Zillow pauses home purchases
YES: After racking up more than $1 billion in losses over the past 3.5 years, Zillow closing down their iBuyer business has significant ramifications for the real estate industry. Kelly Cunningham, San Diego Institute for Economic Research Increased mortgage rates could shake the market, though. Last year we saw them driving home sales buying their first house. Inventory is predicted to remain low, driving demand. There are more signs the housing market will continue strong through 2022 at least. Concern is warranted around labor and supply conditions - including higher costs. Likely not based on a near-crash of the real estate market. NO: Zillow’s decision is for its business efficacy. Reginald Jones, Jacobs Center for Neighborhood Innovation Its reliance on algorithms often caused it to miss local market fluctuations, while delays in renovations and closings have aggravated its losses.
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This division has failed to reach expectations in its 3-1/2 years of existence, losing nearly $80,000 per house in the third quarter. More significantly, it reflects Zillow’s operations. YES: Zillow’s house-flipping shutdown in part probably indicates the firm’s view of rising risks that prices might decline or decelerate more quickly on its large outstanding inventory. Lynn Reaser, Point Loma Nazarene University This is just the beginning, AI and machine learning will become more prevalent in decision-making as these tools mature. However, the reality is that the choice to buy a home is often based on subjective human decisions such as a view or personal preferences. Many aspects of home valuation can be quantified, such as number of bedrooms and bathrooms. NO: Zillow Offers’ failure points to the difficulty of using machine learning and artificial intelligence to make complicated real-world decisions.
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But it is difficult to envision a widespread drop in home prices. Perhaps Zillow is uncertain that it can sell its existing inventory at prices that generate a sufficient margin. Real estate markets have several known problems, such as home construction not keeping pace with demand, but they do not offer a clear explanation for Zillow’s decision. NO: Zillow is alone among iBuyers to pause its home-buying activities. Simply, they tried to beat the market with an algorithm, and it didn’t work. Add in supply chain issues and labor shortages, and Zillow now faces reselling thousands of homes at a loss. Competitors, on the other hand, adjusted theirs down earlier this year foreseeing a cooler market. They tried to accurately predict the cost of buying and selling homes in this current market utilizing aggressive algorithms and ended up overpaying for homes. NO: This appears to be more of a business mistake.
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They may have overpaid on 30 percent of the homes bought, while 10 percent should be the max for a successful iBuyer program. Their valuation model, like all appraisals, has errors, and sometimes misses on the high side. They missed the impact of seasonality missed the fact that the frenzy of buyers creating instant sales would end, and they failed to discount purchase prices by sufficient margins for quick resales. NO: Zillow’s failure is a result of a lack of experience among executing the plan. That could explain why Zillow has never made a profit in their homebuying business Zillow sold 66 percent of their homes at a loss that averaged 4.5 percent. Zillow’s CEO admitted their algorithm is flawed and didn’t accurately predict a slowdown in home price increases. In a fast-moving market it’s likely their algorithms are not keeping up with market changes. YES: I don’t think Zillow’s failure is a sign that there is something wrong with the real estate market, but rather their business model.