Zillow Exits the Home-Flipping Market
Trouble With Zillow’s Algorithms
Zillow (Z) is throwing in the towel on its home-flipping business after putting operations on hold last month. The online real estate company said forecasting home prices proved more difficult than anticipated, despite previously touting its algorithms’ prowess. Continuing to scale Zillow Offers would have been a drain on the company’s earnings. This marks the end of an era for a business which Zillow once predicted would make $20 billion per year.
Zillow’s plan, which includes laying off 25% of its workforce, comes at a complex time in the real estate industry, and a time when iBuyers have seen success. These technology-driven home flippers buy homes, make light repairs and renovations, and quickly put them back on the market. They have been capitalizing on low interest rates and an exodus from cities brought on by the COVID-19 pandemic.
Real Estate Market Cooling
There are signs that the real estate market is beginning to lose steam, which may be hurting Zillow’s ability to unload existing inventory. Soaring home prices have kept some buyers out of the market, which has started to impact pricing. In September, the median home price was up 13.3%. In comparison, home prices soared 23.6% in May.
Exiting the home-flipping market is a big blow for Zillow. The Zillow Offers unit was never profitable, but it was the company’s biggest revenue contributor. The unit lost $381 million in the third quarter with 9,800 homes unsold. Zillow has an additional 8,200 homes in contract. All told, Zillow expects to lose 5% to 7% on its inventory.
Zillow’s Rivals Circle
Zillow’s woes in the home-flipping market were driven largely by its algorithms’ inability to price homes accurately and spot trends in demand. Zillow’s rivals OpenDoor (OPEN) and Offerpad (OPAD) do not seem to have encountered this issue. This past summer, the two iBuyers began slowing down purchases in Phoenix, a big home-flipping market during the pandemic, as demand started to cool. Zillow did the opposite, accelerating purchases and paying more than OpenDoor and Offerpad.
Relying on technology does not guarantee success, as Zillow’s foray into home flipping proved. However, that does not mean the iBuying industry is dead. Other iBuyers have been able to more accurately price homes and gauge demand. With Zillow making an exit, rivals will attempt to take advantage of a less crowded market.
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