Flipping The Flipper

Real estate giant Zillow played with fire (and hundreds of billions in house flipping properties) and got absolutely burned when the computer algorithm designed to push housing prices up broke as the housing market cooled off last month, and they're out of the game.

 

Zillow Group Inc. is pulling the plug on its tech-powered home-flipping operation, after an ambitious effort to transform the company collapsed when its vaunted pricing algorithms proved unequal to the task.

The company plans to take writedowns of as much as $569 million and reduce its workforce by 25% as it winds down the business in coming months, according to a statement Tuesday. Zillow shares plunged as much as 11% to $76.22 in late trading.

The decision to abandon home flipping comes as the company’s third-quarter results showed it lost more than $380 million in the operation, called Zillow Offers. The business hit a major snag in recent months as Zillow tweaked its algorithms to make more aggressive offers, causing it to overpay for houses just as the heated U.S. market began to cool slightly.

With the company’s losses mounting, Chief Executive Officer Rich Barton said it had become too risky to scale the business in a U.S. housing market that has been running hot for well over a year during the pandemic.

“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,” Barton said on an earnings call.

Seattle-based Zillow is the best-known real estate company in America. And for millions of owners who watched their home values surge during the pandemic, the company’s quick exit raises an uneasy question: Is the boom over? Barton emphasized instead that buying and selling thousands of homes every month required the company to put too much capital at risk.

Zillow has had a turbulent few weeks. On Oct. 18, it issued a statement confirming a Bloomberg News report that it wouldn’t make any new offers on houses for the rest of the year as it struggled to find workers to fix the homes it had under contract. In the weeks after, it became clear that the company had overpaid for properties and was taking bigger losses on sales.

On Monday there was another sign that something had gone wrong: Bloomberg reported that the company was marketing about 7,000 homes for roughly $2.8 billion to institutional investors.

For most of Zillow’s 15-year history, the company has been known for publishing online real estate listings and home-price estimates -- called Zestimates -- and seeking to profit by connecting agents with potential clients. In 2018, Barton, one of the company’s founders, reclaimed the role of CEO and pivoted into the high-tech home-flipping business, called iBuying.

Zillow used pricing algorithms to buy homes from their owners, make light repairs, and put them back on the market. Barton set an ambitious goal, seeking to buy 5,000 homes a month by 2024.

Only one problem: Zillow didn't have buyers for the houses they fixed up anymore, and they forgot to stop the computers from buying more.

The real question is if the damage Zillow and other private equity firm backed real estate giants blew out the pandemic housing bubble entirely, in which case, we're all going to have a lot of problems in the months ahead.