Digital real estate marketplace Zillow has been hemorrhaging cash in the home-buying arms race in certain markets, Bloomberg reported on Tuesday, after the company tweaked its algorithm to jack up the bids it offered on real estate.
One of the more ominous movements in both real estate and tech during the current phase of the covid-19 pandemic has corporate house-buying sprees in response to resurgent demand, using predictive algorithms that try to divine the future of the housing market. The aim is generally to flip the homes for a profit, or in some cases convert them to timeshares or rental units, with unknown long-term effects for the housing market. Throughout the summer and fall, Zillow was urgently pursuing these potential buys via an “iBuying” program called Zillow Offers, which advertise homeowners’ offers in as little as a few days.
As Motherboard observed back in August, companies like Zillow have been more interested in growing as rapidly as possible than making money, with its iBuying program losing money on net since its launch in 2018. Concerns about the whole thing go both ways; actual families trying to buy homes are increasingly having to compete with deep-pocketed tech firms, but Motherboard reported that some studies have concluded Zillow’s instant offers are less generous than claimed.
In August, Zillow raised $450 million from a bond backed by houses it had hired but not yet sold, and CEO Rich Barton said the company was on track to buy 5,000 houses a month by 2024. In its second-quarter earnings call, Zillow blew away revenue expectations, yet raised concerns the company’s laser focus on explosive growth was coming at the cost of actual profit. According to Bloomberg, Barton said the company would be making higher offers to keep up with the pace of the housing market, and it bought more homes than ever in the third quarter.
“Of particular note, our iBuying business, Zillow Offers, continues to accelerate as we offer more customers a fast, fair, flexible and convenient way to move,” Barton said in a press release. “Zillow Offers is proving attractive to sellers even in this sizzling-hot seller’s market. Finally, we expect millennial-buyers, low interest rates, and the increasing adoption of location-flexible work policies, to fuel interest in moving for many years to come. And these movers will increasingly demand e-commerce-like solutions where Zillow excels.”
The market has since cooled somewhat, and in mid-October, the company said it would be pausing purchases as it works through a backlog of inventory. Zillow blamed a labor shortage, saying it couldn’t hire enough evaluators to inspect homes or contractors to repair them.
Bloomberg wrote that the available data shows that Zillow’s appetite had probably been much too big for its stomach:
Zillow put a record number of homes on the market in September, listing properties at the lowest markups since November 2018, according to research from YipitData. It also cut prices on nearly half of its U.S. listings in the third quarter, according to Yipit, signaling that its inventory was commanding prices lower than it expected.
In some markets like Atlanta, Georgia, and Phoenix, Arizona, Zillow losing money on listings is particularly apparent, Bloomberg wrote. Its 250 active listings in Pheonix are about 6% under market price, which University of Colorado Boulder scholar-in-residence and real estate expert Mike DelPrete told Bloomberg was about $29,000 off for the typical home.
In one example cited by Bloomberg, Zillow outbid competitor Opendoor Technologies for a Phoenix home, placing an offer at $531,300 minus convenience fees. Within ten days of the sale closing, Zillow’s price had fallen to $505,900, and after that, $494,900. Another example involved a house in Tolleson, Arizona that Zillow bought for $412,000 and sold two weeks later for $387,000, a $25,000 difference.
Zillow was confirmed to be taking similar losses in the states of Arizona, Florida, and Georgia by Business Insider earlier this month, with one particular potential warning sign being the speed by which it was lowering prices.
“Every key metric I’ve seen from Zillow over the past few months just doesn’t make sense,” DelPrete told the news agency. “It’s like it’s making decisions two to three months too late relative to the market.”
“Prices turned on them and they got a little bit flat-footed and they were probably a little too aggressive on the bidding,” RBC Capital Markets analyst Brad Erickson told Bloomberg. “They probably don’t care so much. It’s not as important at this stage of the game to make money.”
Zillow declined to provide an on-the-record comment to Gizmodo.