[HN Gopher] Zillow to stop flipping homes, loses more than $550M...
___________________________________________________________________
Zillow to stop flipping homes, loses more than $550M, lays off 25%
of staff
Author : swatkat
Score : 159 points
Date : 2021-11-02 21:16 UTC (1 hours ago)
(HTM) web link (www.marketwatch.com)
(TXT) w3m dump (www.marketwatch.com)
| jklein11 wrote:
| I'm a little bit confused about what their strategy was. As I
| understand it, house flippers usually buy houses, do some
| renovations to add value and then sell in under a year at a
| higher price. It sounds like Zillow tried to buy homes and hold
| them until they appreciated? Was there any data that supported
| that this would be successful?
| yellow_postit wrote:
| They were also trying to make upgrades and expecting they could
| lower the costs through scale eg give painters steady work at
| lower rates because they were a single party with lots of
| inventory.
| dang wrote:
| The previous thread on this, from earlier today:
|
| _Zillow seeks to sell 7k homes for $2.8B after flipping halt_ -
| https://news.ycombinator.com/item?id=29081118 - Nov 2021 (521
| comments)
|
| It seems the current article adds significant new information, so
| we won't treat it as a follow-up (or dupe).
| dredmorbius wrote:
| Numerous other submissions / articles:
|
| https://www.wsj.com/articles/zillow-quits-home-flipping-busi...
|
| https://finance.yahoo.com/news/zillow-shuts-down-home-flippi...
|
| https://www.businessinsider.com/zillow-homebuying-unit-shutt...
|
| https://www.cnbc.com/2021/11/02/zillow-shares-plunge-after-a...
|
| https://www.seattletimes.com/business/real-estate/zillow-to-...
| busterarm wrote:
| All of the 'Owned by Zillow' listings here in the Miami area are
| _really_ shabby flips. They'll basically redo the kitchen and
| leave the rest of the property looking like garbage and then ask
| for a 15% markup.
|
| Also they prioritize those listings now, with no way to filter
| them out, so when looking at houses I end up just scrolling past
| several pages to get to other listings that I actually want to
| see.
|
| It's amazing that this whole scheme has made their traditional
| user experience worse at the same time.
| qbasic_forever wrote:
| That's about 2k employees in the Seattle area that will be
| looking for a job very soon. Who's hiring in the area? Amazon had
| a bad quarter too so I wonder if they're cooling off a bit on
| recruiting and hiring for a moment. Might be nice to have a
| Seattle area hiring/job opportunity thread of some sort to help
| folks.
| seanmcdirmid wrote:
| For some reason I can't reply to dang's comment, but this is
| Zillow basically saying they are giving up completely on
| flipping, whereas the article this morning said that they were
| pulling back and delaying buying more houses to flip (not giving
| up, but in trouble).
|
| So this is pretty big additional news from the context of this
| morning's article.
| onlyrealcuzzo wrote:
| 7k homes isn't going to move the national market remotely.
|
| There were rumors that Zillow was trying to test if they could
| manipulate small markets - and they were trying to buy a
| significant portion of listings in those markets. If true - in
| those areas - they could get completely destroyed if they list
| a lot of places at once. And if true - I hope they get a huge
| fine for trying to manipulate the housing market.
| holografix wrote:
| When will governments step in to stop historic low interest rates
| from preventing anyone not bathing in cash from buying a home?
|
| It's a grotesque situation in Australia with property
| appreciating by exorbitant amounts every month to keep up with
| the rate of cash printing.
| pezzana wrote:
| > 'We've determined the unpredictability in forecasting home
| prices far exceeds what we anticipated and continuing to scale
| Zillow Offers would result in too much earnings and balance-sheet
| volatility,' CEO tells investors.
|
| That's quite a statement. The head of a company with a privileged
| view of the US residential real estate sector says that the
| market is "unpredictable." Not the good kind of unpredictable
| where you can't figure out how heavy the money bags that get
| dropped at your door will be. No, it's the bad kind of
| unpredictability where you can... lose money.
|
| Reading between the lines, I conclude that Zillow sees a major
| shakeout in real estate on the horizon. They've already been hit
| with losses and see a lot more where that came from. In an effort
| to get ahead of whatever is approaching, the company is making an
| abrupt exit from the home flipping business.
|
| Zillow was founded in 2006, as the last US housing market bubble
| was furiously inflating. It has seen a complete cycle of
| boom/bust. If anybody knows the US residential real estate
| sector, it is Zillow.
| datavirtue wrote:
| I question the wisdom of corporations house flipping. How can
| they evaluate an individual property and make the series of
| educated guesses about the co ability in various regions? How
| do they find and predict all the remodelling issues before they
| happen? How do they know that a particular house is worth
| messing with? I only know a few counties in Ohio where I would
| even attempt it because I know the areas very well.
