Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Is Zillow Making Money?

Investors ask is Zillow making money because the real estate information platform is flipping houses. In fact, hedge fund legend Steve Eisman tells Bloomberg he is shorting Zillow Group (NASDAQ: ZG) because it flips houses.

“My largest short is a company called Zillow,” Eisman says. “The reason why I think it’s an interesting short is they entered into a new business out of their basic business of being an internet platform company. Where they’re going and buying houses and flipping them.”

To clarify, the platform is testing a service it calls Zillow Offers in cities like St. Paul, Minnesota, The Minneapolis Star-Tribune reports. In the service, Zillow buys select houses and resells them through a local real estate agent.

Interestingly, Eisman has long held an interest in the dangers of house-flipping. In fact, Michael Lewis’s book the The Big Short: Inside the Doomsday Machine depicts Eisman’s bets against mortgage-backed securities before the great meltdown of 2008. Moreover, Eisman is the basis for Steve Carell’s character in the movie The Big Short.

Is Steve Eisman Right about Zillow?

I think Eisman’s belief is that Zillow will buy large numbers of houses it cannot sell for a good price. In particular, rundown homes, underwater houses, and properties in markets where real estate is not selling.

Moreover, flipping could increase Zillow’s operating expenses beyond what it can afford. To explain, Zillow will have to pay the property taxes on all those homes and pay to maintain them if they do not sell. In addition, Zillow could have the expense of renting out all the homes it cannot unload.

Therefore, I think Zillow Offers looks like the flipping schemes of the 2000s, which assume there will always be a market for homes. Obviously, the Mortgage Crisis proves that belief is delusional.

Hence, I think Eisman is right about Zillow and competitors like Redfin, Knock, OfferPad, and Opendoor. Unfortunately, Zillows’s 15 May 2019 share price; $38.28, shows some investors are falling prey to that delusion.

Does Zillow Make Money?

Thus, we need to ask does Zillow make money because the flipping looks like the act of a management desperate for cash.

Correspondingly, Zillow did not make money last year. In fact, Yahoo! Finance gives Zillow an operating loss of -$45.628 million and a net loss of -$119.858 million for 2018.

Moreover, Zillow reports a gross profit of $1.180 billion on revenues of $1.334 billion for 2018. In addition, Zillow recorded just $3,850 in cash from operations on December 31, 2018. Meanwhile, Zillow lost -$622.639 million in total cash from investing and saw its cash from accounts receivables fall by $12.556 million in 2018.

How will Zillow Finance its Flipping?

Therefore, people are buying stock in a company that loses money on its investments that is expanding its investing activities. Ben Graham was right “Mr. Market is insane.”

Moreover, it is not clear how Zillow will pay the houses to buy to flip. For instance, Zillow had just $651,058 in cash and equivalents, $66,083 in receivables, and $903,867 in short-term investments on 31 December 2018. Hence, Zillow had assets of $1.892 billion at the end of 2018.

Consequently, I think the only ways Zillow can finance the flips are to borrow money or issue collateralized debt. Thus, Zillow is adopting the business model that led to the mortgage catastrophe of 2007 to 2008.

How Zillow will Collapse

Unfortunately, it will be easy for Zillow to borrow money or issue bonds to finance its ridiculous flipping scheme. Not surprisingly, Eisman predicts the bond market will collapse and bring down companies like Zillow with it.

“You will see big losses in things like Triple B corporate debt, high yield etc.,” Eisman predicts. “But you need a recession first.”

Sadly under these circumstances, Zillow could get away with its flipping scheme and even make money from it for a few years. However, the minute there is a recession, an interest rate hike, or a drop in real-estate prices Zillow will stop making money and collapse.

How Flipping Hurts Average People

Worst of all, flipping hurts average people by driving up real estate prices. To explain, Zillow can offer high prices for houses because it can borrow lots money at a low interest rate.

Consequently, average people get priced out of the housing market. Furthermore, Zillow or its creditors could get stuck with large numbers of houses they cannot unload.

