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Source: Zillow
Zillow shares plummeted 24% on Wednesday, after the company announced plans to exit the home-flipping business because of an inability to accurately predict housing prices.
Once a pandemic winner due to its central position in the red hot housing market, Zillow has lost-two thirds of its value since February and is trading at its lowest in 16 months. While its core internet marketplace continues grow and produce cash, Zillow reported a third-quarter net loss of over $328 million on Thursday, all tied to its instant buying, or iBuying, unit.
CEO Rich Barton told analysts on the earnings call that Zillow was shuttering its iBuying operations, where it competes with Opendoor, in a move that will result in cutting 25% of its workforce. Zillow entered the business in late 2019 with hopes of using its popular marketplace site and massive data sets to profit from buying and selling homes in high volumes.
What started off as a boon turned into a money pit.
“We determined that further scaling up Zillow Offers is too risky, too volatile to our earnings and operations, too low of a return on equity opportunity and too narrow in its ability to serve our customers,” Barton said. “We’ve been unable to accurately forecast future home prices at different times in both directions by much more than we modeled as possible.”
In particular, the pandemic threw Zillow’s predictive abilities into disarray. The housing market dried up for a brief time early last year, and then skyrocketed as the closing of offices and slowdown in business activity in cities led people to move to locations they deemed more desirable. Prices ran up, setting records in many markets around the country.
Zillow was able to make money selling homes at high prices relative to where it purchased them, but at the same time the company was ramping up its buying. The iBuying process allows homeowners to sell on Zillow instantly for cash rather than going through a broker and dealing with an extended bidding and closing process. After purchasing a home, Zillow would invest in repairs and maintenance and, even when factoring in all those costs, try to sell at a profit.
When the labor market tightened and supply chain bottlenecks sent costs for supplies soaring, Zillow’s already thin margins melted away. Add to that a housing market that flattened out or stopped increasing at the rate Zillow expected and the company found itself drowning in a pool of underwater assets.
Barton said the company has learned that it can’t sufficiently trust its pricing model, so it’s best to exit before jeopardizing the whole enterprise.
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