Most people know Zillow as the company that makes it easy to browse real estate properties online. Historically, Zillow's revenue has come from web advertising and selling leads to brokers.
But for years, the real estate giant has been trying to quickly buy up thousands of homes and flip them for a profit, a practice it calls instant buying, or “iBuying.” Its iBuying division, Zillow Offers, generated revenue of $1.47 billion in the first half of this year.
But on October 18, Zillow announced it was pausing iBuying for the remainder of 2021. Then on November 2, it announced it was shutting down that division entirely and laying off 25% of its workforce.
Our team found that the company was selling 64% of the homes it owned in its five largest markets for less than they paid for them — in Phoenix alone, 93% of Zillow's properties were being sold at a loss.
It's a complicated story, so we've created this explainer to answer the question of what happened with Zillow and what it means for people looking to buy or sell a home right now.
1. What is iBuying and why is Zillow buying homes?
While selling a home can take weeks or even months, iBuyers — typically deep-pocketed tech companies — offer near-instant cash offers and transactions that can be completed in a matter of days.
Companies like Zillow, Opendoor, Offerpad and Redfin use algorithms to make offers on homes, then after purchasing, they usually do some light renovations and put the home back on the market at a higher price.
Zillow executives have identified iBuying as a key area of growth, and the company launched Zillow Offers in 2018. Zillow Offers reported second-quarter sales of $777 million, up 71% from the same period a year ago. The company had a goal of buying 5,000 homes per month by 2024.
2. I'm looking to buy a house, should I be worried about Zillow?
For buyers, Zillow's decision to exit homebuying means one less competitor in a crowded real estate market. Nationwide, the housing market is showing signs of a seasonal cooldown, but inventory remains low and prices continue to rise, according to an Oct. 27 Redfin report.
People who sell their homes to iBuyers are willing to accept lower prices in exchange for speed and convenience. The segment is growing, with Zillow reporting that for the first time in the second quarter of this year, iBuyers accounted for 1% of home purchases nationwide. That's about 15,000 homes, a tiny fraction of the more than 6 million homes sold in the U.S. each year.
Despite Zillow shutting down its home-buying division, Opendoor and Redfin continue to run their own iBuying businesses.
iBuyers typically focus on mid-priced and lower-priced homes, said Mark Stapp, real estate program director at Arizona State University's W.P. Carey College of Business. Stapp said that while there have been cases where Zillow's quick cash offers have crowded out other buyers, iBuyers are typically looking to flip a home quickly rather than let it sit on the market for a long period of time.
Typically, iBuyers aim to buy below market price and sell at around market price, said Greg Buczak, a finance professor at Stanford University who studies iBuying.
3. Which cities and states will benefit from Zillow's decision? Which will hurt? Is this a sign that the housing market is in crisis?
Zillow and other iBuyers are most active in the South and Southwest, where there are many similar homes and a high volume of transactions makes it easier to evaluate properties, such as in Phoenix.
Zillow appears to have been overpaying for homes in five major markets: Dallas, Houston, Phoenix, Minneapolis and Atlanta.
Some sellers made a lot of money when their Zillow offers surpassed what they could have gotten on the open market, but future sellers may not be so lucky.
Questions about whether Zillow's iBuying shutdown means disaster for the U.S. housing market are complicated by the uncertainty about the accuracy of the company's valuation model and other factors, including interest rate trends. Competitors Opendoor and Offerpad remain aggressive buyers.
4. So why is Zillow stopping home buying now? Does this have anything to do with the Zestimate?
In a release announcing Zillow's iBuying shutdown, COO Jeremy Waxman said the outage was due to labor and supply shortages, but price discounts on Zillow-owned homes suggest something else may be at work.
During an earnings call after Zillow announced the closure of its homebuying unit, CEO Rich Barton said labor and supply shortages were only part of the problem, along with “extraordinary volatility” and “significant price reductions on a relatively small number of listings.”
Zillow is known for its Zestimate, an algorithmically calculated estimated market value for a home that is offered on the Zillow website, and the company began using it to make cash offers on homes earlier this year.
“Fundamentally, we were not able to predict future housing values with enough accuracy to safely operate this business,” Barton said Tuesday of the decision to close the unit.
5. I saw a TikTok post going viral explaining how multi-billion dollar real estate companies may be manipulating the housing market. Many people assumed this was a reference to Zillow. Is this true?
In September, Las Vegas real estate agent Sean Gotcher posted a video on TikTok in which he explained how unnamed real estate giants may be using their data to manipulate the real estate market.
In Gotcher's “what if” scenario, a company purchases a large number of homes in a particular area and then intentionally overpays for those specific homes to drive up sales of similar properties, or “comps.”
If comparable properties are more expensive, Gotcher said, the company can sell other properties at a higher profit, in a video that has been viewed nearly 3.3 million times, many of whom felt the company's explanation matched that of Zillow.
Zillow publicly denied employing such a strategy, telling MarketWatch that the internet “can be a source of misinformation and falsehoods, as in this case.”
Stapp and Buczak agreed that it's unlikely, but not impossible, that Zillow or other agents are intentionally manipulating the market. For one, it's not clear that they're buying enough homes to have that kind of influence. And it wouldn't make sense, Stapp said, because it would inflate the prices of the homes they want to buy.
Editor's note: This story has been updated to reflect Zillow's announcement on Nov. 2 that it is shutting down its iBuying division.