> ‘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,’ CEO tells investors.
That's quite a statement. The head of a company with a privileged view of the US residential real estate sector says that the market is "unpredictable." Not the good kind of unpredictable where you can't figure out how heavy the money bags that get dropped at your door will be. No, it's the bad kind of unpredictability where you can... lose money.
Reading between the lines, I conclude that Zillow sees a major shakeout in real estate on the horizon. They've already been hit with losses and see a lot more where that came from. In an effort to get ahead of whatever is approaching, the company is making an abrupt exit from the home flipping business.
Zillow was founded in 2006, as the last US housing market bubble was furiously inflating. It has seen a complete cycle of boom/bust. If anybody knows the US residential real estate sector, it is Zillow.
Other commenters on this and the previous thread pointed out, sometimes with first-hand experience, that Zillow would vastly overpay them for their home. I think this is less to do with the housing market in general and more to do with their tech.
Zillow's iBuyer program hit the scene like a bull in a china shop. The real story is that they rushed into this space, had underdeveloped algorithms, overpaid for homes, and now the chickens are coming home to roost.
The housing market may or may not take a turn. But this Zillow story is about incompetency. It smells of some non tech person pitching an AI solution. No need to inspect these homes and neighborhoods, the AI will figure it out.
That sounds like one of the AI people I work with. Like, I know the signal I just fed to our data is a negative signal, why do we need to wait 6mo for the AI to “figure it out?”
(The negative signal was equivalent to an email hard bounce for an email marketing AI. Like, if that signal is there, the customer is gone forever)
This reliance on AI magically figuring things out is pretty annoying.
Overpaying for a house is not a problem in an appreciating housing market. If you overpaid for a house, just wait for its actual market value to catch up and voila, no loss.
The reason you fire-sale that house at loss, is because you believe market value is unlikely to catch up.
> Overpaying for a house is not a problem in an appreciating housing market. If you overpaid for a house, just wait for its actual market value to catch up and voila, no loss.
The price you pay when entering the housing market is substantial. It corresponds inversely to the capital you'll have later to do other things. If you pay $900k for the same house your neighbor paid $600k for, your neighbor has an extra $300k to work with over 30 years, which is significant.
But inflation being as high as it is today...that $300k will be worth much less over time, and you aren't saving it all at once if the down payments are the same.
That isn't even to mention selling at a loss or close to it if you have a pressing need, which will hurt your chances of getting into the next house.
Nitpick but the reason you fire-sale that house at loss is because you don't believe the market will catch up in your beneficial timeline. The housing market historically has a pretty slow appreciation rate, but one that is fairly predictable. Maybe Z sees the incoming rate hikes as a high volatility event?
Holding onto inventory is death. In auto and housing sales if you’re a dealership you’re leveraged in order to hold that inventory (paying interest on it, less friendly interest than you get as a government backed mortgage borrower) and you’re paying insurance and maintenance on that inventory. Vacant houses depreciate very quickly.
Yes, you validated my observation with that assessment. But my point was more towards the private consumer. I think we see a lot of speculation in the housing market now and historically it has been a long term hold investment.
I’d be more inclined to believe this if it wasn’t painfully obvious how much Z was overpaying for homes in the last half year, especially when all the other iBuyers saw the market slow down and reduced their offers accordingly. Seems much more likely that we can take them at face value and Zillow’s forecasts were just bad.
Zillow hasn’t ever bought and sold homes (until now). That’s not their business.
Like 25 years ago I was writing software for financial traders back when trading was mostly done in open-outcry pits. What we had was very skilled human experts, so our systems were all basically supportive. Some larger rival, famous for their technology, thought they could do better by giving traders Newton-esque handheld computers that would receive new information via infrared networking. Then you didn't need smart traders, just monkeys who would do what the computer told them. Everybody was very impressed with all this high-tech gadgetry.
But one day we hit a period with high volatility, lots of price crashing and spiking. The handheld systems and the servers that drove them were too laggy to keep up, so the monkeys would get taken advantage of both on the way up and on the way down. It was a very expensive lesson for the execs who put too much reliance on the tech and not enough on the expert humans.
It seems so wild to me that not only are people making the same mistake, but at a much, much larger scale. Half a billion dollars lost. So far!
According to Forbes, Zillow has been buying homes since 2018:
> In April 2018, the company entered the fledgling on-demand home buying market (often referred to as ibuying) with a service called Zillow Offers. Prospective sellers in 11 markets (and growing) can go to the Zillow listing for their own home and ask for an offer. Within two days they’ll be sent a price derived from the Zestimate and other algorithms. Two local experts also provide input on each house, and if the seller likes the initial offer, a Zillow employee comes to inspect the property. (If a home is in poor condition the offer may be withdrawn or lowered.)
When I use Zillow and check the Zestimate, for various properties, it seems to be super far off. If they used it for speculative property purchases, I can imagine that would go terribly wrong.
If you're interested in the method they use to calculate the Zestimate, one of their data scientists did an interview back in 2017 (before the home buying started) that talked about the factors involved.
Recently had an appraisal for refinance. The appraiser's estimate was <5% increase from the 16 months earlier when we purchased even though we bought during March 2020 at the height of uncertainty and at a substantial discount.
The reason? No comparable homes that were recently sold AND available via MLS (private sales are ignored). The rules for appraisals breakdown when there is no liquidity. At least Zillow still considered private sales. The Zestimate was much more correct than the "expert" appraiser.
I don't know the exact percentage of properties not in Zillow but in the MLS, but it is a very small amount. Zillow changed the game when it came to us non-Realtors(R) having access to housing price data. So much so, that some housing economist types have noted what appear to be permanent changes in months of active inventory (eg https://www.piggington.com, who analyzes San Diego's market)
I don't think it's hyperbole to say Zillow has more data on residential real estate than any other company in the US.
About that last point, Redfin has access to the regional MLSs. I imagine they have a more complete dataset.
My understanding is that Zillow relies on realtors to add their listings, so that means, maybe-it-happens, maybe-it-doesn't, entry errors, maybe-it's-updated, maybe-it's not...
Hard to believe they don’t have MLS access. The listings on Zillow go up essentially at the same time my realtor has gotten them through the MLS, so they must have an automated way of pulling the info…
I question the wisdom of corporations house flipping. How can they evaluate an individual property and make the series of educated guesses about the co ability in various regions? How do they find and predict all the remodelling issues before they happen? How do they know that a particular house is worth messing with? I only know a few counties in Ohio where I would even attempt it because I know the areas very well.
If you could statistically trade houses people would have been doing it before we were born.
Your last sentence is really ironic given the article it is replying to. If Zillow really new the market so well, they wouldn't be in this position in the first place.
That's quite a statement. The head of a company with a privileged view of the US residential real estate sector says that the market is "unpredictable." Not the good kind of unpredictable where you can't figure out how heavy the money bags that get dropped at your door will be. No, it's the bad kind of unpredictability where you can... lose money.
Reading between the lines, I conclude that Zillow sees a major shakeout in real estate on the horizon. They've already been hit with losses and see a lot more where that came from. In an effort to get ahead of whatever is approaching, the company is making an abrupt exit from the home flipping business.
Zillow was founded in 2006, as the last US housing market bubble was furiously inflating. It has seen a complete cycle of boom/bust. If anybody knows the US residential real estate sector, it is Zillow.