Zillow Comes Unglued, Lost $1.4 Billion on Flipping Houses since 2019, Bails Out, Lays Off 25% of Staff, Stock Plunges Further

Another one of the most hyped Wall Street schemes belly-flops.

By Wolf Richter for WOLF STREET.

Home flipper Zillow reported a nightmare today. In Q3, it bought 9,680 houses and sold only 3,032 of them, after having purchased 3,805 houses in Q2, and sold only 2,086 of them. In other words, it was very good at buying houses by overpaying for them, but now cannot sell them without losing bigly. Its inventory of unsold houses ballooned to $3.8 billion, up from $491 million in December 2020. It admitted it overpaid for those houses and blamed its AI-powered pricing genius. It outlined how much it expects to lose on those houses, threw in the towel on its entire house flipping business, and will lay off 25% of its staff.

In its Q3 net loss of $328 million that it reported today, Zillow included $304 million in write-downs of houses that it had paid too much for in Q3. For Q4, it expects additional losses of $240 million to $265 million on the houses it bought since the end of Q3. It stopped making offers on October 18 but will close the deals it made until then.

This confirms my expectations yesterday that Zillow would show a huge write-down when it reports its Q3 results, and would continue in 2021 its well-established and unrelenting series of annual losses.

Its house flipping business – which Zillow calls “Zillow Offers” in public, and the “Homes” segment on its financial statement – showed losses right away in 2019, when it kicked off this scheme.

Back then, I calculated that Zillow lost $109,000 per completed flip, all expenses included, and I pooh-poohed the scheme – “this is a horrendous business, I said,” because you cannot make money flipping houses by overpaying for them. You have to buy low.

But you cannot buy low when you’re the whale in the market that is buying hundreds of houses willy-nilly in no time, and when Wall Street evaluates you on how many houses you bought instead of on how much money you made when you sold the houses.

Since then, the losses from house-flipping piled up, now totaling $1.42 billion, just for the house flipping business, including the write-downs announced today for 2021:

  • 2019: $312 million
  • 2020: $320 million
  • 2021: $789 million (9 months: $539 million + Q4 midpoint estimate: $250 million)

To lose $1.42 billion by flipping houses in the hottest, most inflated, most liquid housing market ever takes a real genius.

The genius was of course the AI-powered well-oiled buying machine. It got to the point where everyone and their dog wanted to sell to Zillow. This AI-powered well-oiled buying machine – founded upon Zillow’s “inimitable living database of homes and superior data science and technology advantages” – was one of the three “competitive advantages” that Zillow showcased in its 2020 annual report.

Today, that AI-powered well-oiled buying machine got taken out the back and shot. It was today, November 2, that Zillow’s board decided to kill the thing, Zillow said.

It blamed the “wind down” of Zillow Offers on, in that order:

  • “Home pricing unpredictability
  • “Capacity constraints
  • “Other operational challenges
  • “An unprecedented housing market
  • “A global pandemic
  • “A difficult labor and supply chain environment.”

“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated,” Zillow said, citing co-founder and CEO Rich Barton.

So they ended that scheme because continuing it “would result in too much earnings and balance-sheet volatility.” I love it when “volatility” takes on the meaning of “huge losses and cash incinerator.”

Zillow said that the wind-down would take several quarters – and there are still thousands of houses to sell, and it’s pitching 7,000 of them to investors, as it emerged yesterday. And it will lay off 25% of its staff, and it will be done with this scheme, and go back to its money-losing roots, after having blown $1.4 billion on flipping houses, and after having done its best to inflate house prices further by overbidding for them. Now those pricing data points are going to reverse when it sells those houses at a lower price.

The bedraggled Class A shares [ZG] fell another 10.5% in afterhours trading, to $76.50, after having fallen 11.5% during regular trading hours on yesterday’s revelation that it was trying to dump 7,000 houses to investors and was underwater on much of its inventory, after having fallen 8% yesterday. They’re down 62% from the February 2021 high. The huge rally toward that high had been fueled by Wall Street hype about, you guessed it, Zillow’s home flipping prowess.

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  146 comments for “Zillow Comes Unglued, Lost $1.4 Billion on Flipping Houses since 2019, Bails Out, Lays Off 25% of Staff, Stock Plunges Further

  1. jon says:

    “To lose $1.42 billion by flipping houses in the hottest, most inflated, most liquid housing market ever takes a real genius.”

    The above is so true. We think people in C suites are the smart ones :-)

    • Mike G says:

      Corporate America rewards aggression and social conformity, not intelligence.

      • NBay says:

        Why not? When you run an outfit with a “legal” piracy license (and even get to write ever better laws favoring your own “pirate ship” or even fleet of them), what’s to lose?….and who needs brains?

      • Phoenix_Ikki says:

        The more psychotic, sociopathic or narcissistic you are, the better you do in the C-suite, this is a fact of life in Corpo America.

        Throw in easy money and lack of accountability and everyone is drunk on never ending hopium, what you get is like Girls gone Wild corpo edition. C-suite’s brilliant ideas run amok and infinite amount of Kool-Aid to pass around but only shareholders and your average joe that bought into the mania gets to feel the hang over afterward. C-suite get that sweet golden parachute one way or another…

      • Jason says:

        House flipping by corporates should be banned. Houses are for living in. Alot of people want to buy a home to access the tax perks given to them but not renters.

