Market Update: Flipped and Flopped

By Morgan Christen


November 2nd marked the date Zillow flopped, as they wrote down their inventory of owned homes by as much as $569 million and laid off 2,000 workers.

Like many, we look to Zillow to see the value of our homes. They do a fairly good job of showing current value and while valuations are not always correct, they are pretty close.

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Like many other financial hazards, Zillow had a bit of overconfidence and entered the home-flipping business. They figured their algorithms paired with flipping services would represent a solid business model.

Initially they utilized actual realtors to confirm pricing, but that took too long and didn’t allow them to scale the new venture fast enough.

So, they dialed up their models and increased their work force, but could not keep up with the need to flip all the properties. And trouble began.

Algorithms and artificial intelligence can work in some areas of the economy, but it is hard in a relationship business – as Zillow and their stockholders now know.

1. The tale of Zillow has many parallels in finance.

First, much like the financial planning business, real estate is idiosyncratic. For example, one may value a house with power lines in-view much lower than a model might otherwise suggest. Just like a stock investor may value income longevity over risk.

This stock market has been kind to new investors, and some have looked to program trading or models that are sans-advisor. As we saw back in March of 2020, investors taking the sans-advisor option do so at their own peril.

Our clientele is not placed in an algorithm that decides how they may react. Knowing and advising our clients is our strong suit and we build plans that are built to suit.

2. The second implication is on housing and the economics of supply and demand.

Many corporations have entered the single-family residence ownership market, crowding out individual homeowners.

What happens when demand outstrips supply? Prices spike. I am not for social engineering, but neighborhoods are generally nicer when there is a large percentage of actual homeowners (non-corporate) on the block.

This leads to another demand-versus-supply issue in our economy… inflation.

Ronald Reagan once said that inflation was as “violent as a mugger.”

Prices are up, but they are mostly due to the pandemic. When Covid hit, we were shut out of restaurants, bars, gyms, and personal care. The economy stayed home and bought computers, stationary bikes, TVs, and backyard equipment. We had a major shift in spending from services to goods.

Adding fuel to the fire was government putting trillions of direct cash in individual and corporate accounts. Unlike the 2008 recession where the government was mostly playing around with interest rates, this time they gave money to the people.

Our use of just-in-time inventory never was modeled for a pandemic or a surge in demand, resulting in major supply chain issues. As the chart above shows, the supply/demand balance is way out of whack. The blue and red lines stayed close through the years. We now see demand (blue) much higher than supply (red).

Less workers, less supply. No wonder there is a spike in inflation. The Consumer Price Index rose in October, logging the biggest monthly increase since June of 2008. Sounds bad, however a good chunk should subside once the pandemic has passed.

The supply/demand mismatch will correct itself in time and goods should come down in price. Wage inflation will remain, as it is next to impossible to take back a wage increase.

Many companies are dangling attractive hourly wage carrots to attract talent. But workers are not going back, and the “great resignation” continues. People close to retirement age saw their houses and 401k’s grow and pulled the plug… atlas shrugged.

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The service sector: food, hospitality and medical workers continue to quit. Wages could help food and hospitality, but the medical sector has “Covid fatigue” and they are not going back to work.

In the Atlantic magazine, a nurse was quoted saying how “we’re at war with a virus and its hosts are at war with us.” Implications: 1) don’t get sick, and 2) less future growth in the economy as we start to see the consumer base shrink.

These trends are anti-inflationary. Growth in the number of consumers doesn’t look to be in the cards as a growing share of US childless adults do not expect to have children.

But hope springs eternal, and a potential millennial baby boom could be a solution to the lower workforce participation as Bank of America reported that sales of pregnancy tests have increased by an annual average of 13% since June 2020.


The latest version of Covid has sent concerns throughout the economy and markets. Our current thinking is the variant will not lead to an economic shut down, but potentially an economic slowing relative to severity.

From what we know now, this variant spreads quickly, but doesn’t appear to be deadly. Fed Chairman Powell recently stated inflation was not completely transitory and they may accelerate tapering. With the new strain peaking is ugly head, Powell may need to hold off on his planned acceleration.


These “shocks” to the market are great examples of why investors should not use an algorithm to manage their wealth. Financial theory relies on the assumption that investors are rational. The overreaction to Omicron and Fed speak, challenges those assumptions. Corporate earnings have looked great over the last year, and we think that could continue.

Please let us know if you would like further information on our thoughts on markets for the end of 2021 and into 2022. Thank you for your continued support.

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With Eric Frazier, Financial Advisor, Spinnaker Investment Group

What are the contribution limits for retirement accounts in 2021 and 2022?

The 2021 IRA contribution limits are $6,000 if you are under 50 and $7,000 if you are 50 and over. Those limits will be the same in 2022.

Your 2021 401k will have a limit of $19,500 if you are under 50 and $26,000 ($6,500 catch-up) if you are 50 and over. 401k contributions will jump in 2022 to $20,500 and the catch up will remain at $6,500 (total of $27,000).

Questions? Comments? Please don’t hesitate to contact us.



The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.

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