Hey everyone kevin here. I've been getting a lot of questions about why the heck zillow is getting out of real estate flipping. Why have they stopped their i buyer purchases? A lot of madness is going on. A lot of speculation is going on around why this is happening, especially since today, housing starts fell.

Let's talk about some of these numbers, break them down and see. What's really happening, quick note if you're interested in learning more about real estate, investing check out the programs linked down below on building your wealth in real estate, from zero to millionaire real estate, investing property management and rental renovations or being a real estate agent check out Those three programs link down below okay, folks, let's get started so housing starts - did fall in september, driven by a pullback, specifically in multi-family construction. We saw a decline of 7.7 percent in permits for multifamily. That's a big decline.

Residential fell about 1.6 percent relatively flat, and when we look at these numbers alone at the same time, and just the day after zillow is stopping its purchases of real estate properties to flip it kind of makes us wonder, is this a signal that zillow thinks we're At the top of the market, we're going to analyze this, but let's understand the numbers, i'm not just going to give you a 7.7 decline in multi-family housing starts and a 1.6 decline in residential without giving you some relativity. Total housing starts right now on average and building permits are up between 5 to 15, comparing now to the pre-pandemic months. So if you go back and you look at the pre-pandemic summer of 2019, the winter of 2019, the january essentially of 2020 right before the pandemic, really struck, we are up from those levels right now. So, even though we're seeing a small little edge down in multifamily starts and a single family starts we're up from those levels, that's very, very important to compare to, because there are a lot of click bait articles and videos circulating right now about how, for example, foreclosures Jumped 32 in the second quarter and that they're 67 higher than they were in the third quarter of 2020, and so you've got these click bait videos, essentially that are circulating, suggesting that oh, my gosh we're going into a foreclosure crisis.

The real estate crisis is starting, and the reality is what we should be getting. Is information like this from adam solutions that shows us that the foreclosure activity is actually at one of the lowest levels that we have been in in 16 years now? This goes through 2022, but the fact that we're going up from this level, where we had a mortgage, a forbearance program in place, in other words where people were not getting foreclosed on because they did not have to make their mortgage payments and foreclosures in many cases, Were halted for not making a payment? The fact that we're up from 2022, i'm sorry from 2020 levels is not a surprise. You would expect that the broader trend, though, is still pretty accurate. In fact, right now we're only at about 25 000 foreclosure processes, starting if you multiply 25 000 by 12, 25, 000 divided or times 12 you're, going to get 300 000 foreclosures on an annualized rate right well, take a look at the foreclosure rate in 2019.

There are almost 500 000 foreclosures now 300, divided by 500 means that we're only at about 60 of the foreclosure level, where we were in 2019, we're way lower yeah we're going to be a little up from there, but we're still going to be on this massive Downtrend of foreclosure activity, i've seen other misleading articles and videos refer us back to this big growth in foreclosures that we had between 2006 and 2007 and then try to imply to folks that the great recession is ahead of us, but wait a minute. This was an increasing trend. This is a substantially decreasing trend and yeah we're popping up, but that's only because this bar here shouldn't even really be here, we're going to continue a trend line, because this was an artificial manipulation by essentially government saying foreclosures are not allowed to happen right. So these are very, very important pieces of data to remember it's the same thing with active forbearances being down, but just because somebody's in forbearance doesn't mean that somebody's going to sell their house.

In fact, less than 15 percent of forbearances are actually turning into house sales and yeah court filings for evictions are up, but in many cases they're half the pre-pandemic eviction rate. In some cases at best - or i suppose you could say at worst, they match the eviction rate of what we had pre-pandemic. So folks, when we look at the actual data, the same thing with the housing starts. Data that we got today is the same thing.

That's going on with foreclosures and evictions and these other issues we're not really seeing big data point issues suggesting that a big market crash is coming, but then why would zillow stop doing housing flips? Why would zillow take something that is the core to their business and say we're not going to do this anymore to the benefit of a company like open door or potentially redfin? These two companies competing obviously with zillow in the i buyer world. Well, zillow writes in their 10k quote, our zillow offers business relies on local and national third party contractors, vendors and service providers to make upgrades to and perform maintenance on homes prior to resale, and we can provide no assurances regarding the quality of their work and that We will have uninterrupted or unlimited access to their services, and this is actually really really important because for the same reason that we saw housing starts decline which was blamed on supply shortages for products for homes, especially multi-family homes, but also labor shortages. Not enough people to build homes by the way we're seeing big labor shortages in part because of the child tax credit, a lot of folks becoming entrepreneurs and we're starting to see some two working parent households turn into one working parent households for households or families with Children or potentially even without children, because folks savings and their their earnings have gone up so much in the pandemic or during the pandemic over the last 18 months, which is crazy. But the household savings rate is at record high.

So it kind of makes sense that we're seeing not only this job shortage but supply shortage affecting home building and construction. This makes a lot of sense to me now. Zillow's stock was down 9.24 yesterday and take a look at some of the numbers here in quarter. Two of 2021, they acquired 3 800 homes in last uh in 2020.