        This business is wasteful and corrosive on society. If you don’t think privatising common man infrastructure is a bad idea then let’s sell off the water system pipe by pipe…

        • Fredo is weak and stupid says:

          Yes. Along with foreign ownership of real estate. We have 1000s of homeless in every city and foreign owners of dozens of homes.

        • Paulo says:

          Jason,

          I think the water systems have long been privatised in many cities. They may not own the pipes, which is even better, because then they don’t have any responsibility, that is saved for the local Govt and population….like Flint Michigan. Then they ask the Feds to step in…..

        • Petunia says:

          China is leading the way in this regard penalizing the ownership of multiple properties. I think it is a good thing. Their new real estate tax system gives every family 100sm(~1000sf) of tax free living space and every thing above that gets taxed at a punitive rate.

          We need to have a similar system here before we all land up living in tents.

        • Petunia says:

          Correction:

          The new Chinese real estate tax give 100sm per family member. So a family of 3 would get 300sm, about 3200sf.

        • cas127 says:

          “Houses are for living in”

          Don’t worry, things like Zillow’s announcement are what blow up bubbles.

          7000 home buys made Zillow the marginal, price setting imbecile in a lot of mkts.

          Without the indispensable imbecile, prices return to rationality.

          At least the Pandemic Euphoria Bubble (dumbest bubble ever) is going to last a much shorter period of time than housing bubble #1.

          Just fear DC/Fed stepping in to save “us” (Zillow).

        • kam says:

          The Federal Reserve has destroyed free market price discovery.
          Price is fake, Fed created – excess liquidity in the hands of their whiney cohorts.
          And that, right there, is another distortion in the demand/supply of every good and service.
          So, what happens, Wolf, when the Christmas trees in those containers, arrive after Boxing Day?

        • Bill says:

          Jeeze. There are no more “Tax Perks” for home ownership. That went out with 14% Cap gains, and personal exemptions.

        • Bubba-Man says:

          House flipping *should* be buying a fixer-upper, fixing it up, and then selling it. Corporations can do this as well as anyone else.

          The current version of “flipping”, sadly, has nothing to do with this. Not even for individuals!

      • NBay says:

        Nice thread….quite rational….almost sorry to throw this in.

        Unfortunately, many of your points/arguments would be better debated with people like this here deceased guy, who pointed out a MUCH BIGGER problem we have in this country:

        Around 50% of your fellow citizens have a Cavinistic world view.

        • NBay says:

          Sorry, Calvinistic.

          Hopefully those who do not understand it’s full implications for a country will look it up.

          Great string of articles, Wolf….so time to donate again…..check’s in the mail.

        • NBay says:

          Ok, I get the link posting pain in butt problem. Google “Barry Goldwater Christian quote”, he’s the deceased guy referred to.
          It’s short and to the point.

    • Djreef says:

      BA taught us different.

    • COWG says:

      “To lose $1.42 billion by flipping houses in the hottest, most inflated, most liquid housing market ever takes a real genius.”

      The only thing they’re genius at is flipping other peoples cash…

      Looks to me like they’re posturing for a super low interest loan for a share buyback…

      And you guys thought they were dumb…

      I was actually being sarcastic … and then thought… ya know, wouldn’t surprise me a damn bit…

    • RH says:

      LOL. Now, Blackrock and the rest of the parasitic Wall Streeters, please god!

      Just smite them this once with their CCP cronies and smite the CCP, please!

    • RH says:

      Wolf, thank you. This report made my day. LOL.

    • Jay says:

      But don’t worry according to ALL the real estate analyst, this housing market is DIFFERENT than 2006. There’s no way the floor on this one could fall out from under all those people who’ve bought in the last 24 months.

      According to Zillow, my little dinky 1300 SF spec house has about $85K to fall from its current value down to where I bought in at, $199K. My house has appreciated, according to Zillow and the village idiots buying houses these days, 84% in three short years.

      ZONKERS!

      • VintageVNvet says:

        Our small cottage has appreciated over 300% in the last six years according to Zillow’s current estimate.
        Tried to get my better half to sell when it got to 200%,,, but then she said, ”where would we go”,,, and that’s the reason she’s the ”better half.” eh
        Really want to encourage the concept of only small time ”flippers” doing the short term ”investment” in RE ONLY IF really rehabbing what they buy, as a service…
        Otherwise, it’s just plain nuts for any attempt at large scale operation because of the incredible variety of very likely issues, FKA problems in every older house, and I have inspected thousands over the last 60 years.

    • Brant Lee says:

      But the CEO and board are still counting their bonuses, right?

  2. Seneca's cliff says:

    Zillow became popular by pumping up everyones home values with its “Zillow Price” that made everyone feel rich. After a while they were like the Hustler who starts to believe their own con and acted like those “flash and trash” prices where real. It is like if Bernie Madoff started to believe that he could actually generate 12% returns every year through his investing genius and then took all the gains he skimmed off his marks and put in right back in his Ponzi Scheme at the top.

    • Jay says:

      I agree up to a certain point. We also need to blame the idiots that are actually buying the houses. If people had the ability to just say NO, that Zillow Z-Estimate wouldn’t be going through the roof, especially since it’s based on actual sales prices.

