As the US real estate website Zillow belatedly discovered, online shopping can be dangerous. While many of us wasted countless hours during the pandemic clicking through Zillow property listings and daydreaming about what kind of house we would buy if we had the money, the company was running a side business apart from its real estate search website, using algorithms to buy and resell its own homes.
The company has been buying a lot, but selling hasn't been so great. This week the company announced that its home-buying division, Offers, lost more than $300 million in the past few months. Offers will now be closed, and about 2,000 people will be laid off. Zillow is reportedly now in need of liquidation of about 7,000 homes, many of which will be sold for less than what was originally paid for them.
You'd be forgiven for not knowing that Zillow is in the home-buying business. The Seattle-based company has focused on publishing online real estate listings for most of its 15-year history. Then, in 2018, CEO Richard Burton started to push aggressively into a business called iBuying. The idea is that algorithms would identify attractive homes to resell, and Zillow would buy them directly from the seller, do minor renovations, and then Zillow would quickly resell them for a profit. Burton once set a goal of buying 5,000 homes a month by 2024.
iBuying is an emerging industry. A recent report from Zillow found that the big four iBuyers (Zillow Offers, RedfinNow, Offerpad, and Opendoor) accounted for just 1% of all U.S. home buying in the second quarter of 2021 (though that number rises to 5% in fast-growing markets like Phoenix). But while it's still early days, there's a lot of excitement among the tech industry about the future of algorithmic home buying. “There's an arms race going on right now about who's going to be the Amazon of real estate,” a Columbia University real estate professor recently told Marketwatch. “That's why companies like Zillow and Redfin want to control everything in-house.”
Big, deep-pocketed companies with tons of data outbidding regular people in an already absurd housing market? Sounds like a nightmare for anyone other than a tech investor. Indeed, news of Zillow's actions has sparked a backlash on social media, primarily due to a TikTok video posted by Nevada real estate agent Sean Gotcher alleging that iBuyers are rigging the housing market.
While Gotcher didn't specifically name Zillow, he alluded to the company, accusing it of using data collected from people poring over their dream homes while bored on its website. Gotcher said the unnamed company buys up lots of properties in the neighborhoods people are searching for, then buys up a few adjacent properties at higher prices to artificially inflate prices. (Zillow and Redfin deny doing this, and real estate experts say the companies don't have enough market share for the strategy to work.)
Zillow wasn't overtly manipulating the market, but it certainly was trying to use technology to outwit it. But ultimately, the market won. Zillow's reversal is a reminder that not everything can be automated. Zillow failed for a variety of reasons, including a labor shortage that made home renovations difficult. But the biggest problem was that its algorithms simply weren't up to par. Unable to handle the complexities of pricing in a volatile market, Zillow ended up overpaying for many properties.
Individual homebuyers may no longer have to compete with Zillow, but buying a home isn't likely to get cheaper or easier anytime soon. Bloomberg reports that Zillow's 7,000 homes will be sold to institutional investors, likely BlackRock, rather than to private individuals. Zillow may be shutting down its iBuying business, but the financialization of housing is likely here to stay. Big money is gobbling up real estate, leaving many first-time buyers in the dark.