How the Housing Market Went Off The Rails - YouTube

(calm music)

- What's up, guys?

Michael here once again at Wisecrack's super secret

offsite location to talk about the biggest lesson

millennials have learned since the 2008 real estate crisis:

that there's nothing more fun

than watching people buy houses on TV.

Whether it's identical twin-led home makeovers,

identical twins who have definitely kissed by the way,

quirky cabin renovators, or a fixer-upper power couple

slowly building an empire,

the fact of the matter is folks under 40

are the primary consumers of channels like HGTV

and the Magnolia Network,

and it isn't just about television.

Younger adults are gawking at dream homes

and turnkey disasters on Instagram, TikTok, Pinterest,

and of course on websites like StreetEasy, realtor.com,

Trulia, and perhaps the most infamous of them all, Zillow.

- I'd never live in North Carolina, but if I did,

I could buy a big, gross mansion.

(audience laughing)

- Zillow.

- But why are we so glued to these visions of property?

Is it all escapist fantasy for homes

we'll never be able to afford?

Are these forays actually preparing us

for the realities of the American real estate landscape?

Or is our obsession with real estate shows

and online listings inadvertently helping us

to dig our own property grave?

Let's find out in this "Wisecrack Edition: Home Ownership,

"What Went Wrong?"

Americans have coveted property since the first Europeans

laid claim to this already inhabited land.

In fact, taking a nod from philosopher John Locke,

the Declaration of Independence touted every human being's

inalienable right to, "Life, liberty,

"and the pursuit of happiness."

But here's the catch.

Locke was better known for his thoughts

on the right to property

and for his complicated views on the pursuit of happiness.

Thus, Thomas Jefferson's phrase of choice

has often been interpreted to mean property.

And we can only assume that the Founding Fathers

would've been huge HGTV fans,

because they like to watch brothers kiss.

The good news was there was plenty of land in North America

for disaffected Europeans to plant flags

and finally call dibs on their own property.

This was in stark contrast to the situation back home.

As historian Gordon S. Wood wrote,

"Land was scarce in relation to people

"and therefore was expensive.

"Hence, unable to afford their own land to farm,

"Europeans were compelled to work for others,

"either by becoming laborers for landowners

"in the countryside,

"or more often by migrating to the cities

"to engage in manufacturing goods in factories."

Because it was easy to find people

to fill both kinds of jobs, wages sucked.

As a result, a lot of underpaid

non-property-owning European workers

put off marriage and kids.

Wow, putting off marriage and kids

because you can't make enough money?

That would never happen to anyone I know.

(melancholy music)

I wish I had kids that would love me, but I don't.

And even though the Founding Fathers may have hated

the oppressive system they fled, they somewhat recreated it.

It's like how you worked your whole life

not to become your parents,

but you look in the mirror one day

and you realize you're just like them.

Under capitalism, property ownership does equal liberty,

at least to some degree.

- We wanna live where everyone else vacations.

- Home ownership in America is the best way

to build generational wealth.

So if your family historically did not have access

to property for reasons,

you have a much smaller chance of upward mobility

than people whose families have been able to use homes

as assets, equity, and inheritances.

Having trouble paying down a debt?

If you're a homeowner, you could refinance

or take out a second mortgage.

If you're not, you can, I don't know,

like sell bodily fluids.

According to the federal reserve,

the median net worth for homeowners in 2019 was $255,000

compared to a paltry $6,300 for renters.

If you're a homeowner, it's also likely

that you around a lot of other homeowners.

That means you and your neighbors are paying property taxes

into the local schools that result in better funding

than neighborhoods with lower income

and higher proportions of renters.

So your kids not only likely benefit

from generational wealth, but from a better education.

And what a cool system

where the quality of a child's education

is tied to property tax rates in their neighborhood.

I see no problems with this.

And let's not forget that property ownership was used

for deliberately exclusionary purposes,

like restricting voting rights to minorities and women.

In fact, even white men who didn't own property

were often disenfranchised from the voting process

until the mid 19th century.