      But, I do agree. Zillow is a really big part of the problem. But, like I keep saying, don’t worry because all those real estate analyst out there know this train is just going to keep chugging on down the tracks and not run off the rails like 2006-2008. This market is DIFFERENT!

      HAHA!

  3. 2banana says:

    Well, maybe a few folks learned how to code as a silver lining.

    “And it will lay off 25% of its staff, and it will be done with this scheme, and go back to its money-losing roots, after having blown $1.4 billion on flipping houses, and after having done its best to inflate house prices further by overbidding for them.”

    • Trucker guy says:

      Isn’t that circular logic?

      My robot buys a commodity based on atypical rising prices. My robot buying things causes prices to rise. My robot keeps buying because prices keep rising for some reason… I wonder why?

      Oops turns out my robot wasn’t big enough to truly corner the market and now prices have slowed the slightest bit and now I’ve just bought a bunch of overpriced crap I’m stuck with.

      Wonder how many of these other bid and buy programs are dead in the water we just have seen them float down the river yet?

      • Niko says:

        Since I’m architecting the Cloud solutions, I have a strong exposure to the AI/ML world and would like to state my observation relevant to your comment. Machine Learning algorithms are as good as the data set feeding them and the given training directions: what are you trying to achieve? Data scientist can build and train an amazing ML algorithm, but the business function it serves can become easily distorted as these models are made mostly by children (20 somethings). It looks to me as if their ML/AI was just trying to “win” as many houses as possible in isolation of the overall business function to “flip” the house and make the profit. IMO, nobody tried to corner the market, they just lacked the skills to create the business requirements and convert them into the working product. AI is going to be a major headache because of the prevailing “move fast, break things” philosophy. We lack enforceable AI safety and ethical control framework.

        • 91B20 1stCav (AUS) says:

          i have always marveled at the look on a face when presented with the statement: “…ANYONE can break a Ming vase, not everyone can craft one…”.

          or, perhaps, over the centuries, we see that human cussedness might approach an art form in itself…

          may we all find a better day.

        • NBay says:

          This philosophical thought calls for some Revealed Religion.

          I fill a glass with water molecules, and decide that they are not worthy. I pour them all down the drain, cursed to a horrible fate in the sewer.
          Then I fill another glass and say they are all good, and therefore I will make them all parts in my own living image.

          I am God.

      • kam says:

        AI is just another bunch of garbage which depends entirely on it’s programming. Kind of like, you can’t run very far away from your DNA.

      • NBay says:

        Thanks for “pyrrhic laugh” Trucker.

        Just be glad the “safety” robots in your car that can stop or steer for you, if they decide it necessary, haven’t decided to “corner the freeway”.

  4. Trucker guy says:

    Welp, all I’ve really got to say at this point is:

    LOL.

    “Wow, real estate sure is hard when the prices are only going up!” ~ Zillow management.

    Again… Ahem: LOL

  5. CCCB says:

    No 1 on the list of the 25% layoffs should be Mr.
    Brilliant CEO Barton.

    So now Zillow is back to their original “business model” of shaking down realtors for a few $$$ every month to buy back crappy leads on their own listings. Any realtor dumb enough to do that will probably buy Zillow stock with their commssions too.

  6. matt says:

    “inimitable living database of homes and superior data science and technology advantages”… that has the number of bedrooms and bathrooms switched on my mom’s house.

  7. J-Pow!!! says:

    I applaud Zillow for their efforts! BRAVO lads!!! Quite a good show doing my dirty work bidding up houses! Doesn’t everyone want to pay a million to live in Phoenix??? I will reward you handsomely in your next corporate bond offering! I will buy them all!! Your stock will increase and we will all laugh while running to the bank with the profits!! Hahahahahahahaha!!!! We are geniuses!!!!! Bitcoin++

    • KurtZ says:

      At least during the last housing bubble, the Hedge Funds came in AFTER the collapse and started restoring the floor to real estate prices, and cornering the market, by buying inventory from the Court House.

      Zillow wasn’t patient enough to wait for the deflationary crash. They ended up just being a bagholder.

    • J-Pow!!! says:

      Zillow may be done but I still have redfin to brainwash the masses into house-envy!!!!!!! Hahahajajajajahahahaha!!!!! Muhahahahahahahaha!!!!! ++bitcoin

  8. LW says:

    I thought I was reading fake news. I was laughing so hard.
    Is this for real?

    • Jake W says:

      this is every asset market. anyone buying stonks at these prices will be feeling like a fool at some point.

      • roddy6667 says:

        Exactly. The financial world these days is a slow motion train wreck. Impossible to stop, but easy to avoid.

  9. Tom S. says:

    A canary in a coal mine.

  10. Nick Kelly says:

    It boggles my mind that someone could drink the AI koolaid to the extent of letting it buy houses. As has been said many times, RE is not fungible.

    Better to assemble a team and MAYBE let the AI sort thru the listings, then the humans talk over a few per hundred. Sometimes the black swan creeps up, other times it’s sitting on the mail box.

    BTW: it’s everyone’s hobby to disparage realtors but you’d do better after selecting a few cities, to find a few and negotiate some deal.

    • Lynn says:

      I really suspect that one needs to consume way too much cocaine in order to believe that AI model. I don’t see any other way it would make any sense. No one has believed it except some wacky owners trying to sell a place by themselves.

