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How Zillow’s model crushed its iBuying business

After selling homes for losses, Wall Street had enough

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On Tuesday Zillow announced it will be shutting down its Offers business, which wasn’t too much of a shock considering how their stock had been performing for some time. The news was that they had been overpaying for homes and their losses on those purchases were getting larger and larger. Life being a publicly traded company can be fantastic or brutal at times.

“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated,” Zillow CEO Rich Barton said in a press release as part of the company’s third-quarter earnings report. “Continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility.”

Forecasting home prices isn’t easy if the goal is to get a reasonable rate of return, since rate-of-growth pricing matters more in that scenario. One of the reasons why I stressed earlier this year that the rate of growth in home prices would cool off is that we didn’t have a credit boom this year, like what we saw from 2002-2005. After you make some COVID-19 adjustments, demand is stable, not booming. 

From my article in April: “This is my take on the reason why we saw double-digit year-over-year growth earlier this year. One thing that happened last year is that existing home sales never got back to 5,710,000 – 5,840,000. This was the level I had been talking about last year that should be the target due to how February 2020 sales were going.

“Because we ended the year at only 5,640,000 total existing-home sales, I left the opening that we could see makeup demand early in 2021.” I included the weekly purchase application numbers from MBA showing year-over-year growth for the first 11 weeks of 2021: +3%, +10%, +15%, +16%, +16%, +17%, +15%, +7%, +1%, +2%, +5%.

The point I was making with this data in April is that the early housing demand growth year over year — which looks great on paper — has more to do with make-up demand in 2020 spilling forward into the early part of 2021. While demand is solid and in the existing home sales range of 5,840,000 – 6,200,000, which I have talked about on HousingWire a lot this year, this isn’t booming credit demand but very stable.  …Article continued on HousingWire.com.

This article was originally published by HousingWire. The full article is available on HousingWire.com for HW+ Members.

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