November 2021 Market Report
- Zillow Is Out of the Home Buying Business
- Update on Las Vegas
- Potential Investment Properties
- In the News
- Market Trend
- About the Fernwood Real Estate Investment Group
Zillow is exiting the home buying market. The stated reason is that they could not predict house prices and was therefore losing money. I believe their problem goes far beyond this.
Zillow made several fundamental mistakes. Below are just a few:
- They did not select their target buyer and work backward to the properties they should purchase. This is a fatal error. Every property targets a narrow pool of people. They should have only purchased properties that target buyers who are willing and able to pay premium prices for the properties.
- They based their offers on their Zestimates, which are highly inaccurate. They should have looked at a property, manually evaluated what it would sell for after it was market-ready, determined the renovation cost, and derived the offer price. I saw no evidence they were doing this. If they did it the right way, they would buy fewer properties, but they would have consistently made money.
- Renovations must match the specific buyer segment you are targeting. They seemed to be renovating every property the same way, which is an obvious error.
- They use "national" data. To be successful with real estate, you need to base decisions on local data. For example, I looked at a Zestimate recently for a $380,000 Las Vegas home, and below is how their data compared to actual data:
| Cost Item | Zillow | Actual/Comment | Zillow Error |
| Principal and interest | $1,151/Mo. | The payment is correct based on a 3.5% down FHA type loan, 30 year, 3.5% | $0 |
| Mortgage Insurance | $0 | Invalid. Unless you put down 20% or more, you will pay mortgage insurance. According to one website, the mortgage insurance would be about $180/Mo. | $180/Mo. |
| Property Taxes | $269/Mo. | Actual taxes for this property are $123/Mo. | $146/Mo. |
| Home Insurance | $122/Mo. | We just purchased a more expensive property ($420,000) and the insurance was $550/Yr or $42/Mo. | $80/Mo. |
| Total error by Zillow | $406/Mo. |
A $406/Mo error is enormous! With such inaccurate data, how could they hope to provide accurate Zestimates? This lack of attention to accuracy was no doubt part of why they failed to price properties correctly.
When I look at the overall state of their software and processes, they are about at the same point we were 13 or 14 years ago. At that point, we realized that you must use local information, not national averages, if you want to produce meaningful information. Without all the local data we've accumulated over the years and our software optimized for Las Vegas, we would be in the same state as Zillow.
In summary, I see the Zillow announcement reflecting poor management, poor software, and poor business practices; nothing to do with the state of the market.
Zillow Selling Will Cause Housing Prices to Fall?
I read an (irrational) article by a real estate "expert" stating that because Zillow will "dump" 7,000 properties, there will be a price decline in the housing market. My reaction to this statement in a single word is, "No." I will explain.
In 2020, there were about 6.5M homes sold nationally. What percentage of the total sales are Zillow's 7,000 properties? 7,000/6,500,000 = 0.00107 or .1% of all sales. Even if Zillow gave away the properties, the number is too small to impact the market.
Your comments and feedback are always appreciated.
...Eric
Below is a screenshot from the MLS for all single family homes for sale. As you can see, total inventory continues to decline.
How do today's prices compare to the peak 2006/2007 prices? If you ignore inflation, price per SF has exceeded 2006/2007 peak prices. If you include the effects of inflation, we are still $63/SF below peak prices. So, prices are not overheated and they have a long way to go to get back to where they were.
Is the market driven by speculation or demand? Demand, because inventory is symmetrical to $/SF. The steady climb of prices corresponds with the decreasing inventory. See the two charts below showing inventory (months of supply) vs. $/SF for the segment of single family homes we target.
Because $/SF and inventory are symmetrical, you know that the price increases are driven by demand, not speculation.
What is driving the demand for Las Vegas homes?
- Thousands of new good-paying jobs just came online, and there is a shortage of workers. Plus, there is another $22B under construction and another $7B announced.
- Land shortage and growing population - Las Vegas is a small island of privately owned land surrounded by an ocean of federal land. At the end of 2019, there were approximately 22,000 acres of undeveloped land suitable for residential development. Las Vegas historically developed about 5,000 areas a year. Also, most of the undeveloped land is located in less desirable areas. Due to the shortage of desirable land and rising demand from a growing population, vacant land is over $1M/acre in many areas. The result is that most new homes cost >$500K. Our target price segment is between $350,000 and $450,000, so there will be no dilution of our target segment.
- California - California continues to make living there undesirable to all but high-income earners. The California exodus will continue due to sky-high (and unreliable) energy prices, home prices, taxes, crime, etc.
There is broad confidence in the Las Vegas market. We are getting new clients at a rapid pace because most investors see the current Las Vegas market as an outstanding time to buy. These are all very smart people who did their own analysis.
How confident are we that prices and rents will continue to rise? I just purchased the property below for $420,000 on 9/29/2021, based on a rent estimate of $2,100/Mo. After the close, we did a $23,000 renovation. It went on the market on 11/03/2021 and was rented on 11/15/2021 for $2,400/Mo.; it rented in 12 days.
Below is a link to this month's list of candidate investment properties. Our proprietary data mining software selected these candidate properties from thousands of available properties, and this is just the first step in our multi-step validation process, as shown below.
- The US Consumer Price Index (CPI) which was released on Nov 10 showed a whopping 6.2% increase year over year, the fastest pace in three decades! Inflation this high makes traditional investments, such as the 10-yr Note, yielding 1.5%, a horrible investment. By comparison, our target property profile saw 32.8% appreciation YoY and 12.2% rent growth YoY!
- Amazon recently opened a distribution center in North Las Vegas that sends products straight to consumers amid a continued growth spurt for Southern Nevada’s warehouse market. The newly built facility spans 147,000 square feet and has created “hundreds of new jobs locally,” according to a news release. Job growth is part of the reason why we are identifying many high performing properties in our target areas of North Las Vegas and the Northwest part of the metro area.
Below are charts from our latest trailing 13 month market report, which includes October data. Remember that this data is only for the property profile that we target, not for the entire metro area. To see all the charts please click here.
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Rental Statistics
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Sales Statistics
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Rentals - Median $/SF by Month
YoY rents grew an amazing 12.2% for October
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Sales - Median $/SF by Month
YoY prices increased by a whopping 32.8%!
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Rentals - List to Contract Days by Month
The median time to rent is about 14 days for October.
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Sales - List to Contract Days by Month
Median days on market is just over 5 days for October.
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Rentals - Availability by Month
This chart shows the average daily number of properties that were for rent in a particular month. Pre-pandemic level was about 1000 (units).
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Sales - Availability by Month
This chart shows the average daily number of properties that were for sale in a particular month. Inventory has been steadily declining since June 2020.
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Rentals - Months of Supply
About 0.8 month of supply for our target rental property profile, even in a traditionally slower month of October.
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Sales - Months of Supply
Inventory is back to about half of a month of supply. This is what is driving the sharp price increases.
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For the last 15 years, we've helped clients build highly reliable, passive income streams they will not outlive. Several are now retired and living entirely on their rental income. Most never invested in real estate before they started working with us, and the vast majority live in other states or countries. Below is a two-minute video of the services we provide.
© Cleo Li and Eric Fernwood, all rights reserved.
