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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