  11. Lynn says:

    YAY!! Now we just need several more private equity/family offices to fold a bit.

    • NBay says:

      Private Equity…..Yeah.

      Don’t look now, but the amount of Public Stocks has been shrinking for some time. The “means of production”, as Marx would say, all still exist.
      Ex: Last I was able to check (Yahoo finance..several years ago), only 3 out of the top 10 food producing corps by SALES are public corps…#’s 3,5, and 7, as I recall.

      However, as said MOP is likely mostly in the hands of Private Equity now, you cannot play in that casino unless you are a high roller with money to burn…..or at least won’t need to access for whatever amount of time the house decides.

      • NBay says:

        Needless to say, what little FDR depression era regulation still exists on corps following the corp owned Reagan-bot years (yeah it kept going down under Dems, too), is even less on PE corps.

  12. MiTurn says:

    “…blamed its AI-powered pricing genius”

    My wife and I would marvel at the sometimes manic pricing estimates of properties that we would watch on Zillow. Made no sense. Price guesstimations made using a shotgun.

  13. Frank says:

    I wonder if the the recently created crowd sourced REITs will follow Zillow. Hopefully they have been more selective and have not manic purchased like Zillow. Still a case of too much money after two few properties.

  14. Lynn says:

    So… anyone know exactly how many SFHs Zillow currently owns? I can see they’re selling 7,000+ right now, but how many do they own? How does one find out how many any company owns?

    • matt says:

      Accidentally replied this to another comment; meant to put it here:

      How ’bout some quick math?

      If they’re on average 10% underwater that’s a nominal value of $14 billion. If the average fair-market value of a Zillow house is $400k that’s 35,000 houses.

      • Lynn says:

        Thanks. That number would not surprise me. I think a huge amount of homes are in corporate or large private buyer ownership. Plus some still quietly in bank ownership. Zillow is not anywhere near the number Opendoor has bought already built according to CNN.

        Rumor has it the large corporations have been quietly buying some (many?) foreclosures before they come on the market this past year. I believe that- tried to buy a foreclosure, called the bank and they said it wasn’t for sale. Saw it changed hands a little while later.

        Hopefully a good percentage of those held homes are in full or partial global corporate ownership that will collapse.

    • Wolf Richter says:

      I looked for it on Zillow’s 10-Q (full quarterly report) of today and couldn’t find the number. I only found the dollar figure. The 10-Q is linked in the text, but if anyone wants to go dig through it to try to find that number, here is the link again:

      https://www.sec.gov/Archives/edgar/data/0001617640/000161764021000087/z-20210930.htm

      It sure would be fun to know. My guess, from the numbers today, is over 8,000.

      • Lynn says:

        Thanks Wolf. But if you can’t find it I’m sure I couldn’t. Have searched for that info off and on for years.

        It would be really interesting to know how many homes and what percentage of the market is held by companies that are on the stock market. If I had to make a very wild guess I’d guess 10%. At least enough to block the market.

        • Paulo says:

          Are the Zillow homes only in bigger urban markets…..like a Houston suburb for example? I guess the laid off 25% were the conveyancing crews? They didn’t raise an alarm?

        • Lynn says:

          No idea Paulo. I haven’t ever seen a home identified as a Zillow home. But the domino effect certainly comes into play.

          I do see a lot of homes with the exact same awful sort of zebra stripe wood laminate and new paint slapped over everything. Half of them have that one accent wall thing going- usually a sage green.

      • cas127 says:

        So long as we are talking about hard to find numbers…I wonder how many 2008 era bank REOs (Real Estate Owned, via 2008+ foreclosures) are still on the books…and have now likely missed the peak of Dumb Bubble 2.0…quite possibly inspiring serious consideration of panic selling in the wake of Zillow’s catastrophe…

        • cas127 says:

          Also interesting to note that Zillow throws in the towel (in a high profile way) just before Fed starts to inch-ever-so-slightly away from pedal-to-the-floor liquidity that has characterized 98% of last 20 years.

          Small steps away from ZIRP have flatlined the post-2000 economy before (2008 and 2018)…how will micro-step away impact post-pandemic economy.

        • Lynn says:

          Not too many in my area I don’t think. The ones that remain I would guess are so badly rotted they’d be mostly tear downs. I saw a lot of those hit the market late last year and early this year. They were sometimes marketed to online buyers; paint layered over the mold and rot, blurry roof pics, and had major problems. Like- cheaper to tear down and rebuild than fix. IF you could get a new septic permitted.

        • Lynn says:

          Maybe Zillow bought some those, lol.

  15. Escierto says:

    I don’t understand why their stock is down. Doesn’t Wall Street reward those who lose billions? Maybe they should have added the words crypto currency to their name? Isn’t this the modus operandi of every high flyer today – lose on every unit and make it up on volume lol?

    • matt says:

      How ’bout some quick math?

      If they’re on average 10% underwater that’s a nominal value of $14 billion. If the average fair-market value of a Zillow house is $400k that’s 35,000 houses.

    • Lynn says:

      I think this is one company that Robinhood fans (or whatever it has transformed into) would never ever bail out. A friend of mine is into that. In general they are all pissed about home ownership being out of reach for more and more with each generation.

