Three-Point Thursday

Real Estate –? Zillow is shuttering its tech-based home flipping business after three years of operations. The company posited that the technology foundational to the program was not satisfactory to, “build a stable business.” This move follows Zillow’s acknowledgement of an “operational stumble” which led the popular online listing and valuation business to purchase too many houses as part of an algorithm-driven plan to augment its primary business. According to the company, “The model doesn’t work as planned due to its inability to accurately forecast prices.”?Zillow estimates they will write-off approximately $570MM and reduce their workforce by up to 25% as a result.?What does this indicate for the company moving forward, and can you trust Zillow’s Z-Estimate in light of this failure? Home price predictions have always been a large part of Zillow’s appeal. Currently, the company publishes value estimates for an estimated 104 million properties and the Z-Estimate is featured prominently on home listing pages across the site. Zillow states they use, “statistical and machine learning models to examine hundreds of data points for each home.” The information primarily comes from property records, which are publicly available in most states, as well as from local multiple listing services. Per most real estate experts and appraisers I’ve spoken to, the Z-Estimate is hit and miss and should not be relied upon as a true valuation for every property. While Zillow uses vast data to determine its Z-Estimates, it is unable to detect various factors that make a property desirable, or not. For example, Zillow isn’t touring each home and cannot smell if a bunch of messy dogs and cats live there (sorry to the dog lovers, but less sorry to the cat lovers), nor can Zillow inspect each property thoroughly and determine if foundational issues exist or not. This isn’t to say Z-Estimates are highly inaccurate, but they should be used as one piece of evidence among many when coming up with a property’s valuation. While a picture (and possibly Z-Estimate) is worth a thousand words, it’s best to use multiple sources of data and physically inspect a property, especially when making a big decision regarding it.?

Banking –?We’re continuing to see a strong trend in the use of cryptocurrencies. In my last post, I broadly discussed FinTechs and the future of banking. On October 25th, Mastercard Inc. announced they are partnering with Bakkt Holdings Inc. to bring Cryptocurrency payments mainstream. The two companies said their partnership will make is easier for banks, FinTech firms, and merchants to offer and accept crypto payments. Banks and other financial institutions that issue cards through Mastercard will be able to issue crypto debit and credit cards that allow people to make payments and earn rewards in Bitcoin. Since the announcement in late October, Bakkt stock is up nearly 385%, while Mastercard shares are down around 7.8%. The announcement has the potential to be impactful far beyond these two companies. Big banks would be able to offer crypto cards that are partially powered by Bakkt, potentially reaching larger numbers of consumers. The cards give consumers the ability to pay merchants in bitcoin. Bakkt will convert the cryptocurrency into currency the merchant accepts prior to sending the transaction over the Mastercard network. This conversion would happen instantaneously, therefore, the merchant wouldn’t be affected by the fluctuating values of cryptocurrencies. The partnership would also enable people to earn rewards in the form of cryptocurrencies rather than airline miles or other traditional card points. That offering may appeal to people who have not previously engaged in the use of crypto.?

Economy –?How soon will inflation pressures fade? Inflation is surging, as it hit 5.4% year-over-year in September. At a recent press conference, Fed Chairman, Jerome Powell assured investors by stating the central bank will not be overly aggressive with rate hikes to ease inflation pressures. Mr. Powell stated the central bank believes inflation will dip by the second and third quarter of 2022, as businesses increase production and supply-chain issues ease. Regardless of how long we see high inflation, how can we best mitigate its consequences and impact on our wallets? Nearly everywhere you look, someone is peddling an investment for inflation protection. Invest in Gold, Bitcoin, Value Stocks, Energy Stocks, and Commodities! Often the people peddling these assets as inflation panaceas are playing on the fears of investors. While all of these may be sound investment hedges for inflation at times, they each have their pitfalls. For example, gold has failed to keep up with increases in cost of living at certain times. It’s down around 5% this year. Bitcoin is limited in quantity to 21 million, therefore, the digital currency has inoculated holders from inflation thus far. However, its price is so volatile that it may plunge at times when investors need stability the most.?The good news is the stock market as a whole has outpaced inflation by an average of 4.9% annually in years when rises in the cost of living were higher than the median spanning from 1927 through 2020. In addition to shrewd investing, spending strategically can be a good hedge on inflation. Buying non-perishables and household goods in bulk is a good move to offset the expected drop in your purchasing power, and is also a good way to achieve economies of scale. Costco, Sam’s Club, and other bulk suppliers can be your best ally.