After Announcing a Pause, Zillow Says Adios to iBuying Program For Good

“I told you so!”

We told you last month that Zillow was putting a big, giant pause on its iBuyer program, Zillow Offers, a move that raised many eyebrows in the real estate world.

Now comes word that the pause is permanent: Zillow is out of the home-buying-and-selling market for good and plans to lay off about a quarter of its workforce, according to filings with the U.S. Securities and Exchange Commission reported by Inman.

Disrupted By Disruption?

“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,” said CEO Rich Barton in a statement.

Let’s let that quote sink in. This is from the people who went on the map (or, to be more accurate, the internet) with the Zestimate! Predicting home prices is Zillow’s bread and butter!

Barton also said Zillow’s iBuying business served “only a small portion” of customers, that Zillow will focus in the future on “creating an integrated and digital real estate transaction that solves the pain points of buyers and sellers while serving a wider audience.”

The wind-down of Zillow Offers, which is what the iBuyer program was called, will take several quarters to sift through and dissolve the considerable inventory: about 7,000 homes. Observers say the company is already offering them up to Wall Street.

“The most difficult part of this decision is that it will impact many of our colleagues,” said Barton.

Zillow Stock Takes a Hit

On Tuesday afternoon, Zillow shares closed at $87.20, down nearly 10 percent for the day. The stock price continued to plunge in after-hours trading. Those figures apparently include, “a write-down of inventory of approximately $304 million within the Homes segment as a result of Zillow purchasing homes in Q3 at higher prices than the company’s current estimates of future selling prices.”

Ouch. Seems like the rising market conditions got to them. While the company is saying adios to iBuying, there are still many homes in the pipeline whose purchases will need to be completed. Hence the company is expected to endure further losses of between $240 and $260 million.

Shutting Down to Stop The Bleeding?

Veterans in the industry may well be saying, “I told you so.”

Jonathan Miller, president and CEO of Miller-Samuelson and author of Douglas Elliman’s U.S. market report series, is one of those. Last month when he and I talked, we both felt the Zillow “pause” was weird. Artificial. Zillow was blaming the pause on being short-staffed, which prompted a great quote by Miller picked up by Bloomberg: “It’s like McDonald’s saying, ‘hey we are short-handed so we are just going to shut everything down.’ ”

“This tells us that what they said last month, their story for turning off the tap, was not accurate,” says Miller. “I think they were hoping to find a way out.”

That’s why, from a long-term perspective, Miller wants to say “I told you so.”

“The Zestimate is unreliable,” says Miller, who is a veteran appraiser. “Here is the valuation methodology: 50 percent of the time it’s within 2 percent of accuracy, 50 percent it is not … and that only applies to listed properties. They used their own money, and the experiment failed.”

Market Conditions Make For Tight Margins

From an investment perspective, this cuts off a long-term upside for Zillow shareholders, says Miller: Zillow Offers was to be a dominant part of the company’s revenue picture in the future.

Mike Del Prete is still bullish on the other iBuyers out there: he says OpenDoor and Offer Pad are in great shape compared to Zillow Offers.

“This doesn’t mean the iBuyer segment of the market is gone,” says Miller, “it’s going to be less of a factor in the shape of a housing market than first thought.”

And Miller reminds us that the Zestimate has only been tested in an up market.

One of the concerns about the current market crunch has always been institutional investors who apparently find flipping lucrative enough to stay in the game. Institutional investors add another layer of competition for the cash-conscious homebuyer in a market with an incredibly tight inventory with no obvious relief on the horizon. Zillow put properties on the market but after mild refurbishing.

“Affordability is tightening,” says Miller. “We look at home prices, but affordability should be based on payments, not necessarily home price. Mortgage rates fell another point or two during the pandemic and after a few months, the economy turned back on. Low mortgage rates have been the driver of this market.”

So the big question is, when will the Feds tap the brakes?

“Certain things are not going to go back down, like wages, which is part of our supply chain problem,” says Miller. And owners locked into those historically low rates may not want to give them up, further contributing to depleted supply.

“50% of all people in US who hold a mortgage are locked in at 4% or less,” says Miller. “4% is probably the tipping point for rates, the magic number that will apply the brakes once rates top it.”

Adios iBuyers?

Let’s face it: most agents will be toasting any bad financial news over at the portal giant who they have feared will rob them of a livelihood. Just two months ago, a Las Vegas real estate agent took to TikTok to dramatize the potential danger of too many iBuyers: market domination which could drive up home prices.

In a video on TikTok, (Sean) Gotcher laid out a hypothetical scenario in which a large unnamed company that “everybody used” starts buying up homes in a neighborhood for $300,000. After buying up 30 houses though, the company in Gotcher’s scenario voluntarily pays $340,000 for an equivalent home, thus boosting the value of all the other properties.

Inman

In this hypothetical, Gotcher says the iBuyer basically created a new comp that drove up prices and netted them $1.2 million.

And don’t interpret Zillow’s “day of reckoning” as some kind of shadow news about our market. Ed Pinto, director of the American Enterprise Institute’s Housing Center and former chief credit officer at Fannie Mae, is the guy who called the current boom. He predicts the market will keep rising at or near double digits well into 2022.

And what’s Pinto seeing now? He’s convinced the naysayers are wrong and that the gangbusters, double-digit run for home prices will keep rolling well into 2022. “Over the past three or four months we’ve heard lots of hand-wringing about a buyers’ strike, talk that people aren’t buying as many homes as before,” he told me in an interview on Oct. 27. “That’s a fake narrative.”

To bypass the pandemic distortions, Pinto compares 2021 buying activity to the identical period in 2019, a very strong year for real estate. Week by week, buying activity is above 2019 numbers. For the week of Oct. 18 – 24, for example, purchase volumes stood 54 percent above their robust readings for the same period two years ago. Rates may be trickling up, but the volume of home purchases is not declining as much as one would expect.

We will be reaching out to DFW brokers for a reaction to Zillow’s news …