      I don’t know how much sway they would have, but there’s that.

    • roddy6667 says:

      If this happened to Tesla, the fanboyz would have jacked up the stock price by 10%.

  16. Michael Engel says:

    Why is UST20 > UST30Y (inverted) again.

  17. Prorkba says:

    These rats caused all kinds of chaos. I’d like to see them go belly up!

  18. Xavier Caveat says:

    Was Zillow a sight unseen buyer, or did they put any effort into making sure they weren’t buying dreck?

    • Tom says:

      Right before they stopped buying I asked him to bid on my house. I can sell my house easily for 1.2 million they offered $900,000 after expenses including their 11% buying fee. I wonder if someone besides Zillow got a large part of that 11%. They asked you to make a video of your house before they make that final offer and they send somebody to inspect it. My guess is there might be trying to do too much improvement in the homes. they really should sell as they are as long as they can still get a loan for the buyer.

  19. Brent says:

    Merriam-Webster Unabridged Dictionary recently updated a couple of entries:

    “Home” – a RE asset price of which keeps soaring

    “House” – a RE asset price of which treacherously plunges.

    “Shack” – former RE asset price of which reached zero and still keeps falling (yes,Virginina,price of an asset can be negative !!!),temporarily housing squatters & dope dealers and undergoing the copper wire stripping process.

  20. Phoenix_Ikki says:

    In my comments in Wolf’s previous article about Zillow, I have expressed my doubts about more than meet the eyes about their stupidity in buying high and selling low quick, surely MSM and every Youtuber that ran with this gotta be missing something right?

    Nope…I guess they are that freaking stupid….fire their entire board and the CEO. In this case, take a fraction of that money and light it on fire, it would be more entertaining than losing money this way. These people must operate on the same level of stupidity as the Las Vegas council that approved expansion of the “hyperloop” in Vegas for Musk. 35mph non-self driving in a death trap tunnel, yup this is what the future will be like.

    • Jeremy Wolff says:

      Remember the lightbulb started with 1000 failed prototypes. The hyperloop 1000th version may be something great. Zillow a.i., probably not.

      • LK says:

        Light Bulbs don’t fundamentally change the environment people inhabit if they fail.

        The Hyperloop is fuck stupid in design and practice, and the Vegas politicians that signed off on it are morons. One only need spend five minutes on any Youtube critical of the concept to see its problems.

        There is a grift / ulterior motive to it. Somebody is making bank off the deal. Not like an inventor wanting to lighten up the world.

  21. polecat says:

    They’re ALL schemes… about to belly flop into a reddened pustulous fantasmagoria of market wishful thinking…

    Boo F#cking Hoo!!

  22. Augustus Frost says:

    One of many, many companies whose market value should be zero. Some now worth tens and maybe hundreds of billions.

  23. DR DOOM says:

    The well oiled AI buying machine might have been programmed by a potential idiot that made an assumption that houses can only go up. If you cannot define a top as a limit then there it’s buy,buy,buy. AI can no more figure out an idiot programmed it than a human idiot figuring out that they are one. Hey, shit happens.

    • Harvey Mushman says:

      “The well oiled AI buying machine might have been programmed by a potential idiot that made an assumption that houses can only go up.”

      Or… the programmer’s initial release was based on sound logic. Then the marketing group realized that it wouldn’t make enough money as is and they started making all kinds of changes until it jibed with their business model.

    • Franz Beckenbauer says:

      That’s the problem with AI.

      You don’t program it, you train it. On historical data, because you have, well, only historical data in the first place.

      An AI that was “trained” on data from a period of time when house prices did go up all the time will “assume” that that’s the case forever. And act accordingly.

      Ouch.

      I like to call AI Artificial Idiocy. But it makes great talking points for marketing. And it might be the reason for the downfall of the U.S.

      Somehow quite a fitting coincidence.

  24. Andrew says:

    I might humbly add that flipping a house is a lot of work. Landfills typically get all sniffy about the junk and charge a premium. The permit process for additions or alterations is a nightmare with local councils. Materials always cost more than estimated. I wonder how Zillow, its brainiac computer, and its shareholder caste thought they could just coast on a rising market without doing any actual work?

    • NBay says:

      To me, that has a lot of similarities to the differences between a Manufacturing economy and a Service economy. When the Reagan-bot was making the necessary changes for the corporations to do so, one of my more perceptive homeless friends said, “What are we all supposed to do, sell insurance to each other?”

  25. Josh says:

    Wolf has pointed out many times that Private Equity companies have been building new home communities to rent out but they haven’t been buying SFH in mass. Could this liquidation by Zillow be an opportunity for one of the PE companies to get in the SFH rental game? As someone who believes a house should be something to live in and not an investment, I don’t feel great about this situation (even if it is quite funny to point and laugh at Zillow).

    • MIke G says:

      Owning and renting an entire neighborhood of new tract homes you have some potential for economies of scale and standardization in management and maintenance, which will be low since they’re brand new.

      But using AI to buy dozens of dissimilar used homes scattered around the suburbs was a disaster waiting to happen. The kind of stupid idea you cook up in desperation when people are throwing too much money at you.

