In a shocking turn of events, Zillow announced Tuesday that they would be ending their iBuying program known as Zillow Offers. As third-quarter 2021 revenue rose for Zillow Offers, the company posted a $422 million loss in its home-buying division, which was too much for the company to bear. At the same time, the company with nearly 8,000 employees announced it would lay off about 25% of its staff.
The news came just weeks after Zillow announced what was then described as a temporary “pause” in new iBuying acquisitions, citing supply chain and labor problems as the main cause.
But the problems seem to run much deeper than labor and material issues. The real problem, it seems, is Zillow’s inability to accurately predict home values and prices.
“We found that the unpredictability in forecasting home prices is much greater than what we expected, and continuing to scale Zillow Offers would lead to too much earnings and balance sheet volatility,” Zillow CEO, Rich Barton, said Tuesday.
This statement probably comes as no surprise to real estate investors and brokers out there — many of whom have long been frustrated with Zestimates and its alleged inaccuracy.
Out of curiosity I took a look at Zillow’s self-reported accuracy data for Zestimates, to see what went wrong. According to Zillow, “The nationwide median error rate for the Zestimate for on-market homes is 1.9%, while the Zestimate for off-market homes has a median error rate of 6.9%.”
As someone with predictive modeling experience, a median error rate for on-market deals of 1.9% is quite impressive. If you look at a home valued at $500,000, that’s only $10k either way. That may sound like a lot, but from a modeling perspective, that’s a good average. That is of course the average wrong. The forecasts for each house can vary by much more than 2% in either direction.
But with iBuying, you don’t necessarily have to deal with on-market deals – opening Zillow for a range of values of +/- $35k on a $500,000 house, which any house flipper will tell you is pretty significant. Because Zillow bought primarily in Southern California, the risk was even greater, as the median home value is above $900,000. This means that their off-market deal algorithm would reach a range of $837k and $963k – that’s a huge difference!
Combine that margin of error with a very unusual (and thus unpredictable) housing market, labor shortages, material costs and everything else going on in the economy, it’s not that hard to see how this could have gone so wrong for Zillow.
According to a report by Bloomberg Zillow now faces the task of offloading nearly 7,000 homes it overpaid and must sell at a loss. However, don’t rush to find one of these homes. It appears that Zillow is trying to sell the entire portfolio at once to an institutional investor, such as a hedge fund or a private equity firm.
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However, iBuying is not dead. Zillow was certainly one of the biggest players in the space, but in the end they have a very large ad business that they didn’t want to risk continuing iBuying. Other companies like OpenDoor, Redfin, and OfferPad seem undaunted, at least for now. It will be interesting to see how these companies perform in the coming years and to see if they can overcome the challenges that Zillow Offers eventually succumbed to.