Some things are easy to sell. Pizza sells for what's on the menu, and buyers don't have to wait weeks for an inspector to check that the olives or pepperoni are OK. A slightly worn hockey jersey sells for what an eBay seller can get someone to pay, and to ensure everyone is honest, all they need is a seller rating, not a lawyer or a license. Inventory is even easier: it sells for what the seller says, and the price goes up or down depending on how many people want it, and the agreed-upon price is just a two-second Google search away.
Some things are hard to sell. Homes are one of them, as anyone who has ever tried to sell one can attest. That’s probably to be expected, considering that homes are typically the most expensive thing people buy or sell. But the whole process is still tedious, involving lots of middlemen, preparation, and verification that can stretch into months. During the first months of the pandemic, Zillow, the website you went to to check out houses you couldn’t afford, tried something nifty to help people get around that process (it worked!) and also make Zillow money by flipping those houses (it didn’t work). Zillow announced Tuesday that it was closing the division after losing $381 million in its most recent quarter. Zillow said it would lay off 25% of its employees, which seems like a direct result of losing $381 million on home flips in three months. The wind-down of the program and the resulting job cuts (about 2,000 of its 8,000 employees) will take several quarters to complete. Zillow still owns thousands of the homes it acquired during that hunt.
On the one hand, Zillow's failure is a classic infuriating business story: some executives came up with something that couldn't be done, it ended up being a disaster, and the people who suffered the most from their decision were the many employees who ended up being laid off. (Zillow's shareholders also lost out, which happens when companies announce this kind of news on earnings calls with investors.) On the other hand, I hope they try again, or that another company does it better. Even if Zillow never comes close, the idea of selling homes as easier is worth someone getting right.
The concept of “iBuying” has been creeping closer to the mainstream for the past few years. At least since 2018, when Zillow launched “Zillow Offers” in Phoenix and Las Vegas before expanding east. There are a few other companies in the game, and as The New York Times explained, they tend to operate in markets where many of the homes are relatively new, affordable, and similarly sized. There are other steps to this, but the concept of iBuying is that the company makes an offer based on a price suggested by an algorithm (in this case Zillow's Zestimate) without actually going to see the house, and the seller can accept or decline it. The long inspection, appraisal, and settlement process in real estate doesn't apply. Another online real estate company, Redfin, reported to The New York Times that at least 1% of home sales in 18 markets were iBuying in the third quarter of 2019. This should work for a company like Zillow, because the housing market in markets where iBuying takes place should be somewhat predictable. In 2019, that was probably the case.
You may have noticed that the real estate market has changed a bit since then. Homes have quickly become very expensive during the pandemic. Zillow announced in October that it would halt the program for the rest of the year. At the time, the company said the problem was a “labor- and supply-constrained economy” that was hindering its ability to competitively resell homes in a booming market. The COO called it “operational delays in renovations and closings” on homes that iBought had bought and hoped to resell at a profit. A lack of contractors to renovate the kitchens of these homes was apparently not the whole story. Now, Zillow acknowledges that the company could not have accurately predicted how quickly home prices would change. “The unpredictability of home prices has far exceeded our expectations, and we have determined that continuing to scale Zillow Offers would result in too much volatility in our profits and balance sheet,” CEO Rich Barton said in a statement to shareholders on Tuesday.
If tech companies want to give people loads of money for homes only to have them sell them at a loss, then of course they will!
The business lost $381 million over the three months, giving the company as a whole (which was otherwise profitable) a quarterly loss of $169 million before taxes and interest. As a result, the company's stock price has plummeted from about $100 last week to about $70 now. This all feels vaguely populist in the same way that MoviePass' short life felt populist. If tech companies want people to pay high prices to buy a house only to have to sell said house at a loss, sure! If tech companies want you to pay to watch a bunch of movies for more or less free, great! Unfortunately, nothing good lasts long when companies have to explain it to investors.
Zillow is an easy target for ridicule here — losing nearly $400 million in three months when they could have done almost anything is extremely laughable and, in hindsight, wasteful — and the machines may never get good enough to do this on their own, in a way that works for both sellers and companies looking to buy homes.
I lost a lot of weight. I didn't expect these results. Unfortunately, JD Vance's Spotify flopped completely. The reasons why air travel is a mess today may haunt us for a while to come. Electric cars were supposed to take the world by storm. What happened?
Maybe, as Bloomberg's Matt Levine speculated last month, the future will be computers buying houses with a little human review. So instead of pushing a button to sell a house for X price, someone drives there and pushes a button to sell a house for X price until they make sure there are no ridiculous issues. Maybe an actual real estate professional will have to spend 20 minutes looking at the final deal. It seems impossible for iBuying to accurately price every little quirk in a house. If the backyard smells funny or the neighbors play loud music, iBuying won't know about it. But the real estate market is logistically very challenging, so I hope someone can figure this out. If the market was fair and no one was losing money on the deal, the giant companies that buy houses without taking out loans would be a great way to make sellers' lives much easier and expedite sales in a way that saves a lot of people a lot of hassle. Zillow Offers is gone, but maybe its demise can serve as inspiration for someone to make big money from traditional real estate.