      • kam says:

        “The kind of stupid idea you cook up in desperation when people are throwing too much money at you.
        So, you are saying that the Fed throwing money at the Wall (St.) is only going to work if they continue to throw money at the Wall?
        Shocked, it I tell you. Shocked.

    • NBay says:

      As I learned from reading articles here long ago, PE is VERY scary stuff.
      Lambert and Sears comes to mind.

      For what it’s worth, Cramer used to say he knew him personally, vouched for his skill, and put him on his “CEO hall of fame”.

      Pre FC, when I was trying to learn financial things from CNBC…..

      That is ignorance on my part, I never took Econ or Management or Accounting anything, just too damned boring.

    • Lynn says:

      “Wolf has pointed out many times that Private Equity companies have been building new home communities to rent out but they haven’t been buying SFH in mass. ”

      No, he’s been pointing that out about Blackstone in particular.

  26. Matthew Scott says:

    Any idea what parts of the country they bought these houses?

    • matt says:

      From the Zillow Offers FAQ, likely to be nuked in the next day or two:

      Zillow Offers is currently available in these areas:

      Atlanta, GA
      Austin, TX
      Charlotte, NC
      Cincinnati, OH
      Colorado Springs, CO
      Dallas-Fort Worth, TX
      Denver, CO
      Fort Collins, CO
      Houston, TX
      Jacksonville, FL
      Las Vegas, NV
      Los Angeles, CA
      Miami, FL
      Minneapolis-St. Paul, MN
      Nashville, TN
      Orlando, FL
      Phoenix, AZ
      Portland, OR
      Raleigh, NC
      Riverside, CA
      Sacramento, CA
      San Antonio, TX
      San Diego, CA
      Tampa, FL
      Tucson, AZ

      Posting URLs seems to put posts into moderation, so to confirm just google “zillow offers faq”

      • BuySome says:

        Should have concentrated their attention on Tombstone, Bodie, and Moundhouse.

        • NBay says:

          Tombstone is owned by old established families. Not for sale. It’s their own lucrative “Disneyland”. Unless things have changed since I was living in AZ, (per buddy in Bisbee), off and on ’07-’12, or so with GF in Tucson.

    • Happy1 says:

      They have bought and sold a handful of homes in my suburban Denver neighborhood, each has sold at a roughly 5% loss. This in an environment where prices rose 20% in 18 months. They were late to the market and overpaid for each one, and did the most basic paint and carpet upgrades, very cheap looking. This news doesn’t surprise me at all.

  27. OutWest says:

    Zillow. I still like the Zestimate. It’s free…I thought that was the purpose all along…

  28. HollywoodDog says:

    I just can’t get over the irony of a business built on predicting home prices attributing its setbacks to “home pricing unpredictability.”

    • Mike G says:

      Not a great look for their reputation. It’s like a computer security company having to announce its internal IT systems were hacked.

  29. Franz Beckenbauer says:

    “But these are essentially just mortgages, which allowed us to employ leverage far greater than would normally be allowed”

    From “Margin Call, senior partners’ meeting”.

    “Sell it all today”

  30. Joe says:

    AI mistake causes 25% of staff unemployed. Mad world.

    Zillow: “You are fired!”

    Staff: “Why?”

    Zillow: “Computer says so”

  31. Rowen says:

    Should have just blamed it on Evergrande.

  32. SpencerG says:

    I gotta say that I am really surprised that the company didn’t announce that some senior staff (like the CEO) were being replaced AND that the company was being put up for sale.

    Maybe those announcements will come next week.

    • Wolf Richter says:

      CEO is co-founder and is hard to fire.

      • Petunia says:

        Not after this disaster. Lots of CEO founders get fired, like Steve Jobs.

        • 728huey says:

          But they won’t get fired these days for blowing hundreds of millions of dollars in cash. Maybe for sexual harassment or publicly saying racist things, but not hemorrhaging money.

        • Nick Kelly says:

          John Scully was CEO who fired Jobs with Board’s approval and if I recall at its instigation. This was painful for Scully who had been lured by Jobs from the # 2 spot at Pepsi, shocking its CEO. Scully had something of a father-son relationship with its CEO, who assumed Scully would take over at some point. Jobs famous challenge to Scully: ‘do you want to change the world or sell sugar water to kids?’ Then Jobs and Scully became close.

          Of course Jobs comeback is maybe the greatest biz comeback ever but at the time it was probably the right move. Apple was
          heading for bankruptcy and at that point it needed a bean counter more than a visionary. This way there was a base for Jobs comeback.

          If now to us it seems almost unbelievable that Apple could have gone BK, just think about George Westinghouse, who backed N. Tesla’s AC power against Edison’s DC, going into receivership when he got overextended.

          We could have our modern techno- civilization without the i-phone but not without AC. When both bid to harness Niagara Falls, Edison could only get the power to Buffalo. DC can’t be ‘stepped up’ by a transformer for efficient transmission.

  33. fizee says:

    Zillow. Sounds like a new pharmacological product to help you sleep.

    • Lisa says:

      Lol

    • NBay says:

      Was reading about that process…LOTS of people involved….much searching of existing names and marketing….has to sound unique, easy to say to Docs and public, and bear some relation, if possible, to what it’s a yet another “magic bullet” for. Very complicated process.

      And just wait till Dr Gorbeck gets his “proteomics is the future” he is drooling to invest in.

