The termination of iBuying comes after the company said it was suspending new home purchases until the end of 2021.
Real estate firm Zillow Group Inc. exits the home sales business, saying on Tuesday its algorithmic model of quickly buying and selling homes is not working as planned.
The firm’s termination of its high-tech home sales business, known as “iBuying,” follows Zillow’s announcement about two weeks ago that it was suspending all new home purchases for the rest of the year. At the time, Zillow cited labor and supply shortages due to its inability to renovate and resell homes quickly enough.
In a statement Tuesday, CEO Rich Barton said Zillow had failed to accurately predict the rate at which home prices would rise, ending a venture the company once said could bring in $20 billion a year. Instead, the company said it now plans to cut 25% of its workforce.
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“We have determined that the unpredictability in home price forecasting is far greater than what we expected, and further scaling of Zillow’s offerings would result in too much profit and balance sheet volatility,” Barton said.
Zillow and other tech-savvy home sellers, known as iBuyers, buy homes, renovate them, and then try to sell them quickly, making money from transaction fees and rising home prices. Zillow used an algorithm to estimate home prices called “Zestimate” and determined how much it would pay home sellers.
Ultra-low mortgage rates and the need for more space to work from home have fueled robust home buying demand over the past year and a half. Prices have skyrocketed in almost every corner of the US.
“It looks like it’s going to be hard to lose money buying and selling homes right now,” said Benjamin Keys, professor of real estate at the Wharton School of the University of Pennsylvania. “This is a time frame where prices have skyrocketed in many places.”
Sky-high prices have squeezed out some buyers in recent months, and the market has shown signs of cooling, as many economists expected. According to the National Association of Realtors, the average selling price of an existing home rose 13.3% year-over-year in September, still remarkably resilient, albeit down from the 23.6% year-on-year price increase in May.
Even this gradual slowdown in price growth has baffled the Zillow algorithm, forcing the company to end the venture.
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Zillow’s Class C share price tumbled 10% on Tuesday, falling before the company announced after the market closed that it would stop selling homes. Shares continued to fall during after-hours trading.
This move represents a big blow to Zillow’s top line. The sale of houses was the company’s largest source of income, but it never turned a profit.
Zillow, which released earnings on Tuesday, said its home sales business Zillow Offers lost $381 million last quarter, as measured by adjusted earnings before interest, taxes, depreciation and amortization. This resulted in a cumulative adjusted Ebitda loss of $169 million across Zillow.
Zillow has an inventory of about 9,800 homes in the United States that it currently sells to investors. In addition, the company has agreed to buy another 8,200 houses under the contract. The company expects to lose somewhere between 5% and 7% on these homes, the company said.
Beginning in the summer, competitors like OpenDoor and Offerpad began pulling back on home purchases in one of Phoenix’s biggest home sales markets as the pandemic’s red-hot market began to cool.
But Zillow has accelerated, according to an analysis of sales reports by real estate technology researcher Mike Delprete, a research fellow at the University of Colorado Boulder. Zillow also paid significantly more than these competitors for every home it bought, buying homes at an average price of $65,000 above average, according to DelPrete’s analysis.
By October, the company had listed 250 Phoenix homes for sale at an average discount of 6.2% below what it paid for them. DelPrete called Zillow’s price blunder a disastrous failure.
KeyBanc Capital Markets analysts’ broader look at Zillow’s nationwide performance showed that the company listed 66% of its homes for sale at prices below what it paid for them, at an average discount of 4.5%.
“The fact that Zillow can’t get it to work shouldn’t be the death knell for iBuying,” Delprete said. “Other companies are making improvements, but Zillow is not. They still lose a lot of money.”
Zillow said it expects the winding down of its home equipment will take several blocks.
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