Home is where the algorithm is

05/22/19
  • iBuying has expanded its footprint in the retail housing market
  • Homebuilding stocks have outperformed this year
  • Zillow Group (ZG) has shown positive results from its iBuying business

Bought or sold a house lately?

Hold that thought. First, let’s check in on what’s been happening with homebuilding stocks lately. Considering housing market data so far this year has been a mixed bag (witness yesterday’s blah Existing Home Sales number1), the resiliency of the homebuilding sector after its brutal 2018 has been fairly impressive.

The industry is up around 24% on the year, based on the performance of one of the leading homebuilding ETFs, with some individual names, like LGI Homes (LGIH) up significantly more (see “Flip or flop?”):

LGI Homes (LGIH), 12/24/18–5/21/19. LGI Homes (LGIH) price chart. Rebounded from punishing 2018.

Source: Power E*TRADE


OK, so far, so good for the homebuilders. That’s one part of the story.

The other part has been the recent evolution of a potentially transformative (dare we say “disruptive”?) development in the housing industry itself—“iBuying” (instant buying), which is pretty much what it sounds like: Instead of finding (and paying) a real estate agent, fixing up your house, and staging it for prospective buyers, home sellers can contact an iBuying company, give them a handful of data (zip code, age of home, basic condition, etc.) and receive a cash offer, lickety-split.

The draw: No hassle, no haggling, no agent commission, no parade of potential buyers snooping around your house, and minimal waiting. The possible drawback: The iBuyer’s offer may not be as high as what you’d get if you went the traditional route. They’re in it to make a buck, of course, and their model is based on having algorithms that tell them whether they’re picking up a property at enough of a discount that they can buy it, make the necessary fixes or upgrades, and turn it around for a profit.

There are a number of fairly recent iBuying startups, including Opendoor and Offerpad, that have attracted significant venture-capital infusions,2 but in terms of publicly listed companies, Zillow Group (ZG)—probably best known as a real estate listing platform—is currently the highest-profile player. Real estate brokerage Redfin (RDFN) has also gotten in the game, and other property brokers have signaled their intention to do so.

The chart below doesn’t show it, but ZG fell around -7% on April 13, 2018 after announcing it was entering the iBuying arena—in effect, leveraging the massive amount of home-pricing data it had acquired over the years into a business opportunity. Although it subsequently rallied to record highs around $65 within two months (far left of chart), the stock crumbled along with the rest of the market as summer turned to fall before beginning to crawl higher in November.

Zillow Group (ZG), 6/11/18–5/21/19. Zillow Group (ZG) price chart. Up more than 30% since May 2.

Source: Power E*TRADE


A huge up move after its February earnings release was followed by a retracement to the March 2 low around $32, but since then ZG has rallied to the tune of +31%, in the process beating its most recent earnings numbers on May 9. The report suggested Zillow’s iBuying biz is doing well, having contributed $129 million to the firm’s $454 million revenue total—a 51% year-over-year increase.3

Bulls looking for more upside in ZG may notice the stock has had only two down days in the past 13 and, as of yesterday, had rattled off six straight days of higher highs, closes, and lows—the type of high-momentum roll that makes experienced traders consider waiting for a pullback that could give them more of an edge.

Stock traders, just like home buyers, don’t do themselves any favors by rushing in at market highs.

Market Mover Update: Another day, another twist in the trade-war drama: After the US announced some exceptions to its ban on companies doing business with Huawei Technologies,4 semiconductor stocks made up some of the ground they lost on Monday. The PHLX Semiconductor Index (SOX) rallied more than 2.5% intraday, and NXP Semiconductors (NXPI) jumped more than 3%.

Today’s numbers (all times ET): EIA Petroleum Status Report (10:30 a.m.), FOMC minutes (2 p.m.).

Today’s earnings include: Advance Auto (AAP), Analog Devices (ADI), Lowe's (LOW), Photronics (PLAB), Target (TGT), Ctrip (CTRP), Huazhu Group (HTHT), Kraft Heinz (KHC), L Brands (LB), NetApp (NTAP), Williams-Sonoma (WSM).

 

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1 Econoday. Existing Home Sales. 5/21/19.

2 TheRealDeal.com. The iBuying wars. 11/1/18.

3 Economist.com. Instant buyers are changing the way people buy and sell their homes. 5/18/19.

4 Bloomberg.com. U.S. Stocks Climb on Huawei Reprieve; Bonds Mixed: Markets Wrap. 5/21/19.

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