  34. NoPrep says:

    Looks like the share price is heading to “Less than Zillow”. The Fixx once sang that song. Maybe I misheard the lyric. Now the song is stuck in my head, which is annoying.

    • NoPrep says:

      No, Less than Zillow, that was not the Fixx but Bret Easton Ellis’ masterpiece. Saved by Zillow was the hit song. Sadly Zillow aren’t saving anybody, including themselves.

    • Bead says:

      Declan McManus aka Elvis Costello sang it

  35. Dave k. says:

    While there home buying business has been a bust, I like the website. Use it all the time for my rentals and quick scans of what’s out there. If they stick to what they should have been doing all along, I can see them still doing WELL. The question is then, at what point is the stock a BUY??

    • Augustus Frost says:

      CNBC shows it with a market cap of $17B, a still insane valuation down from an even more insane $50B+.

      Income statement shows they have made measly profits during this fiscal year (quarterly) but what’s available shows annual losses back to 2017.

      Did the company ever make any money before that? I understand it hasn’t but if it did, it’s a pittance.

      Growth in revenue has been high (3X since 2017) but it still sells at 5X revenues with a P/E over 100.

      It’s a ridiculously overpriced stock with an OK balance sheet (great by today’s standards) even after losing 2/3 of it’s value which I guess looks “cheap” thanks to manic psychology.

      What kind of growth can this company possibly achieve where the current price will be “reasonable”, except in a mania?

      • BuySome says:

        Engines may be afire, wings cracking under stress, a stripped screw in the tail, and the pilot’s a coke addled drunk…but the fuselage looks intact. Anyone want to buy a ticket a see if it’s possible to slow the descent by flying inverted before setting her down in a field? Okay, so there is that minor problem of a few steeples on unsold churches, but the land underneath has some value that might yield a good crop of taters.

  36. c1ue says:

    Zillow is the American Evergrande: smaller, doesn’t create anything, catchy pitch but still a loser.

  37. fred flintstone says:

    but but but……..we deserve a government bailout…….we are going to hurt some people with this layoff……they will feel pain…….so no matter how incompetent we are……..we deserve a billion or two……and keep rates low so we can borrow more and apply it incompetently. Its our right.
    How is this different from the Soviets?
    My 4th grade granddaughter made about the same argument the other day when her snickers bar melted because she left it in her bag in the sun.

  38. CJH says:

    Warren Mosler predicts the largest drop in demand in US history is about to walk through the front door. Economist Bill Mitchell (MMT co-founder) reminds everyone that without widespread income gains, the current prices will be unsustainable. Economist Michael Hudson believes the private debt bubble will depress demand as it bursts. I have no idea if these folks are correct. But none of them are losers.

    • Wolf Richter says:

      Read my article about widespread and massive income gains a few days ago.

    • Depth Charge says:

      I agree. All that stimulus is over with. They pulled massive demand forward and created unsustainable demand. I foresee MASSIVE GLUTS in most products forthcoming.

  39. YuShan says:

    I’m sure their management made millions for themselves.

    It’s amazing that people are still participating in this clown world.

  40. The Real Tony says:

    Zillow didn’t do their homework. You have to buy where you think the Chinese will buy and buy before them. Of course if Zillow read my comments about buying all the houses near the elementary schools in mostly Chinese cities in America their share price would triple or quadruple.

    • Augustus Frost says:

      I live in metro Atlanta. Zillow lists 18 corporate owned houses for sale. Some are in ok locations but others aren’t. Though I have never driven in those neighborhoods, it’s not where most people will really want to buy or live anywhere at the current list price. Somewhat “centrally” located (by today’s standards) but in neighborhoods that must have been hit hard during the GFC.

      As one example, 32 Weyman Avenue lists at $349K (down from $385K) previously sold in 2010 for $48K (that’s right) after selling for $330K in 2008. They bought it for $373K two months prior to initial list.

      Good luck to any buyer, regardless of how “discounted”.

  41. Gbc1 says:

    This is a major fall flat on your face splat for Zillow which not only calls into question their business acumen in buying houses but also throws doubt on their entire database, algorithms, trend predictions etc.

    On the other hand this is only 7000 houses, which is not much against the 6 1/2 million house transactions which occur every year in America.

  42. Depth Charge says:

    Where’s SoCalShill?

    • Phoenix_Ikki says:

      Oh he will be back. Just a matter of time before I see his comments on price still going up in SoCal and this won’t end anytime soon.

      The way things are looking, I wouldn’t say he is wrong so far. It takes certain level for stupidity to correct this stubborn market.

  43. California Bob says:

    re: “… “We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated,” Zillow said …”

    i.e. The Law of Unintended Consequences, the second-most immutable law (after gravity).

    Succinctly: Shit happens

  44. Depth Charge says:

    Housing is shelter. The fact that it has been allowed – ENCOURAGED – to be turned into a speculative tool is sinful. We have the worst crop of politicians in history.

  45. Gbc1 says:

    This is a major fall flat on your face splat for Zillow which not only calls into question their business acumen in buying houses but also throws doubt on their entire database, algorithms, trend predictions etc.

    On the other hand this is only 7000 houses, which is not much against the 6 1/2 million house transactions which occur every year in America. This will not impact the housing market.

