Zillow has become the most popular residential real estate portal in the U.S. They did this by becoming masters of lead generation. Their first big win was their Zestimate, which allowed homeowners and prospective home buyers to see an algorithmically created estimated property value for any home in America. This put them in the front of the pack of real estate portals. It also gave them the ability to generate a ton of leads, both of the people researching for their upcoming home purchase and the ones thinking about selling.
Their algorithm got so good (so they thought) that they eventually rolled out an iBuying program that would purchase a property, sight unseen, for the price of their Zestimate.The iBuying program did not go as planned. In November of 2021, they shuttered their Zillow Offer division and halted all purchases, leaving them with over 7,000 properties worth hundreds of millions of dollars to sell.
Now Zillow has moved on from buying into this tight market and are instead rolling out solutions for buyers. Their newest product is a mortgage that only requires 1 percent of the purchase price as a down payment. In their press release, Zillow pitched this service as a way to help first time home buyers more easily afford to buy homes: “The 1% Down Payment program can reduce the time eligible home buyers need to save and open homeownership to those who are otherwise ready to take on a mortgage.” They cited a study that shows that “a majority of first-time buyers (64 percent) are putting down less than 20 percent, and one-quarter of first-time buyers are putting down 5 percent or less.”
This new mortgage will be helpful to some, but it certainly is not a case of altruism. In Zillow’s recent earnings report their CEO Richard Barton explained how important first-time buyers were to their business. “First-time homebuyers make up a larger relative share of buyers in the market today. This benefits us because we have a richer mix of first-time homebuyers.” The press that their 1 percent down loans have already generated has certainly brought in a number of leads. Many of these prospects likely don’t even qualify, the program is only for homes in Arizona and there are no specifics about which buyers or which properties they are lending to. Oh yeah, and to find out if you qualify you have to call them directly.
Comparing this loan to a conventional one that generally requires 20 percent down isn’t exactly fair, either. First-time homebuyer (or FHA) loans have always given the ability to put as little as 3 percent down. Zillow’s 1 percent offer actually looks very similar when you look at the fine print: “Through the 1 percent Down Payment program, Zillow Home Loans will pay 2 percent of the down payment for eligible borrowers. The 2 percent is paid through closing and not as a payment to the borrower.” That means that Zillow isn’t really offering a 1 percent down loan, they are just paying the other 2 percent with the commissions that they get from being the loan broker and, hopefully, the agent. Plus, many other lenders like Rocket Mortgage and United Wholesale Mortgage are also offering similar 1 percent loans.
I’m not knocking Zillow here, I think they are a really innovative company. But I do think it seems a bit disingenuous to say that this is a way to get more people into homes. What keeps people from homeownership, even more than down payments, is their monthly mortgage payments. And that goes up when you only put 1 percent down (not to mention the extra property mortgage insurance expense). I think there is an ulterior motive to Zillow’s move, to bring in more leads, to expand their mortgage brokerage services, and possibly to get more people using their “Housing Super App” where they see the entire transaction taking place in the future. Even their choice of location for this 1 percent mortgage is interesting, Arizona is one of the states where they did the most iBuying and likely where they still have the most inventory. Zillow is a smart company with a concise strategy. But let’s just admit that this new loan program is part of that strategy and not a charity program for first time homebuyers like they make it out to be.
If you wondered what other markets besides Phoenix that Zillow did most of their iBuying in, check out this map.
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