Zillow's Big Bet on House-Flipping Is a Bust
Zillow Group Inc. (NASDAQ:Z) is best known as an online real estate platform. On Zillow.com, users could (and still can) track property sales and market trends, as well as access a range of useful tools aimed at all the key stakeholders in the home-buying experience, from buyers and sellers to real estate agents and brokers.
While Zillow originally made its name as an asset-light digital platform, the company changed course in the spring of 2018. Faced with plateauing demand for its core service, the company decided to make a major pivot. In April 2018, the company announced the launch of Zillow Offers, a home-buying platform that would see it transformed from a platform provider into a direct player in the residential real estate market.
More than three years on, it looks like Zillow is ready to give up on house-flipping.
From boom to bust
Zillow certainly sounded confident when it dove into the market head first. However, not everyone was sold on it ability to translate its success in the digital real estate world into the brick-and-mortar real estate world. Indeed, I warned GuruFocus readers back in May 2019 about the potential dangers that could threaten to derail the companys big pivot.
Market skepticism did not deter Zillow. Indeed, it became a core part of CEO Richard Bartons strategic vision for the company. In a May 2019 interview with the Wall Street Journal, Barton evangelized his daring decision with gusto:
We were comfortable saying that in three to five years we could have $20 billion in revenue in our Zillow Offers business alone. It seems like a really big number until you realize the house-transaction market every year is $1.5 to $2 trillion, so thats maybe 1%, or a little over 1%, of transactions. In a market where we already are doing this, in Phoenix, we think the market share of the combined competitors [like us] is already 6%. In my crystal ball, I see this kind of supernova thing happening, I really do. This is one of the reasons that drew me back in.
Zillow Offers got off to a slow start at first, buying just 686 homes in 2018. Zillows foray into the home buying business really began to take off in 2019, leading the company to set the ambitious goal of buying 5,000 homes per month.
Despite initial successes, Zillows home buying business began to sour over the course of 2021. On Oct. 18, the company announced it would halt home buying for the remainder of the year. On Nov. 2, Zillow admitted that the temporary shutdown of Zillow Offers would be permanent.
Failure to disrupt
The failure of Zillow Offers was in large part due to the failure of its technology. The company had believed its algorithm-powered home-buying strategy, dubbed iBuying, could give it a competitive edge in a real estate market that had done little to harness data in order to drive better decisions. Unfortunately, Zillows belief proved inaccurate, as the Wall Street Journal reported on Nov 17:
Technology has in many ways transformed the hidebound real-estate industry. But Zillow ran into some of the limits of technology in a business still informed by emotional attachments, personal tastes and other intangible factors. Some current and former employees say the companys missteps made matters worse. Computer-driven analysis has become mainstream in stock and bond markets, but buying and selling single-family homes has proved a trickier proposition. The real-estate market varies widely by city, region and type of property, with a range of aesthetic, social and other factors playing into Americans home-buying decisions. Zillow also overstretched its staff as it tried to catch up to competitors and disregarded internal concerns that it was overpaying for homes, according to former and current employees.
Faced with market volatility and interest rate uncertainty, Zillow has seen its iBuying business unravel rapidly. In an October presentation to investors, Bartons tone was markedly different from what it had been back in 2019, when he was still boasting about house-flipping as a $20 billion revenue opportunity for Zillow:
Our observed error rate has been far more volatile than we ever expected possible. And makes us look far more like a leveraged housing trader than the market maker we set out to be.
My take
Zillows ill-fated home buying venture has resulted in its stock falling precipitously. From a peak of $48.4 billion in February, Zillows market capitalization has collapsed to less than $16 billion today. In my assessment, investors can learn a lot from the company's painful experience. As much as new technology has done to disrupt a host of industries in recent decades, it offers no sure guarantee of success, especially in a staid industry such as real estate.
This article first appeared on GuruFocus.