    • Lynn says:

      Well, Matt (comment above) did some math and guessed by their current losses that it might be around 35,000 houses. Zillow is not by any means the biggest player of many. If so, it’s definitely a few small straws being placed.

  46. CreditGB says:

    Their “excuses” would seem to outline the very opportunities that their moronic AI overpaying machine screwed up for them. Blame everyone and everything else even if it doesn’t make sense. Gotta say ‘something’.

    “Home pricing unpredictability (Rising consistently most markets)
    “Capacity constraints (Limits supply drives increased pricint)
    “Other operational challenges (Their blundering AI system)
    “An unprecedented housing market (Robust demand = increasing prices)
    “A global pandemic (meh)
    “A difficult labor and supply chain environment.”( Driver of FOMO on existing home)

  47. wkevinw says:

    I don’t understand the low quality bar these people have for implementing models. I did modeling in physical science for graduate school, and we had to have all kinds of information about the model performance, e.g. how sensitive it was to each input, the accuracy of the predictions, etc.

    Do these AI/Modelers backtest? Over what timespan?

    Is anybody home? If so, are the lights on?

    I guess if you are a CEO and have you multimiliions, losing other peoples’ money isn’t too big an issue.

    • BuySome says:

      They might have installed the A(ll) I(n) program into Fembots whose natural instincts for nesting resulted in a “buy-nary” failure. Now that they can’t afford the mortgage, the Fembots will be ejected and have to become Hobots living in camps along railroad tracks. Eating will require chasing mechanical chickens through abandoned corporate farmyards. And so it goes.

  48. Nick Kelly says:

    Sorry off topic, an update re: Tesla and Hertz

    No doubt after a call from legal, Musk has tweeted that there is ‘no contract and no impact on Tesla’s financials’. The whole thing so far is hot air but the SEC could fine him and Tesla re: the bump in the stock.

    • Massbytes says:

      Hertz announced their plan to buy 100K Teslas, not Tesla. Hertz also announced they are already buying some of the vehicles. Tesla said it doesn’t really affect their economics since they aren’t discounting the vehicles to Hertz.

      • Bobber says:

        You better tell Hertz they are paying full price. I don’t think they’ve agreed to that.

      • Nick Kelly says:

        A) there is no contract so at this point no one has bought anything.
        “announced they are buying some’ does not equal ‘bought’ anything, even if only two.

        B) Hertz can only finance 100K Teslas or 4 billion if Tesla finances it which Tesla would have to stretch to do. A high share price does not equal cash on hand.

        Musk didn’t say there was no impact on Tesla financials because there was no discount. OBVIOUSLY there would be an impact if T sold 100k cars at full price. OBVIOUSLY the reason for suddenly tweeting that there is NO DEAL and no reason for a bump in share price is because a bunch of gullible people took what was at best an expression of interest as a deal. This runs T afoul of the SEC again.

  49. Lynn says:

    New stuff out today by the International Consortium of Investigative Journalism on the Pandora papers.

    “The leaked records expose billions of dollars of spending by the rich and famous — celebrities and politicians, oligarchs and other members of the uber-rich. And they’re buying not only luxury real estate but also properties not typically associated with offshore purchases. Dairy farms in Tasmania, a shopping mall in Uganda and rental homes in American suburbs have all been bought directly or indirectly through offshore companies or trusts, the records show.”

    • Lynn says:

      Also, “Earlier this week, members of the European Parliament in Brussels submitted a resolution that, for the first time, condemned the U.S. states of South Dakota, Alaska, Wyoming, Delaware and Nevada as hubs “for financial and corporate secrecy.””

      Zillow can’t possibly compete with all that. Neither can US citizens who just want to buy one home.

  50. J. Gerty says:

    “[Zillow] admitted it overpaid for those houses and blamed its AI-powered pricing genius.”

    Garbage in garbage out. AI leaves them holding the bag with no one to blame. This seems to be an offshoot of “corporations are people”. Still waiting for Texas to execute one.

  51. Matthew Scott says:

    I just saw a house in Oakland CA, it has been on the market a few months, that just dropped its asking price below what was paid for it when it sold in August 2019 ($1.3 Million).

    Zillow is that you ?

  52. ausmarc says:

    the problem with an AI developer in this business model is they probably have no in-real-life flipping skills instead they are long ego, entitlement, and think their ai is going to eat the worlds property market and poop out $$$. thinking it will just level them up real easy like their fortnite and cod characters. its halarious to say the least.

  53. Egaria says:

    Wolf,

    Thought it would be an interesting idea to compare Zillow to OpenDoor. OpenDoor seems like it could be left holding the bag with 6B on real estate on its balance sheet. Not to mention its net losses which have been larger than Zillows. No idea why OpenDoor is spiking seeing that it’s Gross Profit means nothing since its cost of operations weigh it down. Food for thought.

    • Wolf Richter says:

      I suspect that these iBuyer outfits don’t sell homes that they would lose money on, and that they’re building an inventory of overpriced homes, and they’re selling what they CAN make money on. I think Zillow did that too. After a while, unless markets continue to shoot higher, there will be a come-to-Jesus moment à la Zillow. But until then, they can play the game.

      Since we don’t know what exactly they have in inventory that they cannot sell without a loss, this is very hard to track until that come-to-Jesus moment.

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