“High interest rates are painful for almost everyone, but especially painful for Silicon Valley,” said Kairong Xiao, an associate professor of finance at Columbia Business School. “Unless the Fed reverses its tightening policy, I expect more layoffs and investment cuts.”
Currently, that possibility is slim. Markets expect the Fed to raise rates two more times this year, to at least 5%.
In real estate, that’s trouble for anyone hoping for a quick recovery. Low interest rates have not only driven up home prices, but they have also made Zillow, along with companies like Redfin and Opendoor Technologies, irresistible to get into what used to be considered a disreputable business: flipping homes.
In 2019, Zillow estimates that its revenue from selling 5,000 homes a month will soon reach $20 billion. That has excited investors, who have boosted the Seattle-listed company’s valuation to $45 billion and created a hiring spree that has boosted the workforce to 8,000.
Zillow’s idea is to use artificial intelligence software to make the chaotic real estate market more efficient, predictable and profitable. Venture capitalist Marc Andreessen spoke of this innovation in 2011 when he said digital insurgents would take over entire industries. “Software is eating the world,” he wrote.
In June 2021, Zillow owned 50 homes in Sacramento, California’s capital. Five months later, it had 400. One of them is a nondescript four-bedroom, three-bathroom house in the northwest corner of the city. Built in 2001, easy access to multiple parks and the airport. Zillow paid $700,000 for it.
Zillow put the house on the market for a few months, but no one wanted it, even for $625,000. Last fall, Zillow sold the house for $355,000 after unceremoniously exiting the flipping market. Low interest rates make it seem like Zillow could hit the moon, but even they can’t make it.