Can iBuying survive a market slowdown?

Even as established real estate players enter the iBuying game, skeptics are questioning the sustainability of the new home-selling practice.

Some critics view the business as overhyped and capital-intensive, and they think it will fizzle out once investors get tired of thin profit margins, according to the New York Times. They are also concerned about the risk and volatility it could bring to the housing industry.

Last year, rising interest rates led to a slowdown, and Redfin ended up selling homes at a loss. Though the market rebounded, Redfin chief executive Glenn Kelman said that “If rates had continued going up and the housing market continued going down, it would have been a squeeze.”

Zillow, which bought less than 700 homes last year but expects to buy 5,000 per month over the next few years, said it doesn’t expect much money from its iBuying program. Instead, it sees the platform as a means to bring business to its mortgage-lending arm.

But the process is still growing. Opendoor, which last year landed a $400 million investment from SoftBank, bought more than 11,000 homes last year and has raised more than $1 billion to speed up its process. Traditional brokerages like Realogy and Keller Williams are planning to break into the instant-buying market as well.

Markets like Phoenix and Las Vegas have already proven to be popular spots for the practice, but it has yet to take off in the Northeast. It also remains to be seen whether the practice can sustain a slowdown in the housing market and whether enough buyers are willing to accept the risk of a fast home sale.

“The biggest headwind to this getting mass traction is human psychology,” said industry analyst Mike DelPrete. “The bigger the potential downside, the more risk averse they are.” [NYT]  – Eddie Small