|
| If you could statistically trade houses people would have been
| doing it before we were born.
| andromeda-brain wrote:
| I'd be more inclined to believe this if it wasn't painfully
| obvious how much Z was overpaying for homes in the last half
| year, especially when all the other iBuyers saw the market slow
| down and reduced their offers accordingly. Seems much more
| likely that we can take them at face value and Zillow's
| forecasts were just bad.
|
| Zillow hasn't ever bought and sold homes (until now). That's
| not their business.
| totablebanjo wrote:
| A counterpoint to your last statement is that if Zillow really
| knew residential real estate they wouldn't have had such large
| losses this quarter.
|
| It really calls into question their pricing algorithm, but I
| give them credit for actually trying to get into buying and
| selling properties.
| missedthecue wrote:
| Big ups to hedge fund short seller Jim Chanos for calling this
| one way back in 2019.
|
| https://twitter.com/WallStCynic/status/1192663938720292864
|
| Steve Eisman, the short seller who was Mark Baum in 'The Big
| Short' also predicted this in 2019.
|
| https://www.cnbc.com/2019/08/08/big-short-investor-steve-eis...
| dreyfan wrote:
| With the complete rout today of -11.5% and the additional
| -11.0% aftermarket on Zillow's stock, it's still up +95% from
| when Chanos made that comment.
|
| Calling bullshit simply isn't worth the hassle these days (e.g.
| see Tesla and cryptocurrency fans). Better to figure out how to
| identify the top and keep opinions to yourself.
| missedthecue wrote:
| Short selling is one of those things in life where being
| right can make you worse off.
| d136o wrote:
| Sigh... It's interesting that they blame the ML models, on the
| one hand it seems like a perfect example of ML gone wrong, on the
| other hand losses at this scale (hundreds of millions) don't just
| signal that some data scientist's model was not accurate
| enough... who's running the ship over there? The ML model?
|
| Also I'm really curious about the geographic distribution of
| their inventory... let's do some Data Science on this blow up!
| nradov wrote:
| It's not really ML gone _wrong_ , more like a misapplication of
| the technology. No one who understands ML ever claimed it could
| produce accurate forecasts of chaotic systems.
| slownews45 wrote:
| "pushing total losses on those houses to more than $550 billion."
|
| How can this even be possible? These numbers make zero sense.
| sedatk wrote:
| *million, not billion.
| seanmcdirmid wrote:
| Definitely a typo where an extra three zeroes were added to the
| $550 million loss headline.
| bufferoverflow wrote:
| And to think, Zillow has so much data that we don't have access
| to. And they still failed to buy the most profitable properties.
| tppiotrowski wrote:
| "The surprising exit, announced with pedestrian quarterly
| profits, thrashed shares in another rough trading session
| Tuesday, a day after an analyst said two-thirds of the homes it
| bought are underwater."
|
| https://fred.stlouisfed.org/series/MSPUS
|
| The fed chart shows almost hockey stick growth in housing prices
| this year. How can the Zillow properties be underwater, did they
| just massively overpay up-front?
| latchkey wrote:
| That is a good chart, but this one answers your question:
|
| https://fred.stlouisfed.org/series/MSACSR
|
| Supply is going up.
| edrxty wrote:
| Similarly housing starts are increasing drastically now that
| lumber has stabilized
|
| https://fred.stlouisfed.org/series/HOUST
| tppiotrowski wrote:
| Thanks. Definitely paints a contrast to 2009 when a lot more
| property was on the market.
| ProAm wrote:
| > did they just massively overpay up-front?
|
| This is exactly what they did. Tried to manipulate the market
| in a sense.
| topspin wrote:
| > did they just massively overpay up-front?
|
| That's the only possibility available as far as I can see. I
| recall seeing the housing stock they favored were all in the
| hottest US markets, so they're exposed to small fluctuations at
| the extreme end of the histogram. Otherwise the US median home
| price curve still looks like a boost phase ballistic missile
| track as of Q3 2021.
|
| Zillow only got into this flipping game in 2018. They've never
| seen anything but rapid price growth. I will not be surprised
| when we learn the place was off the hook with buyers snapping
| up properties with no adults at the table.
|
| There is always someone caught way over extended when markets
| move. This time one of them is named 'Zillow.' Expect a bunch
| of tedious 'insider' stories from Wired et al; wrecked hotel
| suites and orgies and $2e6 super cars. All the usual.
| gravypod wrote:
| I am not an analyst but this is my armchair understanding of
| the market:
|
| 1. The construction of new homes was limited in late 2019 early
| 2020. This was due to covid and labor shortages and supply
| lines being blocked.
