Zillow Exit & iBuying Market: What It Means
Zillow's Exit from iBuying: A Market Analysis
Following a period of 3.5 years, Zillow recently declared its intention to discontinue Zillow Offers and withdraw from the iBuying sector. This development, while not unforeseen – given the company’s earlier announcement of a temporary halt to home acquisitions and its search for investors to offload approximately 7,000 properties – still reverberated through the industry.
Market Reaction and Competitor Impact
The announcement triggered a significant market response, with Zillow’s stock value plummeting by over 20%. Concerns surrounding the viability of the iBuying model also impacted competitors, causing shares of Opendoor and Offerpad to decline by roughly 15% and 6%, respectively. While some recovery has occurred, a degree of caution persists regarding iBuying as a sustainable business strategy.
Further insights into the effects of decelerating housing sales and price increases on the broader market are anticipated when Opendoor and Offerpad release their third-quarter earnings reports next week. Currently, substantial anecdotal evidence suggests that Zillow’s substantial losses stemmed not from inherent flaws in the iBuying concept itself, but rather from deficiencies within Zillow’s proprietary algorithm.
The iBuying Model Explained
iBuyers operate by acquiring homes at a modest discount to their current market value. This provides sellers with the convenience of a swift, all-cash offer. Subsequently, these companies undertake necessary repairs and renovations before listing the properties for sale, aiming to generate profit from the difference between the purchase price and the eventual sale price.
Zillow’s core issue, and the primary driver behind its decision to exit the iBuying business, was its practice of paying above-market prices for homes during the third quarter, only to sell them for less than their initial assessed value.
The Risks of Loss-Making Sales
Selling an asset at a loss is generally undesirable in business, but it becomes particularly problematic in a market characterized by sluggish sales cycles, unpredictability, and limited control. Zillow’s initial announcement of a pause in homebuying last month attributed this decision to supply chain issues and labor shortages.
While the company may have underestimated the time required to process its inventory, it’s evident that Zillow continued to aggressively acquire properties even as other iBuyers reduced their purchasing activity and lowered their offer prices.
Zillow's Aggressive Acquisition Strategy
In fact, Zillow purchased more homes in the third quarter than it had in the preceding 18 months combined, and at considerably higher prices than its competitors. This resulted in diminished profit margins in certain markets and outright financial losses in others.
Acknowledging its missteps, Zillow reported losses exceeding $380 million in its iBuying operations during the third quarter and anticipates writing down as much as $569 million related to its existing home inventory in the latter half of the year.
The Role of the Zestimate
“Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in,” stated CEO Rich Barton during the earnings call. Zillow essentially conceded that its pricing model, the Zestimate, is at best a reactive indicator and ineffective in a rapidly appreciating market.
This outcome was presciently predicted in 2018 by Opendoor co-founder Keith Rabois, who questioned the validity of the Zestimate if Zillow were to base its purchases on its valuations, tweeting, “If they [Zillow] buy homes at the Zestimate price, they will be bankrupt quickly. If they don’t, isn’t the Zestimate fraudulent?” He further elaborated that the Zestimate “[s]kews high in almost every market.”
Implications for the iBuying Landscape
What does Zillow’s departure signify for the future of iBuying?
While Zillow’s exit may have initially unsettled investors, there are indications that competitors like Opendoor and Offerpad are navigating the challenges more effectively. Their models and algorithms demonstrated a greater responsiveness to the cooling housing market, allowing them to adjust their offers accordingly.
Data from various markets reveals that Opendoor and Offerpad’s average purchase prices have decreased over the past three months, while their average buy-to-list profit margins remain significantly higher than Zillow’s.
Although other iBuyers may not achieve exceptional earnings, particularly in a softening market, there is reason to believe they will continue to operate, unlike Zillow.
- iBuying: A real estate model where companies purchase homes directly from sellers, typically with cash offers.
- Zestimate: Zillow’s automated valuation model used to estimate the market value of homes.
