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Zillow shares fell 24% on Wednesday, after the company announced plans to exit the home turnaround business due to its inability to accurately predict house prices.
Once a pandemic winner due to its central position in the searing housing market, Zillow has lost two-thirds of its value since February and is trading at its lowest level in 16 months. As its primary internet market continues to grow and produce money, Zillow on Thursday reported a net loss of more than $ 328 million in the third quarter, all tied to its instant purchase unit, or iBuying.
CEO Rich Barton told analysts during the earnings call that Zillow is shutting down its iBuying operations, where it competes with Opendoor, which will cut 25% of its workforce. Zillow entered the business in late 2019 in hopes of using its popular marketplace site and massive data sets to profit from buying and selling homes in high volumes.
What started as a windfall has turned into a money pit.
“We have determined that a further increase in Zillow offerings is too risky, too volatile for our earnings and operations, too little ROE opportunity and too narrow in its ability to serve our clients,” Barton said. “We have been unable to accurately predict future home prices at different times in either direction by much more than we have modeled possible.”
In particular, the pandemic has disrupted Zillow’s predictive abilities. The housing market dried up for a brief period at the start of last year and then soared as office closures and slowdown in business activity in cities led people to move to new homes. places they found more desirable. Prices rose, setting records in many markets across the country.
Zillow was able to make money selling homes at high prices compared to where she bought them, but at the same time, the company was increasing its purchases. The iBuying process allows owners to sell on Zillow instantly for real money rather than going through a broker and facing a lengthy auction and closing process. After buying a house, Zillow would invest in repairs and maintenance and, even with all of these costs included, would try to sell at a profit.
As the job market tightened and supply chain bottlenecks pushed up supplies costs, Zillow’s already slim margins melted. Add to that a real estate market that stabilized or stopped growing at the rate Zillow predicted and the company found itself drowned in a pool of underwater assets.
Barton said the company has learned that it can’t trust its pricing model enough, so it’s best to get out before putting the entire business at risk.
“It comes down to our inability to have confidence in prices going forward, confidence enough to put our own capital at risk,” he said on the call.
On Friday, analysts quickly lowered the rating.
In a report titled “Cannot Justify Buying Without iBuyer,” BTIG downgraded its rating to neutral. Piper Sandler made the same cut to her recommendation in her “ZOffers Mothballed” report, as the company returns “to its roots as a model of light assets.”
Stifel Nicolaus and KeyBanc have opted for the same pun by maintaining the equivalent of holding ratings on Zillow shares. Stifel titled his note, “From Reversal to Flop”, while KeyBanc added “Reversal is a Flop”.
Zillow suffered a $ 304 million write-down in the third quarter due to “the unintentional purchase of homes at prices higher than our current estimates of future sale prices,” the company said in its income statement. Zillow said it bought 9,680 homes in the quarter and only sold 3,032.
Zillow expects another loss in the fourth quarter as it records between $ 240 and $ 265 million in write-downs related to inventory it has already agreed to buy, and up to $ 230 million in depreciation and restructuring costs, s ‘extending until next year, as and when down the business Offers.
In an interview with CNBC’s “Closing Bell” on Thursday, Barton admitted that many people had told him to never get into home buying and keep Zillow focused on the online market.
“I’m sure there are those out there waving their fingers at me right now,” he said. “And justified.”
LOOK: Zillow CEO quits home turnaround business