|
| 2. Demand for homes rose to an all time high. The people in big
| cities said: "Why quarantine with nothing to do in my Manhattan
| apartment when I can buy a house and sell it when the pandemic
| is over. House prices always go up so I'll make money"
|
| 3. Zillow, banks, etc saw the fed start printing money which
| was going to lead us into an all-time high inflation rate.
| Their inflation hedge was simple: shift all liquids into long
| term stable solid assets. For most of human history this has
| been housing (single family and rental properties). Zillow
| specifically got a massive credit line via taking advantage of
| "zero risk" money from the fed via their bank.
|
| 4. Zillow + banks + the middle and upper class families start
| buying homes at a record high. This compounds with the lack of
| new supply.
|
| 5. Foreign speculators move in and see the increase in property
| value. The common wisdom of "prices only go up for homes" has
| encouraged them to invest in these properties. I know some
| people who have been doing this. Foreign speculators are
| concentrating on some limited markets (USA, Canada, and
| Australia).
|
| Now that most of our liquid assets have shifted into properties
| any fluctuation in property value would have interesting
| implications so there will now be a large interest in keeping
| home prices high.
|
| The core problem: properties are only worth what people are
| willing to pay for them. Regardless of what has been going on
| with inflation or how much money you have put into flipping it.
| If no one will buy the home for 200k over assessment then you
| have to lower the price. This is slowly causing a large
| reversal in the market. I've been seeing homes steadily creep
| back to what inflation would account for in price delta.
| edrxty wrote:
| Yes, yes they did. The vertical part of the hockey stick is
| EVERYWHERE. Homework: go on zillow and find the most depressing
| row house in urban Detroit/Cleveland/wherever with enough
| pricing history to have a graph. You will see that exact same
| line shape. Literally everything has doubled since around 2014.
| Completely bombed out crackhouses were a 300-500% ROI in that
| period. You couldn't lose money even if you set the structure
| on fire. The past year has eclipsed that though. Everything has
| gone up massively and for seemingly no reason.
|
| For comparison, since 2014 the US population has increased 4%.
|
| Also, people aren't moving from somewhere to fill up your town,
| go on a random city subreddit and you'll see a different local
| mythology to explain the prices. It's happening everywhere
| though. There's literally no significant area that's seeing an
| exodus with decreasing prices. Not California, not libruhl
| lockdown states, not Texas, it's happening everywhere.
| rafale wrote:
| I wonder if Black Rock will fare better than Zillow. My
| understanding is that they are not planning to sell/flip,
| rather rent then and hold on them forever.
| m0zg wrote:
| I think they might know something we don't. Such as, for example,
| that loan rates are about to go up a lot. They already did go up
| some. In spite of their large loss, this could prove to be a wise
| divestment under that scenario. If loans get a lot more expensive
| (which happened during Carter and then Reagan years, see
| "stagflation"), the housing market will tank right away and
| people will be desperate to lock in at least some of the gains
| they thought they had, creating excess supply. Not a good
| environment for flipping, especially at the mid- to low end of
| the market. The game of musical chairs seems to be coming to an
| end, and Zillow has just grabbed a chair. Three legged and busted
| chair, but a chair nevertheless.
| woeirua wrote:
| This is kind of a big deal in the real estate sector. The only
| reason that Zillow would sell everything right now is if they
| believed that the carrying costs of the properties until they
| (eventually) sell would eat all of their profits. They must be
| seeing flashing red signs across the board that there's a
| slowdown in the market and that scenario is exactly what will
| play out if they don't exit quickly.
|
| There's no way that OpenDoor doesn't follow them out the door
| here in the next couple of months. The business model is exactly
| the same. Anecdotally I haven't seen any reason to think OpenDoor
| is doing much better around here.
|
| This coupled with the Fed tapering could cause the real estate
| market to cool pretty quickly.
|
| If you're buying a home right now, make sure you're moving
| somewhere you're willing to live for a while and that you're not
| going to be in financial duress if your home loses 20% of its
| value.
| missinfo wrote:
| Maybe, but there's also this perspective:
|
| Selling or shorting Opendoor due to Zillow's flaws is akin to
| shorting Google due to Yahoo's inability to monetize search
| well or return long tail queries properly.
|
| https://twitter.com/rabois/status/1455564619494436870
| onlyrealcuzzo wrote:
| Well - if the Fed stops buying MBSes and interest rates go up -
| flippers in highly speculative markets (almost everywhere ATM)
| are likely to have a bad time.
| toomuchtodo wrote:
| Right. This is Zillow getting out before the Fed tapers,
| interest rates go up, and real estate sales and values go
| down.
| datavirtue wrote:
| Zillow paid too much. Tapering isn't going to have a
| material effect on new mortgages or home sales.