In total they acquired 4162 homes. That means, in one quarter of this year, they've pretty much bought as many homes as they did in 2020. Combined. All quarters combined, that's crazy and in the last quarter, so far, they've already purchased over 4 000 properties.

These folks are capped out, there's no way they can scale this way, and the last thing you want to do is scale a construction related business too quickly because you'll go bankrupt, and i know because i scale the construction business too quickly. I've been there as a licensed contractor and it's horrible, but consider this on top, and this is where some market headwinds come in. Potentially, let's say you have a four hundred thousand dollar house. The average house that zillow sold last quarter was about three hundred.

Seventy thousand dollars, but let's just round it to a four hundred thousand dollar house and let's say just to just on holding costs, you're going to pay around eight thousand dollars a year just to hold the property, not even to mention your opportunity, costs or other issues. You're just going to hold that that particular property. What happens next well, the next thing that happens is every single month. You have a headwind of somewhere around 650 666 bucks a month and if your average profit on a deal at zillow is somewhere around 36 to 37 000 during a really strong market, then hey holding a property for six months, isn't really that big of a deal Right, you hold a property, you make thirty six thousand dollars, but it takes you an extra, let's say six months to actually get it down at six hundred.

Fifty bucks that's going to take your thirty six thousand dollars and turn it into something. Much more. Like thirty two thousand dollars, it's a hit but you're still profitable right sure, but depending on how you actually look at the numbers for how zillow does their business see? Zillow has a problem when zillow says in the last quarter they made 777 million dollars of revenue. Uh and they those those revenues for home sales, cost them 707 million dollars, in other words, about a 9.8 profit margin when they say this they're, not including in that the marketing costs that it took to actually acquire these homes, see zillow is marketing like crazy.

They are spending, or at least last quarter. They spent 229 million dollars to not only acquire real estate leads, but also acquire these properties. Let's just say for giggles that sixty percent of this 229 million dollars is to find homes and that they advertise the other money on other things, that's 137.4 million dollars. If you include that in to the 707 cost of revenue, that zillow has, that means zillow's home project costs them 844 million dollars and they only brought in 777..

That's a loss of about eight percent per home. A loss of eight percent per home on a 370 thousand dollar home is about 30 thousand dollars per home that you're losing right now, so zillow's not profitable on these home purchases. Right now, and the last thing that they need is to be even more unprofitable because of additional holding costs or worse interest rates going up, which guess what? Folks? The federal reserve just told us that interest rates are expected to start bumping up about a quarter of a percent of the federal reserve at the second half of 2022 and that we could expect two rate increases in 2023 and three rate increases in 2024.. These are going to be little quarter.

Percentage point increases in the fed funds rate, which can have the effect of pushing up interest rates in mortgages and in the real estate sector, and unfortunately, that is a headwind that zillow is suggesting hey. This is not something that we want to be up against. We don't want to be in a situation where we're losing more money, running an unprofitable business waiting longer for contractors, aka losing more money at the same time as potentially running into the interest rate increase that we're potentially going to see next summer, maybe even earlier, if Their continued inflationary concerns because see that would be the double-edged sword. Inflation gets worse.

Let's just say: inflation gets worse. The fed has to raise rates sooner and zillow overwhelms themselves with more homes, while not having enough contractors to even get them off the shelves. It's a potential recipe literally for bankruptcy. The last thing you want is to be overly indebted and in projects, while you are investing in real estate.

This is very, very dangerous. Now. The good news for now, though, is zillow, is pretty dang. Well capitalized.

So i'm not horribly worried about zillow going bankrupt, but i'm actually not really worried at all about solo going bankrupt. I think more zillow doesn't want their profit margins to look even uglier than they kind of already do. Okay, home flipping is not a really easy profit business, so the ones who make money do a lot of them to offset some of their losses with other profits, and they hope to do so in an appreciating market. Last thing you want to do is be flipping homes in a depreciating market.

You get screwed because the margins are very thin. It's because it's expensive to sell real estate, but the good news for zillow is, as of the last quarter of uh or last quarter, that they reported ending june 30th. They had 3.7 billion dollars in cash and equivalents and they had current liabilities of 1.6 billion or less than half so they've got plenty of cash. They're well capitalized they're not going bankrupt, they're, not going anywhere they're just running an unprofitable business and i don't think what they're doing is marking a top to the real estate market.

It's just being prudent that the last thing you want to do is bury yourself in thousands of homes that you can't even manage to get renovated, while at the same time potentially having some headwinds coming to the real estate market. Like interest rates going up, let's say even a half percent interest rates go up; half percent, that's a potential five percent headwind to real estate prices and that's another five percent of losses for zillow, and that is not what you want. As a ceo on your earnings reports, so now you have the full story, in my opinion, of course, as to why zillow stopped buying homes and quit real estate. For now, don't worry they'll be back.

I expect in the meantime, if you want to learn more of my perspective in real estate or stocks, or investing take a look at the program's link down below on building your wealth. There is a coupon code that does expire october 29th. Super excited to have you there and we will see you very soon thanks so much bye, you.