(Bloomberg) — Zillow Group Inc.’s decision to stop pursuing new home purchases comes as the U.S. housing market appears to be cooling off slightly, showcasing the challenges for an emerging high-tech spin on home-flipping.
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The online listing giant has been buying and selling thousands of homes in recent months through its iBuying program, which depends on the company’s ability to use number-crunching software to predict where home prices are going.
The company blamed its decision to stop new acquisitions for the rest of the year on the labor shortages roiling the U.S. economy. But two of its key competitors are pushing forward, raising questions about why Zillow is backing off its pivot into home-flipping.
“This feels like they bought way too many homes and they’re trying to work off that excess supply,” said Jonathan Miller, president of appraisal firm Miller Samuel. “It’s like McDonald’s saying, ‘we’re having a hard time filling positions so we’re going to close all of our restaurants down.’ No, you’re going to maybe limit your hours, or warn people that it’s going to take longer.”
Zillow shares plunged more than 11% on Monday as investors reacted to the company taking a break from the pivotal initiative. Opendoor Technologies Inc., an iBuying competitor, saw its shares jump after the company said it was “open for business.”
Zillow’s iBuying business loses money, so stopping purchases should help its bottom line, Wedbush analyst Ygal Arounian said in a note. But it’s “a huge negative for top-line growth, and major setback for the strategic initiative put in place over the past few years.”
For its part, Zillow says labor shortages are to blame. After the company makes an initial offer on a home, it sends a human evaluator to examine the property. Once it closes on the house, it sends contractors to make light repairs. Labor is tight across U.S. industries, and Zillow competes for workers with fellow iBuyers, single-family landlords and others.
Also, crucially, the company often lets customers schedule closings months in advance. The company plans to continue closing on homes that are already under contract, meaning that it will keep feeding raw material into its iBuying machine for a while at least.
“We now have an operational backlog for renovations and closings,” Jeremy Wacksman, Zillow’s chief operating officer, said in a statement. “Pausing new contracts will enable us to focus on sellers already under contract with us and our current home inventory.”
“We’re operating within a labor- and supply-constrained economy inside a competitive real estate market, especially in the construction, renovation and closing spaces,” Wacksman said. “We have not been exempt from these market and capacity issues.”
It’s not the first time that Zillow has halted purchases. The company and its main competitors stopped buying homes in March 2020 when the pandemic brought the U.S. economy to a halt.
Then the lockdowns lifted, and the housing market boomed, lifting Zillow’s business in key ways. Selling a home to a website let Covid-wary consumers avoid hosting open houses. And surging home prices let iBuyers draft off of appreciation, since homes gained value during the time it took to make repairs.
“The iBuyers’ recent profitability is being driven by record home price appreciation — a temporary artifact of a hot housing market,” Mike DelPrete, a real estate tech strategist, said in a September report. “As the market eases off its red hot highs, slowing price appreciation may have an adverse affect on iBuyer profit margins.”
Zillow has said in the past that its iBuying model is designed to work regardless of how the housing market is faring. While halting new purchases may provide the company time to adjust to the shifting market, the move comes at the risk of losing ground, as its largest competitors, Opendoor and Offerpad Solutions Inc., continue to buy homes.
Offerpad announced plans to start buying homes in three California markets, saying in a statement that the “expansion is fueled by our company’s operational excellence and our strong real estate background enables us to buy, renovate and sell homes across many markets in changing real estate cycles.”
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