Zillow Drop with a Subprime Pop? How a 2018 Crisis Would be Worse than the First. . .

Are subprime loans coming back, are they back already, and who is buying homes in a hyper-overpriced residential property paradigm?

On April 12 2018, the stock of Zillow (Z) popped over 6% after hours on good earnings. However, this pop was short-lived as the company opened down over 9% on April 13th after a conference call revealed details about the company’s plan to implement GAAP practices (making their numbers less attractive) and the expansion of its ‘Instant Offers’ pilot program, a directive that would put Zillow in the home flipping business, exposing it to real estate ownership risks.

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TLDR: In early 2018, the demand for residential credit was supermassive, but 25%-33% of millennials live at home, have no job or a bad job and have no credit or bad credit. Companies like Zillow are acknowledging that although the demand for credit is high, the throughput of home sales is down and home prices are at unreasonable levels, prompting the company to investigate other business models to stay strong in 2018’s real estate climate.

Zillow’s plans to adjust its practices prompt many questions about the future of the real estate market and its biggest players, including companies like Zillow, banks, and lenders.

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A decade ago, the United States was in the midst of a subprime credit derivatives crisis. Dubbed “nonprime lending” in technical financial parlance, banks made a massive amount of loans to individuals and families that showed little to no ability to repay – and when they couldn’t, many homes went in to foreclosure. To exacerbate the problem, banks bundled and sold these junk loans to one another – and put the global financial system in a bad spot.

Although the economy eventually recovered and 2017 saw great gains in the market, many metrics are just as bad if not worse than 2007. It is estimated that a quarter to a third of millennials live in their familys’ homes, with little or no income, and home prices that are out of their (and many others’) reach. For this and other reasons, home throughput – the listing and selling of homes – is down.

Despite this, banks are reporting that the demand for residential credit is huge.

After-the-fact analysis of the subprime mortgage crisis revealed banks were making nonprime loans fully intending to foreclose and take possession of the property when the borrower inevitably became unable to repay.

Do these past transgressions forecast a repeat of bad behavior?

Some experts believe that banks will need to engage in nonprime activity again in order to preserve their business model. Given the practices of lenders in the past, it is conceivable that creditors will make questionable loans knowing that many will not be able to repay and properties will be available to them at firesale foreclosure prices. With 2 out of 3 jobs anticipated to be replaced by AI in the next several years, the situation may prove even more dire than 2007-2008.

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