Flippers could dump all those homes on the market at once and drive down housing prices. Notably, such dumping will drive down property values and hurt average people, especially seniors that need to sell homes to raise cash.

I think this could create terrible pain because there are millions of seniors; or Baby Boomers, with big mortgages and no retirement savings. Many of those seniors will have to sell their homes to raise cash because they have “nothing but Social Security” to live on. However, those seniors may receive a pittance for their homes after the flippers get done.

Is it Time to Ban Flipping?

Zillow Offers proves it could be time for the federal government to ban real estate flipping.

We should examine a ban on property flipping because the alternative is for the Federal Reserve to raise interest rates. To explain, the Federal Reserve can put the brakes on an overheated economy by raising interest rates. If interest rates rise, lending becomes too expensive and people stop borrowing.

Thus, the Federal Reserve could drive Zillow and other flippers into bankruptcy overnight with an interest rate increase. An interest rate increase will destroy home values by making mortgages more expenses.

However, we could avoid the need for an interest rate increase by making flipping illegal. An obvious way to achieve that is to ban to home ownership by corporations. Another could be a 90% or 95% tax on home sales by corporations.

Finally, Zillow’s actions could violate the antitrust laws. Consequently, the Federal Trade Commission (FTC) could have the authority to pull the plug on Zillow Offers before it hurts anybody.

Zillow is the anti-platform

I, like Eisman consider Zillow an anti-platform or un-platform, despite the seven billion views, management claims Zillow had in 2018. To explain, Zillow turns the platform business model upside down.

Ideally, a platform makes money and builds value by charging users for access to a good or service. However, Zillow reverses that by giving a service; real estate listings, away for free.

Consequently, Zillow is a great deal for the 195 million monthly visitors and 32 million people searching doe rental units, Expandedramblings estimates it had in March 2019. In addition, Zillow is a superb deal for the two million real estate agents that reportedly use it.

In fact, Zillow visitors could view  about 110 million homes in March 2019, Expandedramblings estimates. Moreover, visitors viewed 186 homes a second on Zillow on 5 November 2014.

How Zillow Hurts Communities and Journalism

However, Zillow is a lousy deal for investors; who get stuck with the tab, and communities.

To clarify, platforms like Zillow make it impossible for local information platforms like newspapers to make money. To elaborate, real estate listings are a major source of revenue for newspapers. However, nobody looks at classifieds today because far more information is available online for free.

Consequently, newspapers lose money and end up shutting down newsrooms and laying off journalists. For instance, people lost over 2,400 media jobs in one city; New York, alone in March 2019, Business Insider estimates. Moreover, New York lost 5,000 media jobs between 2014 and 2017, Business Insider calculates.

How Zillow Hurts News

Outside New York, 41 newsroom employees of The Cleveland Plain Dealer lost their jobs on 15 March 2019. Business Insider reports those jobs are besides the 29 newsroom layoffs scheduled for May 2019.

Plus, The McClatchy Company; which owns newspapers like The Miami Herald and The Kansas City Star, will offer voluntary buyouts to 450 journalists this year. Meanwhile GateHouse Media, one of the largest local newspaper publishers in America is eliminating an unknown number of jobs. Finally, The Dallas Morning News cut 43 newsroom jobs on 7 January 2019, The Columbia Journalism Review reports.

Therefore, news is unreported because the people who were reporting it are driving for Uber or studying for their real state exams. Consequently, transparency disappears from local, and increasingly state government, because nobody is covering politicians’ and bureaucrats’ activities.

Zillow Stock is Worthless stay away from it

In the final analysis, Zillow (NASDAQ: ZG) stock is junk investors should stay away from. For instance, Zillow loses money, pays no dividend, and I think  Mr. Market overvalued it at $38.28 a share on 15 May 2019.

Consequently, Steve Eisman is right about Zillow. The only value in this stock is in your ability to short it.