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Zillow is a 'long way' from becoming a player in the housing market: Professor

Christopher Mayer, Columbia Business School Paul Milstein Professor of Real Estate joins the Yahoo Finance Live panel to discuss the outlook for the real estate market.

Video transcript

ZACK GUZMAN: Welcome back to Yahoo Finance Live. In this week's Real Estate report, we are looking at outrage on social media. Not just TikTok, Twitter targeting companies like Zillow and Blackstone institutional buyers who allegedly have been scooping up homes, driving prices up for the average home buyers out there looking in certain markets.

Let's break down the truth behind some of that here and what we've seen historically with our next guest. Christopher Mayer, Columbia Business School Professor, Paul Milstein Professor of Real Estate joins us now. And professor, Mayer, appreciate you taking the time here to chat because there's no shortage of people who are angry about this.

And of course, it makes sense, you know, nobody likes private equity coming in here and hurting the little guy. But when you look into the historical analysis of this, I mean, how true is it maybe or how overblown is the impact of a Zillow and other institutional buyers here in the home market?

CHRISTOPHER MAYER: Sure. If you look at last year, there were about 6 and 1/2 million home transactions. Of those home transactions, a little over a million were by investors, period, all investors. So everybody from, you know, people who are buying a few homes or one home to rent out, fix up, and, you know, and get a little bit of income all the way through to large private equity buyers.

But if you look at that million-- little over a million homes that are, you know, bought by investors, only a small fraction of it, about 10% of it is actually coming from people, from portfolios who own over a 100 houses. So the vast majority of the purchases by investors are not large private equity firms, they're actually small mom and pop investors, about 55% of that total of the investor total are these kind of mom and pops.

So private equity is not-- you know, the amount of money you would have to spend to do this is just enormous. Zillow, for example, I see you've got them on the screen, Zillow announced that by 2024, they were hoping to buy 5,000 homes a month, which would mean they would buy 60,000 homes in 2024. If they get to that, that would be out of more than six million. So the idea that they're going to become a dominant player in the market for housing, they're a very long way from that.

AKIKO FUJITA: So maybe not a dominant player, professor, but if we take specifically some of the allegations that were put forth in this latest TikTok video that went viral, it is that Zillow is manipulating the market by bidding higher. So essentially, I think the analogy he makes is, you know, they can buy five homes in one community all around the same price. And then that last home, they bid higher, so that it raises the value of the other homes as well.

I mean, I'm just curious to get your response on that. And whether, in fact, you know, there is still an impact on the price of these homes even if it's a small portion from a company like Zillow.

CHRISTOPHER MAYER: So the first thing is, if you think about their-- you know, the idea that they'll buy, you know, a bunch of homes and then buy one more. The problem with that analogy is what Zillow is doing is not holding these homes for 10 years, Zillow is going to turn around and sell them. So if what happens is Zillow pays more for a house, a house is only worth what the buyer can pay for it. It's not worth what some appraiser says or some market to market model says about the home.

So if they buy 30 homes, and then the 31st home, they pay more money, it's only going to be worth what-- you know, their role as an eye buyer is to try and sell those homes. So they have to come up with 31 buyers to buy the homes. And the 31 buyers will pay whatever they're willing to pay.

And, you know, The data on this if you look at what I-buyers have done in general, the data suggests that I-buyers are actually losing money on these transactions. So net-net, they're paying more relative to what they're selling them for. So the idea that they may be pushing up prices a little bit, they're pushing up what they're paying to sellers. So If you're a seller, having more buyers in the market is good.

But what Zillow is doing is then putting that house back on the market again. And so that house is going to be worth whatever the person, the next person who comes along is willing to pay for it. So they're serving more like a market maker than they are somebody who's going to hold a bunch of homes and hold her on a portfolio for a long period of time.

ZACK GUZMAN: And I guess that's kind of why it seems like a genius push too because they have all this data, right. They have a lot of data in terms of what people know Zillow to be normally seen as, a tool for kind of finding and looking at house prices, home prices in a lot of different markets. So I guess they collect that and can use it. Another piece of the allegations here.

But just kind of to put it back in the context to you from when you look at the peak of institutional buyers here, it wouldn't seem that that was really leading to prices because it's still what? Below the peak in 2018. So I mean, we've heard the same allegations against Blackstone too now lobbied against Zillow. But it doesn't seem like that would be the main underlying reason for home prices appreciating so much, is it?

CHRISTOPHER MAYER: Right. Well, people are confusing two different kinds of buyers. So Blackstone and a lot of other private equity buyers are buying houses to rent them out. They're not buying them to flip them. So they're buying them to put on the market for renters. And single family rents have been rising rapidly because there's an influx of people who are moving to different places and want to rent houses.

So one set of buyers, the sort of Blackstone of the world, are doing very different things than the other set of buyers, which are Zillow, Opendoor, Easy Knock, these so-called I-buyers. So it's not useful to combine these together because you have single family rental owners who are also buying on the order of, you know, less than 2% of all houses in the market to make for single family rentals. Those people, they're just not touching enough houses.

So Blackstone, and all Invitation Homes, and, you know, all Emerson, all the other-- you know, put all those companies together, they just buy a tiny share of the US market to hold and rent. And the I-buyers who are a different group of people, which are Zillow, Opendoor, Easy, you know, those kind of players, their job is to buy houses to flip them.

And the idea is buy them, create liquidity in the market, and sell them to somebody else. So if you really need to sell your home right away, you can find somebody to buy them. And that's a very different business model. So we just have to be careful not to mix the two different things because some of them are long term buyers. They're tiny. And then the I-buyers who are less tiny than the long term buyers.

But their goal is to put those houses back on the market. They don't want to hold them off the market for-- you know, for long periods of time, because for them, every day that the House is sitting vacant is a day that their capital is depreciating.

AKIKO FUJITA: So fascinating to see the dynamics at play. You know, a lot of people are taking notes, especially those who are looking to buy right now. Christopher Mayer, Columbia Business School, Paul Milstein Professor of real estate, good to talk to you. Appreciate the time.