As Katherine Levine Einstein and Maxwell Palmer point out,

even today, "Homeowners dominate

"contemporary local politics.

"They participate at far higher rates,

"are electorally powerful,

"and comprise virtually all elected officials,

"even in cities with large majorities of renters.

"Their disproportionate influence

"comes with stark consequences

"for American local governments.

"Land use and housing policies

"that favor the interest of homeowners

"have spurred high housing costs,

"sprawling and environmentally destructive land use,

"racial and economic segregation,

"and unequal access to high quality public goods."

At the Constitutional Convention,

the question of whether you needed to own property

to participate politically was hotly contested,

and folks like future president James Madison argued

only land owners could be trusted

with our delicate Republic.

See, in Madison's mind, realistically,

most Americans would never own property.

And if all those unpropertied people banded together

and, say, voted in unison,

well that would be bad news bears for the upper crust.

But like, what if we did that for real though.

Others at the Convention,

like kite enthusiast Benjamin Franklin, disagreed,

concerned that land ownership

as a condition of electoral participation

would create a powerful aristocracy

and powerless lower class.

Besides, many in the latter group, he pointed out,

had fought in the recent Revolution

that allowed these guys to even be having this conversation.

Ultimately, the Constitution ended up

with little to say about property,

and decisions about whether you needed to own property

to vote were left to individual states

who got cruelly creative.

As we moved forward, and especially in the Jim Crow era,

local restrictions on voting

and political participation increased.

At the same time, discriminatory housing policies

made it incredibly difficult for pretty much anyone

who wasn't a white male to own anything at all.

The emphasis on property ownership

as the paragon of American virtue was intentionally designed

to benefit one class of people

to the exclusion of all others.

So in some ways, owning your little piece of land

has always been crucial to success in America.

At the same time, it's remained an elusive dream

for so many.

And today that includes older millennials.

They remain deeply impacted by the 2008 financial crisis

that saw millions of Americans lose homes

to predatory subprime lending practices.

And they saw good paying jobs disappear almost overnight.

And, of course, they're further saddled

with an unprecedented amount of student loan debt,

which really counts into your white picket fence budget.

Or your food budget, rent budget, toothpaste budget.

Just your budget as a whole 'cause you don't have any money.

And that's not great because studies have shown

that renting is literally bad for your health.

A 2012 study of urban homeowners and renters reported

that homeowners perceived, "A sense of control,

"trust in neighbors, and residential stability"

that resulted in better mental health outcomes

than their renting counterparts.

Unsurprisingly, the lack of stability

that has defined millennial adulthood

leads to depression, anxiety,

and a fertile landscape of Instagram and TikTok therapy.

But then (sighs) the pandemic hit.

And while cooped up in tiny apartments,

we started gazing longingly

at the internet listings of homes with yards,

room for an office, and enough space to escape the scent

of our roommate's deteriorating hygiene habits.

- And you know how I am about my gas range.

- [Michael] But as young people flocked to the internet

to ogle their dream homes,

one of the main purveyors of #housegoalscontent

found itself in hot water

for deeply anti-consumer practices.

And it managed to also royally screw itself

in an ill-conceived effort to profit even further

off the home selling process.

That website is Zillow.

And if you're between the ages of 25 and 40,

you've probably lost at least one afternoon to it.

- Are you bored?

- Mm-hmm.

- [Michael] Launched in 2006,

Zillow began as a simple listings website

where users could put in specs for homes they wanted to buy,

things like location, budget,

numbers of bedrooms and bathrooms, et cetera.

- I go to open houses

'cause I love seeing how other people live.

- Then they could connect with a broker

when they saw something they liked.

According to Will Parker of the Wall Street Journal,

"It's a platform for real estate agents to find people

"who are looking for homes and want to buy them.

"That's the primary way that Zillow makes money,

"and it's a good business.

"It's very high margins.

"And so it's not a very capital

"or asset intensive business."

Side note, if you wanna learn more

about how platforms function,

check out our recent video on Elon Musk.

