Zillow's flipping halt marks major collapse in housing push

Washington

IT was the startling culmination of a turbulent few weeks for America's most famous real estate company, as Zillow Group pulled the plug on its tech-powered home-flipping operation.

The decision, reached by the board of directors on Tuesday morning (Nov 2), sent the company's shares plummeting. It also raised big questions about what comes next for Seattle-based Zillow, which had staked its future on the idea that its data scientists could power a business that buys and sells thousands of homes a month.

Analysts, competitors and industry observers are left to puzzle over how exactly the company managed to misjudge the housing market so badly that it is writing down more than US$500 million on the real estate it purchased.

Zillow's shares plunged as much 19.7 per cent to US$68.65 on Wednesday, the biggest intraday drop since March 2020. The stock closed last year at US$135.94 after nearly tripling as the company rode the pandemic housing rally.

Investors are wondering how Zillow will move on from the home-flipping business, which was central to its strategic goal of shifting from a company known for real estate listings to one that gets a bigger slice of the lucrative space around property transactions.

"It's a drastic and unexpected move," said Ygal Arounian, an analyst at Wedbush. "It was a central part of what the company was built on over the past three years, and management needs to go back to the drawing board and fill in the gap as it continues to aim to be a bigger part of the overall real estate transaction."

The first sign of trouble emerged on Oct 17, when Bloomberg reported that the company was pausing new home offers for the rest of the year.

While the company blamed a labour shortage, it quickly became clear that Zillow had struggled to read the frothy pandemic housing market - overpaying for homes that it would later be forced to sell at discounts.

From there, the collapse was swift. It was reported on Monday that the company was marketing about 7,000 homes for roughly US$2.8 billion to institutional investors.

A day later, it was all over, with Zillow telling investors that it would stop flipping homes, write down existing inventory, and reduce its workforce by 25 per cent. The company had roughly 8,000 employees as at Sep 30.

Zillow's third-quarter results showed that it lost more than US$380 million in the operation, called Zillow Offers.

On a call with investors, chief executive officer Rich Barton said that the risks of getting home prices wrong were greater than he had anticipated, turning the company into something like a "leveraged housing trader" that faced "a high likelihood, at some point, of putting the whole company at risk".

At the same time, Zillow decided that the home-flipping service - intended to ease the headaches consumers face when selling a house - was not broadly applicable. Roughly 10 per cent of serious sellers accepted Zillow's offers, while the rest preferred to sell their homes the traditional way.

The company had spent three years and more than US$1 billion trying to push its iBuying service.

But ultimately, it decided that its offers were only appealing to a small portion of the market.

"Zillow's experience shows that iBuying is a tough business where pricing accuracy is paramount," said Court Cunningham, the CEO of Orchard, a venture-backed company that offers an alternative path to disrupting housing. "But it also shows that 90 per cent of consumers did not want the iBuyer price."

For most of Zillow's 15-year history, the company has been known for publishing online real estate listings and home-price estimates - called Zestimates - and seeking to profit by connecting agents with potential clients.

In 2018, Barton, one of the company's founders, reclaimed the role of CEO and pivoted into the high-tech home-flipping business.

Zillow used pricing algorithms to buy homes from their owners, make light repairs, and put them back on the market. Barton set an ambitious goal, seeking to buy 5,000 homes a month by 2024.

Barton now faces his next pivot after the company determined that it was too risky to continue banking on its ability to predict housing prices.

He will have to reposition the company as it winds down the flipping business and faces widening losses on thousands of homes that it has under contract.

"Zillow missed the offramp," said Mike DelPrete, a real estate tech strategist. "It's like you are driving on the highway and you see brake lights ahead of you. You take your foot off the gas, you pump the breaks. Zillow didn't do either of those things until it was too late." BLOOMBERG