Zillow, a real estate website known for estimating home prices, said on Tuesday it was exiting its quick home buying and selling business after suffering heavy losses and plans to lay off about 25% of its workforce.
The announcement was a major strategic setback and a blemish on Zillow CEO Richard Burton, who founded the company 16 years ago and has long spoken about turning Zillow's popular website into a marketplace. Last year, Burton estimated that Zillow Offers, which allows people to make instant offers on homes through a process known as iBuying, could generate $20 billion in annual revenue.
Zillow, which has 8,000 employees, said on Tuesday that the division had contributed to huge losses and made the company's overall revenue unpredictable. Zillow Offers lost more than $420 million in the three months ended September, roughly the same amount the company made in total over the previous 12 months.
“We have determined that the unpredictability of home prices is far greater than we had anticipated,” Burton said in a statement accompanying the quarterly earnings announcement.
The decision “weighed heavily,” Barton said on a conference call with analysts Tuesday afternoon. “You could argue that our current losses are due to exogenous market events,” he said. “But it would be naive to predict that unforeseen events won't occur in the future.”
The company lost a total of about $330 million in the third quarter, much more than Wall Street analysts had expected. The company made a profit of $40 million in the same period last year.
Zillow shares have fallen more than 50% from a high of nearly $200 in February, when they were a favorite among investors as the housing market boomed. They fell 11.5% to about $85.50 on Tuesday before the earnings release and were down another 7.5% in after-hours trading. (Still, Zillow shares are worth twice what they were when the pandemic began.)
Three years ago, the company announced plans to use its price predictions to buy and sell homes. Now Zillow has thousands of homes worth less than what it paid for them. Last month, Zillow said it would temporarily stop buying new homes. At the time, the company cited a lack of manpower to renovate and sell the homes it bought. But on Tuesday, Barton said using its algorithms to buy and sell homes hadn't produced the profits it expected. The company is now trying to sell its remaining 7,000 homes.
The company appears to have underestimated the risks of holding homes between transactions — a departure from its low-risk, high-margin advertising business — and rushed to expand its home-flip business to Barton's target of 5,000 transactions per month in a housing market that was already low on inventory and cooling.
Zillow's failure also calls into question the company's core product, which is built around estimating value. Aaron Edelheit, who started buying homes after the Great Recession, He tweeted his gratitude This summer, Edelheit, who is exiting the real estate market to focus on his cannabis business, was outraged that real estate firm Zillow paid a “very high price” for one of his properties. “It seemed like they were panic buying. I didn't get it. I should have sold it short,” he told The New York Times' DealBook newsletter.