But in 2018, the company decided to cut out the middleman

and start buying and selling homes directly,

a practice called instant buying or iBuying,

because when you put I in front of anything

it makes it fancy.

And they predicted it would make them, in real estate terms,

a metric butt full of money.

Journalists Ryan Knutson put it this way,

"With iBuying, consumers could skip the long hassle

"of listing a home, showing it, waiting for offers,

"negotiating, and so on,

"and instead sell their home almost instantly

"to a company like Zillow.

"Zillow thought this model would be more attractive

"to buyers and sellers."

And as Parker points out, even if the price Zillow offered

for your house was lower than its market value,

the convenience of the transaction

and the promise that the deal would go through quickly

was attractive enough to lure in more sellers

and grow Zillow's inventory.

In essence, Zillow was simply home flipping,

a practice any HGTV viewer is familiar with.

- The asking price was 390,000,

and we wound up paying 9 billion, plus closing costs.

(audience laughing)

- Ideally, Zillow would buy homes

and then sell them for more than they purchased them.

On top of that, iBuyers bring in money

through transaction fees, the real cash cow in the deal.

Zillow predicted that their iBuying scheme,

which they called Zillow Offers,

would rake in an extra 20 billion a year.

But house flipping isn't that lucrative on a small scale.

You can't, say, buy a house for 100,000

and sell it for a million.

The margin between buying costs and selling profits

is relatively small.

So in order to live up to the massive promise

of a multi-billion dollar surge in revenue,

Zillow had to go big or go home.

Or go big and get homes.

And that's exactly what they did.

Zillow snapped up 7,000 homes

at prices that baffled their competitors,

and in many cases delighted homeowners

who were putting their houses on the market.

Zillow would sometimes pay more than the price

at which local real estate agents had valued the homes

in order to entice the seller

to make an easy and quick decision.

And this practice inspired a now viral TikTok

where real estate agents Sean Gotcher posits-

- Why would they pay 340 for this 31st home

whenever they've only paid 300 for these others?

Well, what that just did is create a new comp.

So when they go to sell these other 30 homes,

that extra $40,000 that you could say

this ones sold for 340 just made them 1.2 million.

- Of course, Zillow tried to shoot down these insinuations

in a statement to Yahoo News, claiming that,

"We pay market value for every home we purchase.

"When we looked at homes that sold traditionally

"after they declined a Zillow offer,

"we learned that on average,

"those selling traditionally sold for only 0.09% more

"than the Zillow offer."

And if we learned anything about corporate PR,

we can always trust exactly what they say.

But quibbles over price fixing aside,

Zillow's plan had a few kinks.

Real estate isn't a Costco,

and snapping up houses in bulk is considerably riskier

than impulse buying those five-ton cartons

of pizza-flavored Goldfish.

Although, realistically,

both are gonna leave you with some regrets.

And in the fall of 2021, regret hit hard

when Zillow announced that it had taken

a half billion dollar loss on Zillow Offers,

which, if you're counting, is $20.5 billion less

than the profit they'd expected.

It's hard not to collapse at Zillow's hubris,

but it's instructive to consider what they're planning to do

with all those houses.

And spoiler alert,

they're not selling them to families or newlyweds.

According to Bloomberg News,

Zillow's pitching them to institutional investors

like private equity firms.

And this whole debacle is really a microcosm

of a much larger problem in America.

In the aftermath of the 2008 housing crisis,

huge corporate investors started scooping up houses

that had been dispossessed and renting them out,

often for more than residents would've paid otherwise.

This practice has ramped up aggressively since

with corporations like Blackstone

pouring billions of dollars into real estate

and yielding record profits.

For example, in Atlanta last year,

17% of single family homes were bought

by large corporate investors according to Atlanta Studies.

See, big corporations are often willing to take big risks

and big losses on properties,

something the average individual or family can't afford.

At the same time, by artificially constraining

the supply of real estate in America,

these corporations have driven prices sky high.

As such, neighborhood dynamics are upended

as families and businesses are priced out

of their communities.

And we're not alone in this.

America's maple syrup-soaked neighbors to the north

are experiencing something similar.

