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You’re Going To Love Some Of The Craziest Housing News Of 2023
Crazy because The Juice has seen this coming since last year. And crazy because, well, it’s just crazy.
Both pieces of news involve Zillow (Z), a stock that has done quite well in 2023. Up roughly 50%, it has significantly outperformed the broad market.
However, we don’t like the stock. We’ll explain why in a second.
But first …
Zillow, the company, predicts housing prices will increase 6.5% by July 2024 amid tight inventory.
If you’re a regular reader of The Juice you know we’ve been predicting record housing prices since January. One of the things we got wrong was anticipation of lower interest rates. With the rate on a 30-year mortgage still stubbornly north of 7.0%, buying a home continues to be an increasingly unaffordable proposition for large swaths of the population. Forget 2024, some analyses say we’re already back to record highs in a majority of U.S. cities.
Zillow’s solution: Offer a 1% down payment mortgage scheme, starting in Arizona with plans to expand because …
Most markets are in the midst of an affordability crisis, and saving for a down payment remains one of the biggest barriers for many potential home buyers. This is especially true for first-time buyers, who are often paying high rents …
Zillow Home Loans’ 1% Down Payment program lowers the down payment barrier and increases access to the housing market for eligible borrowers.
What’s our take on this? Yes, it might decrease the amount of time it will take a renter to save for a down payment. However, the idea that being able to make absurdly high rent payments justifies taking on a potentially higher and even more absurd mortgage payment doesn’t sit well with us. Basic math tells us that, the lower your down payment, the higher your monthly payment.
Prospective homeowners sometimes don’t ask this all-important question before jumping headfirst into a 30-year mortgage:
Will home ownership make me better off financially starting today and forever than I was yesterday?
Home ownership at all costs isn’t always a great idea.
However, we’re in a difficult environment. Many renters look at their homeowner friends and family and ask why can’t I have what they have? I want what they have. And I’m going to find a way, any way, to get it. Along comes Zillow with another way.
While we won’t liken it to the irresponsible lending of the subprime mortgage crisis of 2008 – because it’s nothing like that – Zillow’s move does make us stop and think about the perils of having good credit, but not a lot of cash in the bank. Using Zillow’s own words, this is the profile of the household this 1% down payment plan is for.
If you don’t have enough money saved for a down payment, do you really have any business owning a home? In addition to the monthly payment, you must have cash on hand to cover everything from taxes and insurance to regular and unplanned maintenance. Isn’t this something lenders should be looking at? Clearly, Zillow isn’t because it’s flat out saying, you don’t have a lot of cash, so here’s what amounts to a shortcut into home ownership.
Which leads us to why we don’t like the stock.
In the shell of a nut, consider what we often say about buying relatively speculative stocks as long-term, buy-and-hold investments:
As an investor, you have to separate hype from reality.
No doubt, Airbnb stock took some hits shortly after we suggested it in May of last year. However, when we suggest stocks, nine times out ten, we’re talking to long-term investors. And we make that clear. We suggest stocks that we believe have strong, long-term narratives …
Call UBER, DASH and ABNB the holy trinity. More than anything they’re tech companies. Not travel, delivery or whatever traditional category people try to fit them into. They’re tech platforms that become a part of people’s lives. The ones with the stickiest ecosystems are the ones we want to own now and buy regularly for a long, long time.
As much as we love gawking at rent and house prices on Zillow, we don’t consider it an ecosystem “that become(s) a part of people’s lives.” Instead, they’re playing with people’s lives as they dangle the dream of home ownership in front of their faces with this financially unsound 1% plan.
We don’t think this ends well for Zillow. It makes us recall Zillow peer Redfin (RDFN) and its exit from the house flipping market in 2022. Getting into a business you have no business getting into.
The Bottom Line: There’s no question we’re in the midst of a housing affordability crisis that only appears to be getting worse. And this absolutely is a problem. However, making home ownership possible at all costs isn’t the answer.
Alternatives for building wealth in America exist beyond home ownership. Just because your parents got house rich doesn’t mean you should follow the same route.
A better path might be lowering your cost of living wherever you can, renting a modest apartment and putting your extra cash in the stock market, especially when opportunity presents itself. Like it is right now with the main players in artificial intelligence.
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