Real Estate Website Is off to a Bubbly Start

Oh, the irony!, the “in” darling of real estate wbesites, just went public and its IPO shares tripled in value on the first day – at least, for a while. Founded by the same former Microsoft execs that rolled out Expedia a few years back, Zillow is best known for its “Zestimate” that uses a proprietary algorithm to appraise the value of properties, plus it has the usual listings and other market info.

So, let’s see…this company”s purpose is to make money by featuring a housing market in crisis and will tell you that your property is becoming worth less and less. Don’t get me wrong – Zillow is a fine website. It had 22 million visitors in May and has a nice collaborative agreement with Yahoo! that could position it for success. But the fact (and the irony) is that it’s still losing money, in spite of revenue gains in the past year, and it’s $35 stock price (nearly double it’s $20 opening price) makes it worth almost a billion dollars.

It’s trading at nearly 30 times revenue, like many of the dot-com companies of the late 90s, when geniuses told us that fundamentals (like profitability and a valuation based on real revenues) didn’t matter in this “new economic reality.” We know what happened to that bubble. And, of course, the added irony that the thirst for information about the terrible state of the post-bubble housing market is creating a valuation bubble for Zillow can’t help but bring a smile to an old jaded face.

Sure, everybody wants a piece of the new stock on the block. But, just like the house for sale down the street, if you wait a month you’ll be able to get it cheaper.


Demographics are putting a long-term curse on the future of the housing market just as much as the economy, tight credit, and the foreclosure situation.

Those looking at retirement in the next decade are having to spend a greater percentage of their income on necessities due to lower income or job loss, while at the same time they have to squirrel away more of their income for retirement in light of hefty 401(k) losses and uncertainty about the future of Social Security. This means that there won’t be as many purchases of retirement homes.

Veteran homeowners are hunkering down in their current homes, often doing all they can just to hang on to them, so there is not much “trading up” going on either. Their incomes have leveled off or decreased as well, while at the same time they are paying a fortune for gas, food, and their kids’ skyrocketing college tuition.

Which brings us to the most severe element of the problem: New college graduates are earning less, saddled with more debt from college loans, and not positioned to become the next generation of first-time homebuyers. It is only first-time buyers, after all, that can expand the housing market and reduce the inventory of homes on the market. Current homeowners just “house hop” and leave one house vacant when they buy a new one.

Some of the statistics are alarming. According to PIMCO, the average debt from a four-year college degree is over $23,000 and rising. At the same time, the average starting salary for a new college grad dropped from $30,000 in 2007 to just $27,000 in 2010.

The debt does a several bad things for housing and the prospects for homeownership. It makes the debtor less worthy of credit or possibly makes the person unable to qualify for a mortgage. If they can qualify, it will be for a much smaller mortgage. The lower income together with the debt also make it difficult or impossible to save for a down payment . The money that they could be saving for a down payment will instead be going to service the student loan – not to mention that the rising cost of rent will make it even more difficult to save. Now throw in the fact that Dodd-Frank regulations may require a 20 percent down payment to get a mortgage at all, and yesterday’s first-time buyers will become tomorrow’s long-term renters.

Without a major change in the American economy, today’s generation of college graduates may be buying their first home at the age of 40 or 50.

Will Political Measures Fix an Economic Problem?

With election season getting into gear, the administration is getting serious, or perhaps desperate, about “solving” the housing crisis. New initiatives and ideas are being discussed, but it’s hard to say if they have what it takes to turn the tide before November of 2012, which could end up being a referendum on the economy as a whole.
The $8,000 home-buyer tax credit that ended in the spring of 2010 did jump-start sales while it lasted, but the battery wouldn’t hold a charge when the power cables were removed. Demand died when the perk expired; so it wasn’t a cure, but rather just a pain reliever that worked while it was in the system. Some of the new ideas seem like they might be more of the same:
Interest-free loans of $50,000 for home-owners that find themselves temporarily unemployed will toss a life-preserver to some, but it won’t help the housing market in general. FHA announced a week ago that its unemployed borrowers can miss up to twelve months of payments while they try to find work. But everybody in mortgage trouble isn’t unemployed.
It’s not likely that Congress, after the spanking it took from voters demanding fiscal responsibility in 2010, will fund expensive programs or bailouts, so the administration is looking at creative ways to use Fannie and Freddie that they can pull off without congressional consent. They’ve considered easing up on refinancing fees to lenders so that borrowers can more easily get a more affordable mortgage. Another idea, coming from outside the administration, would change Fannie and Freddie’s guidelines to allow investors to buy more foreclosed properties and soak up the glut that is holing down the whole market. If those of us without enough cash or credit can’t become buyers, then maybe it makes sense to entice those who do have the wherewithall to invest in real estate. And they’re also kicking around an idea that would have Fannie and Freddie renting out much of it’s foreclosed inventory. These things could make a difference perhaps, if they worked – although there is a lot of room for disaster when you start turning huge quasi-government agencies into landlords. What are they going to do when millions of their renters don’t pay the rent, depending on their government landlord to get them by? Cash-strapped taxpayers aren’t interested insubsidizing millions of renters. And talk about the road to serfdom…this could be a path that literally transforms the country into a nation lords and serfs, or landlords and tenants.
So, where do we go from here? Tax credits, loan modification programs, low interest rates, and low home prices can’t get the housing market to budge or the crisis to lighten up. Housing has always puylled us out of economic tailspins before; maybe it’s time to quit tinkering with the housing engine to try to get it to start on its own and revive the broader economy so that it can push-start housing this time.