Its ‘iBuyer’ platform has led to two-thirds of the homes it listed for sale featuring an asking price below what Zillow paid.
Zillow’s unexpected announcement in October that it was temporarily pausing its home-buying activities raised many analysts’ eyebrows. Now, the company is reportedly offloading thousands of homes at a discount, Marketwatch reported Wednesday.
It also announced it would lay off 25% of its workforce over the next few quarters.
Some argue that more concerning trends could be on the way. The company’s Zillow Offers division—what’s known as an “iBuyer”—purchases and sells homes directly to consumers, typically renovating them in between.
Following a report in mid-October from Bloomberg, Zillow confirmed that its Zillow Offers division would not be signing any additional new contracts to purchase homes through the end of 2021.
In explaining the move, Zillow said the company was facing a backlog of renovations and dealing with operational-capacity issues.
Now, though, Bloomberg is reporting that the company is selling off roughly 7,000 homes, looking to claw back $2.8 billion in the process. A separate report from KeyBanc analyst Edward Yruma found that two-thirds of the homes Zillow has listed for sale feature an asking price below what Zillow paid for the property, with the average discount being 4.5%.
“Zillow may have leaned into home acquisition at the wrong time,” Yruma wrote in a research note.
Potentially a ‘Minimal Impact’
Crystal Sunbury, senior manager and real estate senior analyst with RSM US, tells GlobeSt that she believes there will be a minimal impact from Zillow on pricing or supply in the existing home market.
“The number of homes that Zillow purchased on a quarterly basis ranged from 86 to 9,680 homes,” Sunbury said. “To provide perspective, the most recent seasonally adjusted annual rate of existing home sales for the United States, according to the National Association of Realtors, was 6.29 million homes (with 5.59 million being single family homes and .7 million being condos/coops). This would put the average number of single-family homes sold on a monthly basis in the United States at 465,000, with Zillow representing a minimal portion of those.”
iBuyers operate in limited markets. Zillow had the most homes in the Phoenix, Minneapolis-St. Paul, Houston and Dallas markets, Sunbury said. “Given the relatively small quantities of homes being sold by Zillow, we will not be seeing a large influx of inventory, and thus, this would have a minimal impact on pricing,” she said.
Sunbury said the iBuyer business is risky and operates on low margins and is contingent on scale for investments to pay off.
“Where companies have seen the greatest success with iBuying is when they are able to isolate to a limited geography and buy more than just one or two homes, and instead really focus on development and expansion of an entire community,” she said.
“This community approach model is one that homebuilders have been employing recently, with many expanding their operations from not just ‘building to sell,’ but also building to rent. When you are able to achieve scalability in a very specific geographic presence, there are opportunities for success.”
Sunbury said that the greatest challenge the current existing home market faces is affordability. The first-time homebuyer affordability index declined from 118.8 during the Q1 2021 to 100 in Q2 2021.
“Many would-be, first-time homebuyers are seeing housing price increases and forgoing purchases until prices begin to settle,” she said. “Additionally, home builders are running into supply chain and labor constraints, which are slowing their ability to produce new homes to keep up with the surge in demand.
Market Trends Misinterpretation
Rick Rudman, Chairman, President and CEO of Curbio, a pre-sale renovation company for the single-family home market, tells GlobeSt, “In markets where iBuyer presence is significant, we may see a dip in housing prices in the very short-term. iBuyer presence isn’t the same in all markets across the country, so we realistically wouldn’t expect to see any remarkable changes in pricing nation-wide.
“What is really going to affect home prices in the short and long-term is inventory, which will continue to be in flux regardless of iBuying. What we can expect to see, however, is lower prices being offered by iBuyers everywhere. Now that Zillow has stepped out of the iBuying game, there is less competition in the sector as a whole, meaning that companies like Opendoor can make lower offers and still win business.”
Rudman said that there are many distinct factors which contributed to Zillow exiting iBuying, some of which are unique to Zillow, and some of which are not.
“Zillow’s misinterpretation of market trends and purchasing homes at higher prices appears, at least for now, to be isolated to Zillow,” he said. “However, labor and supply shortages also contributed to Zillow’s situation, and both of those things are certainly not unique to Zillow. There has been a contractor labor shortage for years now, and it has only been exacerbated by the pandemic. iBuyers rely on fixing up homes before reselling them to make a profit, and that can’t be done without labor and supplies.
“If iBuyers can’t figure out a solution to labor and supply shortages, the entire industry will certainly take a hit.”
Chris Loeffler, the CEO and co-Founder of CaliberCos, tells GlobeSt, “Zillow had it, the brand, the capital and the access to win this race at scale. What they didn’t have, and you cannot replace, is the proper balance of local, specialized knowledge and flexibility to move with the market. Technology can enable better real estate investing. What it cannot do is replace a world-class local team that realizes each property is unique.”