliver value daily that is impossible to fully quantify. I'm am very proud to be a part of the leadership team who assisted in this monumental initiative."
Blue Cross and Blue Shield's Hudnall said there was "no way" to compare the Baldwin association's AHP costs to the cost of purchasing insurance through an ACA exchange because on the exchange, costs are based on an individual's age, while in the AHP, the cost is based on the average age of the members as a whole. Wilson said the AHP is written for an average age of 57 based on a census of the association, but he's not sure if that reflects the actual average age of the membership. (The median age of Realtors overall is 54, according to NAR's 2018 Member Profile.)
For younger people, costs would probably be lower on the ACA exchange, Hudnall said, while for older people he expected the AHP to be "pretty competitive." After seeing some of the insurance renewal letters the Baldwin association shared, Hudnall said, "This seems like it's going to save some of the folks over there a lot of money."
Anticipating 'a lot of activity'
Other Realtor associations are likely to follow Baldwin's lead. Hudnall said Blue Cross and Blue Shield of Alabama has been offering quotes to other Realtor associations and other trade associations in the state, but he's not sure if any others have signed up. "This is really new. I know it's something that's going to have a lot of activity. I imagine there will be more pretty soon," he said.
Because associations don't have information on prior insurance claims to submit, then demographics — including age — are a portion of the consideration for the premium, according to Hudnall. Groups with more older folks, such as Realtor associations, would typically be charged more than a trade association with younger members. "Older people tend to spend a little bit more in medical care," he said. The company aims to sign up close to 500 members in an AHP. "The more people in the plan the better stabilized it will be going forward," Hudnall said.
Inman News, November 21, 2018
"I would expect this somewhat disappointing spring selling season will be a bit of a wake-up call for (North Dallas suburban) home sellers, and they will eventually consider lowering asking prices, which in turn will bring some buyers back to the table," Attom Data economist Daren Blomquist said.
The slowdown in Dallas-Fort Worth's housing market may be worse than at first glance. Sales of preowned single-family homes dropped 1 percent annually in August in all of North Texas, according to the latest numbers from the Real Estate Center at Texas A&M University. Those numbers include data on more than two dozen counties stretching from the Red River to Waco. When you drill down in the numbers to just the immediate D-FW area, August's dip in home purchase activity was much larger. In the Dallas area, sales of preowned homes by real estate agents fell by about 4 percent in August from a year earlier. Fort Worth-area sales managed to eke out a 1 percent year-over-year rise in home purchases made through real estate agents. But some Dallas-area residential districts saw marked declines in home buying last month.
Real estate agents say the overall numbers understate the housing sector cooldown. A look at individual neighborhoods gives clearer insight into the state of the market. Sales last month were down almost 31 percent in Far North Dallas. They dropped 24 percent from August 2017 totals in Allen, and were off 21 percent in Coppell. Plano had a 16 percent year-over-year sales decline and sales were down more than 11 percent in Richardson and about 9 percent lower in Frisco. Not all of North Texas' markets saw the housing market hit the brakes. Sales soared 40 percent in Prosper, for instance, and were 37 percent higher in DeSoto. The pricey Park Cities market had a 29 percent jump in August sales from the previous year.