Zillow plunges 25% to its lowest stage since July 2020 after the corporate went out of the house shopping for enterprise

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Zillow shares plunged 25% on Wednesday after the company announced it would exit the home flipping business due to its inability to accurately predict house prices.

Zillow, once a pandemic winner due to its central position in the red-hot real estate market, has lost two-thirds of its value since February and is trading at its lowest level in 16 months. The stock fell $ 21.63 to close at $ 65.57.

As its central Internet marketplace continues to grow and produce cash, Zillow on Thursday reported a net loss of over $ 328 million for the third quarter, all related to its buy-it-now or iBuying unit.

CEO Rich Barton told analysts on the conference call that Zillow is discontinuing its iBuying activities, in which it competes with Opendoor, in order to reduce its workforce by 25%. Zillow got into the business in late 2019 in hopes of leveraging its popular marketplace site and massive datasets to capitalize on buying and selling homes in bulk.

What started as a blessing turned into a money pit.

“We have found that expanding Zillow Offers further is too risky, too volatile for our results and operations, too low a return on equity, and inadequate to serve our customers,” said Barton. “We have not been able to predict future house prices at different times in either direction much more accurately than we have modeled as possible.”

In particular, Zillow’s predictive ability has messed up the pandemic. The housing market dried up briefly early last year and then skyrocketed as office closings and business slowdown in cities caused people to move to places they thought were desirable. Prices rose and set records in many markets across the country.

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Zillow was able to make money selling houses at high prices compared to the place, but at the same time the company stepped up its purchases. The iBuying process enables homeowners to sell for cash instantly on Zillow instead of going through a broker and dealing with an advanced bidding and closing process. After buying a home, Zillow invested in repairs and maintenance and tried to sell for a profit, even considering all those costs.

As the job market tightened and supply chain bottlenecks drove up the cost of deliveries, Zillow’s already thin margins melted away. Add to this a housing market that flattened or stopped rising as fast as Zillow expected, and the company drowned in a pool of underwater assets.

Barton said the company has learned that it cannot trust its pricing model enough. So it is best to get out before the entire company is put at risk.

“It boils down to the fact that going forward we have no confidence in pricing, enough confidence to put our own capital at risk,” he said on the conference call.

Analysts quickly downgraded the stock on Friday.

In a report with the headline “Can’t buy without iBuyer”, BTIG lowered its rating to neutral. Piper Sandler also shortened her recommendation in her report “ZOffers Mothballed”, as the company is returning “to its roots as an asset-lite model”.

Stifel Nicolaus and KeyBanc opted for the same play on words to keep the hold ratings equivalent on Zillow stocks. Stifel titled his note with “From flipping to flopping”, while KeyBanc went with “Flipping is a flop”.

Zillow took a $ 304 million write-down in the third quarter for “inadvertently buying homes at prices higher than our current estimates of future sales prices,” the statement of operations said. Zillow said it bought 9,680 homes and sold only 3,032 in the quarter.

Zillow predicts another loss in the fourth quarter as it shut down the supply business between $ 240 million and $ 265 million.

In an interview with CNBC’s “Closing Bell” Thursday, Barton admitted that there were plenty of people telling him to never get into the home buying business and Zillow to focus on the online marketplace.

“I’m sure there are people out there waving their fingers,” he said. “And justified.”

SEE: Zillow CEO on leaving the home flipping business

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