Why did Zillow stop buying houses?

Many experts were taken aback by Zillow's surprise statement this week that it is temporarily suspending its home-buying activity. Some believe that more worrying developments are on the way.

The business, Zillow Offers, is an "iBuyer" - it buys and sells properties directly to clients, often remodeling them in the process.

Following a Bloomberg story, Zillow announced that its Zillow Offers subsidiary will not sign any new contracts to acquire properties until 2022.

In justifying the decision, Zillow stated that the corporation was contending with a backlog of repairs as well as operational capacity concerns.

Zillow's competitors continue to grow their businesses.

"We're working in a labor- and supply-constrained economy — inside a competitive real estate market, particularly in the construction, renovation, and closure spaces," Zillow's chief operating officer, Jeremy Wacksman, said in the statement.

She went on to say that the delay would allow the firm to "concentrate on sellers who are already under contract" as well as the company's current inventory of properties.

As of currently, no other iBuyers have followed suit. In fact, most of Zillow's rivals, including Redfin and Offerpad have re-emphasized their growth ambitions in response to the news.

Scarcity of labor and materials

However, several analysts and industry professionals have observed that the difficulties Zillow claims to be under are quite genuine.

According to a recent study by the National Association of House Builders, construction businesses are still encountering significant challenges in completing new home development, particularly a lack of building supplies and manpower. The same difficulties arise during remodeling initiatives.

"Labor shortages in the economy are genuine, and they are likely to result in bottlenecks along the supply chain," Truist analysts stated in a research note. "In such a scenario, the present halt, in our opinion, reduces inventory risk to Zillow."

Zillow's position in the iBuying environment differs from that of some of its competitors. Zillow, like Redfin, has other revenue streams on which it may rely.

"Because Zillow's business model is much more focused on aggregating eyeballs across the spectrum of real-estate transactions, it may make sense for them to periodically de-emphasize the riskiest or most capital-intensive parts of their business," said Michael Greene, co-founder and CEO of ResiShares, a residential real-estate investment company.

Rising Home Prices Have Made Margins Tight

According to an August analysis by independent real-estate expert Mike DelPrete, Zillow, Offerpad, and Opendoor were all paying considerably over the value of homes in 2021, but in 2019 they were generally purchasing properties at a discount.

Today, iBuyers are paying more for houses than they are worth, but the median price they paid in 2019 indicated a bargain.

Margins for iBuyers are quite narrow, especially when remodeling costs are taken in. And the longer a corporation has a house, the greater the danger.

According to data from real-estate firm Attom Data Solutions, the average home-flip generated just a 33.5 percent return, the lowest since the first quarter of 2021.

"While flipping has not turned into a losing venture on deals that typically take around six months to turn around," said Todd Teta, chief product officer at Attom, "trends are showing signs of potentially heading in the opposite direction, which is likely influencing decisions by home-flipping businesses across the country."

Can Zillow Predict the Future?

Zillow's other business lines provide it with a massive amount of data about the U.S. Housing Market – between their real-estate site, which purchasers use to begin their search, and its Zillow Premier Agents division, Zillow has a pulse on buyer demand and the direction of house prices.

Some experts speculated that the corporation might not like what they were seeing.

“Is it possible that Zillow is seeing something in their data…that maybe on the margin makes them a little bit nervous about holding inventory right now?” said Tom White, an internet research analyst with D.A. Davidson.

If Zillow does expect house values to fall — maybe as a result of rising mortgage rates — it may be taking a step back to let the market to settle and avoid incurring too many losses, especially considering the lengthy turnaround periods on remodeling projects nowadays.

Is it possible that regulatory monitoring is to blame?

Zillow's home-buying services aren't for everyone. Last month, a series of TikTok videos from a Nevada real-estate agent went viral, accusing Zillow and its competitors of manipulating the housing market.

Those assertions were soon debunked by real-estate specialists, who pointed out that no iBuyer has a large enough market share to actually tilt the needle in terms of property pricing. But that doesn't mean the businesses aren't being scrutinized.

Zillow is currently being sued for antitrust violations by tech-based real-estate broker Real Estate Exchange (Rex), and the Federal Trade Commission has allegedly renewed its investigation into Zillow's acquisition of real-estate listings provider ShowingTime.

Ultimately, no one knows for sure why Zillow has stopped buying houses. Do you think it's actually due to an operational backlog, or do you think that this was a calculated move? Comment below or sign up for a class to discuss this (and other current events) with your peers and our seasoned instructors!

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