Instant buyers are changing the way people buy and sell their homes
A WELL-FUNCTIONING market is one that enables buyers and sellers to execute transactions quickly, easily and cheaply. Take the market for oil, or for blue-chip shares. Lots of buyers and sellers, gathered on commodity or stock exchanges, mean lots of bids and offers. Transactions are speedy and fees low.
Company bonds, by contrast, vary in their tenor (the length of time till they fall due) and coupon (interest rate). That makes it much harder to match buyers and sellers. To create liquidity, institutions such as investment banks act as intermediaries, holding an inventory of corporate bonds and guaranteeing to buy from or sell to their clients at any time for a (hefty) fee.
The more varied a product is, the harder it is to create a liquid market. One of the most troublesome—and important—is the market for homes. No two are exactly alike. Compounding the difficulties, most buyers and sellers are links in a chain. Two-thirds of Americans who are selling a home are also looking to buy another. A delay at one point in a chain holds up transactions all along it. So intermediaries in the property market offer a bespoke service, matching individual buyers and sellers and taking a chunky fee.
Enter i-buyers (instant buyers), who aim to play the role in homebuying that investment banks play in the corporate-bond market. They use fancy algorithms that analyse data, from the number of bedrooms to local crime rates, to estimate what a property should sell for. Then they buy it, tidy it up and sell it. Opendoor, a startup based in San Francisco that launched in 2014, now offers i-buying services in 20 American cities.
Just over a year ago Zillow, America’s biggest online property marketplace, said it would move into i-buying. Its share price promptly fell by 7%. Investors feared it would be unable to price with enough certainty that its offers could compete with those of real-estate agents, and doubted that sellers would accept a discount in return for an instant sale.
On both counts they may have been mistaken. Stan Humphries, an economist at Zillow, says its listing platform yields enough fine-grained information that it can set prices accurately and competitively. Average fees are around 7%, not far above the cut a conventional estate agent takes on a sale. And sellers are turning out to be keen on the service. I-buyers are not present in every region of America—they have entered big cities with large “cookie-cutter” housing stocks first—and therefore accounted for a tiny fraction of home sales in 2018. But where they operate they are becoming sizeable players. In Phoenix, Arizona, a city with several i-buyers, 7% of sales involved them last year.
On May 9th Zillow reported first-quarter earnings showing a better-than-expected 51% year-on-year increase in revenues, to $ 454m. Zillow Offers, its i-buying arm, contributed $ 129m to that rise. Revenue for the year could climb by 79% compared with last year, the firm said, largely because of its i-buying programme. It says it expects revenue to reach $ 20bn by 2024. Its share price had climbed to $ 38 by May 15th, up by 22% in the year to date.
The service i-buyers offer is a difficult one to pull off. The greater the variety within an asset class, the harder it is to act as an intermediary. But the frictions inherent in the housing market mean it is also a very valuable one.
