Abstract
Technological innovation continues to disrupt virtually every sector of the U.S. economy. This paper explores one such innovation, namely iBuyers (i.e., firms who use PropTech to provide online quotes and make quick cash offers on homes), and studies their impact on various housing market dynamics. More specifically, we find the presence of iBuyers increases home prices in local markets by up to 2.8%. We further hypothesize that strategic behavior on the part of home sellers, and particularly increased “fishing” for high offers after the entrance of iBuyers into a market, helps explain this phenomenon. This explanation is strongly supported by an observable increase in both time on market (TOM) and listing prices following the entry of iBuyers. Lastly, we find iBuyers compete with and crowd out potential local homebuyers, forcing them into neighboring markets, and thereby causing home prices in these adjacent ZIP codes to increase as well.
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Notes
iBuyers typically offer slightly less than full/fair market value, and thus anticipate a positive resale margin, due to (1) reduced agent fees, (2) greater surety of close (i.e., a cash sale means no complications over a buyer falling through), (3) relatively hassle-free transactions, (4) timely and flexible closing dates, and (5) adverse selection due to asymmetric information (i.e., sellers may know of unobservable hidden property defects and will likely be more willing to sell when it is to their advantage, thus creating a potential winner’s curse scenario for iBuyers).
For example, imagine a seller accepts a new job out-of-town that starts in three months. If they have an offer in hand from an iBuyer, “fishing” (i.e., listing at an unrealistically high price hoping the right buyer will come along) on the open market for 45 days to see if they can do much better is a virtually cost-free option. See Sun and Seiler (2013) for additional insight along this dimension.
Importantly, however, not all outcomes from such innovations are positive. Consider, as an extreme example, the findings of Foley et al. (2019) that approximately one-quarter of Bitcoin users are involved in illegal activity. As such, any responsible accounting of the true impact of innovative technological disruptions should recognize not only first order, direct implications, but also potential indirect and/or spillover consequences.
https://www.zillow.com/sellers-guide/what-is-an-iBuyer/; iBuyers: Is The Convenience Worth The Cost?, Forbes, Jun 5, 2018; To sell your house fast, you don’t need to deal with a bottom feeder, The Washington Post, April 25, 2018.
We identify seven primary iBuyers. Opendoor led the way and was established in 2014. Offerpad and Knock followed a year later and were established in 2015. RedfinNow, Perch, and Ribbon were all established in 2017, while Zillow Offers was established in 2018.
Venture capital investment dedicated to PropTech initiatives in 2014 was almost double that observed in 2013. This was largely driven by both strategic investment opportunities and a low interest rate environment which facilitated capital acquisition.
For this comparison, we use the national median single-family housing price as of December 2016 reported by Zillow (https://www.zillow.com/home-values/102001/united-states/), which is the mid-point of our 2014 through 2018 sample period.
These numbers comport nicely with similar data reported by Redfin (https://www.redfin.com/news/ibuyer-impact-phoenix-housing-market/), who estimate the iBuyer market share ranged from 4.1 − 5.0% during the summer of 2018.
See, https://www.redfin.com/blog/data-center/. Redfin has direct access to data from local multiple listing services, so it has relatively complete records of home sale information.
We use the NBER’s Zip Code Tabulation Area (ACTA) Distance Database, derived from 2016 Census definitions, for this calculation. The database is available at: https://www.nber.org/research/data/zip-code-distance-database.
Data source: https://www.redfin.com/blog/data-center. Redfin reports the median TOM in each ZIP code for different property types. We download and use the Single-family Residential data for all ZIP codes located in the Phoenix-Mesa-Scottsdale Metro area.
The economic magnitude of this two-day extension takes on added significance in light of the robust housing market conditions prevailing in Atlanta during our sample observation window. Of note, this two-day increase represents more than a 10% increase relative to the mean TOM of 19 days.
For additional insight into Opendoor’s acquisition model and strategy, see:
For additional insight into Offerpad’s acquisition model and strategy, see:
https://web.archive.org/web/20190505014411/https://www.offerpad.com/faq/sell-your-house/.
Individual investors may choose to either resell the property within a few months, or alternatively, convert the property into a long-term rental. We are primarily interested in the first group of individual (resale) investors, and define a transaction made by them as one where a purchased home is subsequently sold within six months.
We appreciate an anonymous reviewer’s comments and suggestions along this.
See, https://www.redfin.com/news/ibuyer-real-estate-q3-2019/ and https://www.zillow.com/research/data/. Appendix Table 13 reports detailed information regarding the entry date of iBuyers by market. Once again, we appreciate an anonymous reviewer’s comments and suggestions for leading us down this path.
The ability of homeowners seeking to either upsize or downsize within the same housing market would also seem to be made more efficient if iBuyers were more prevalent in the marketplace.
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Harrison, D.M., Seiler, M.J. & Yang, L. The Impact of iBuyers on Housing Market Dynamics. J Real Estate Finan Econ 68, 425–461 (2024). https://doi.org/10.1007/s11146-023-09954-z
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DOI: https://doi.org/10.1007/s11146-023-09954-z