Canadian publication The Walrus illustrated the problem

with the story of S.W. Welch,

an independent used bookstore in Montreal.

When the building housing the bookstore

was bought by a real estate firm,

68-year-old Stephen Welch was informed

that the store's rent, taxes, insurance,

and maintenance would increase to 5,000 a month,

a staggering 150%.

Unable to afford the surge, Welch said simply,

"I think they'd rather the building be empty

"than have me here."

And increasingly this is true

throughout the United States as well.

For a real estate firm that can afford to buy up properties

and lucrative locations and leave them empty,

it's a waiting game.

As executive director of Downtown Montreal

Business Association Glen Castanheira explained,

"Say a landlord buys a property with a mom and pop shop

"that pays its rent on time every month,

"but it only pays $1,000.

"The landlord may think he can get 5,000

"or 10,000 per month.

"Even if the property remains vacant for 10 months,

"it only takes one month's rent with the new tenant

"to make back what they lost."

Some cities have created taxes and fees to penalize firms

who leave usable property vacant

for extended periods of time.

But real estate speculation, the act of buying up property

in anticipation of favorable changes in the market,

has proven too profitable to be shut down,

especially by slaps on the wrist

like Oakland, California's 6,000 a year flat fee

for homes in use fewer than 50 days a year.

And in a red hot housing market,

some 16 million homes still remain vacant

throughout the United States.

The injustice of there being 16 million vacant homes

in a country with half a million unhoused people

is pretty staggering.

Meanwhile, since the recession,

the value of American real estate has ballooned

at an unprecedented rate.

But remember, lots of homeowners lost their houses

during the crisis.

So instead of these gains going to moderate

or middle income homeowners,

it's going into the coffers of huge corporations

and their shareholders.

And it's all fun, games, and easy television

for our glowing surrogates

in their newly remodeled happily ever afters.

But when you turn the TV off, the reality is a lot darker.

One survey referenced in Fortune

showed that some 82% of millennials

have at least one significant regret about buying a home,

including decreasing home values,

neighborhoods that turn out to be a bad fit,

and the decidedly unglamorous realities of fixer-uppers.

Meanwhile, foreclosures spiked a staggering 700%

in January 2022, according to data company Black Knight.

This picture doesn't quite square

with the cheer antics of "Christina on the Coast."

So what about the majority of us

left window shopping on Zillow, fantasizing about the day

we too will join the ranks of landowners?

In some ways we're cosplaying a dream

in stark contrast to reality.

Put differently, we're situating ourselves

squarely within a system

that's rendered us pretty powerless.

Iris Marion Young contends that, "The goal of a dream house

"sets workers working and keeps workers working,

"fearing job loss, working overtime.

"The consumer-driven desire of civic privatism

"tends to produce political quietism."

That is to say, when we're really worried

about finding our own single family house,

we're gonna work our butts off

instead of questioning the political system

that puts us in this position.

As sociologist David Madden and urban planner Peter Marcuse

write in their book "In Defense of Housing,"

"Ownership restricts household members' opportunities

"to engage in other activities,

"as well as their desires to do so,

"especially their willingness to participate

"in collective action that might involve social conflict."

When we're more focused on benefiting from a (beep) system,

we're less likely to agitate against that system.

At the same time, the writers argue

that this individualist thinking means that,

"If something goes wrong,

"the individual is thought to be to blame

"rather than social and political structures."

The fact that so many millennials can't buy a house

or can't keep up with their mortgage payments

isn't because they're blowing

their not-keeping-up-with-inflation wages

on avocado toast.

It's because they're being priced out by huge corporations.

Zillow's accessibility belies that reality

and keeps us dreaming,

and that's what makes it so seductive.

But what do you guys think?

Are you still gonna spend your Friday nights on a hot date

with the Zillow listings and a rerun of "Property Brothers"?

Or is real estate porn actually a lot more sinister

than the other twins that do real estate

might have you think?

Let us know in the comments.

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And as always, thanks for watching. Later.

(upbeat music)