| onlyrealcuzzo wrote:
| Do you think lower interest rates had no effect on
| prices? Or do you think it did - but that raising rates
| for some reason won't have an effect?
| sbierwagen wrote:
| That's exactly what the Fed is expected to do:
| https://www.reuters.com/business/wall-street-banks-step-
| up-p...
| Nasrudith wrote:
| > They must be seeing flashing red signs across the board that
| there's a slowdown in the market and that scenario is exactly
| what will play out if they don't exit quickly.
|
| There could also be the issue summed up as "thr market can stay
| irrational longer than I can stay solvent" issue. Even if your
| bet is right if you lack available capital for the temporal
| range and trajectory you can never capitalize on any
| theoretical gains. Even if you were right about Atari going
| bankrupt if you shorted at the very beginning of their
| existence in the late 70s and it took until the 90s for it to
| happen chances are you would default even though you were
| right.
| quickthrowman wrote:
| > They must be seeing flashing red signs across the board that
| there's a slowdown in the market and that scenario is exactly
| what will play out if they don't exit quickly.
|
| The Fed is (likely) going to announce bond purchase tapering
| this week, they're currently buying $80B of US Treasuries and
| $40B of MBS every month. I believe the plan is to taper buying
| completely before raising rates.
|
| The lack of QE could see the long end of the yield curve start
| to rise, which would push home prices down. If and when they
| start hiking the FF rate, look out!
| jahabrewer wrote:
| > They must be seeing flashing red signs
|
| Hope those come from a different model than they used for
| buying.
| davewritescode wrote:
| You don't need ML algorithms to know that interest rates in the
| medium term will be rising which puts downward pressure on home
| prices.
| omgwtfbyobbq wrote:
| It can, but it's more downward pressure on higher cost homes
| (eg coastal metros). Even with higher rates, average home
| prices can increase like in the 60s through 80s, albeit just
| to keep up with inflation from higher interest rates.
|
| https://fred.stlouisfed.org/series/MSPUS
| https://fred.stlouisfed.org/series/FEDFUNDS
| darthvoldemort wrote:
| It's a huge pivot to go from flipping houses to becoming a
| landlord. It would essentially be a disaster for them. That's a
| high-touch business and probably the costs associated with it,
| and the legalities around it are too complex. That's basically
| turning into an Avalon or something.
|
| The interesting question is around their bonds. They were
| basically convertible bonds which likely triggered, but now
| they have to pay back the cash. How much of a liquidity crisis
| will this introduce to the company?
|
| The more interesting thing is that this business crisis won't
| be reflected in their last quarter 10-Q which should be coming
| out soon. I'm assuming this is going to be talked about in that
| earning call, so that will be an interesting one to listen to.
|
| I think Opendoor's model is a lot better, but I guess we will
| have to wait to see if there are any repercussions to their
| business.
| datavirtue wrote:
| Flipping is extremely high touch.
| beamatronic wrote:
| Agree 100%... I'm astonished that a large corporation trying to
| get into this business, would "bite off more than they could
| chew". Don't they have MBAs and financial models to assess this
| sort of thing?
| datavirtue wrote:
| Yeah, throw your model at: "contractors took six months
| longer than expected to finish the kitchen"
|
| Extrapolate that out a hundred thousand times and you get a
| sense of what they were trying to manage. How did they
| predict remodel costs? Pre-pandemic material costs and back-
| of-the-napkin labor estimates?
| yalogin wrote:
| If MBAs and financial models can predict slowdowns, we won't
| have them at all. If anything ML models will exacerbate the
| situation IMO and they probably relied on them too much and
| bought more than they should. Of course what I said is also a
| projection (without even an ML model), so that is not
| accurate either :)
| dragonwriter wrote:
| > Don't they have MBAs and financial models to assess this
| sort of thing?
|
| All models are wrong, some are useful.
|
| Zillows were wrong, and apparently not useful.
| [deleted]
| seanmcdirmid wrote:
| Isn't Zillow more like a post-IPO startup than a bigcorp? If
| so, it makes complete sense that they might "bite off more
| than they could chew," (e.g. Pets.com) a lot of startups end
| that way.
| vineyardmike wrote:
| They're not amazon/google big but they're not small. They
| have tons of employees and billions in cash.
| vineyardmike wrote:
| > the carrying costs of the properties until they (eventually)
| sell would eat all of their profits.
|
| Yes, they have to pay taxes. They have to maintain the
| property, and check on it against break-ins. There is a lot of
| cost to holding a property.
| oceanghost wrote:
| Anecdotally:
|
| Zillow quoted a number for a house that I was selling right at
| the peak of all this, pending inspection. They couldn't come
| around and look at it though for about 6 weeks.
|
| By that time the market had turned and they said they weren't
| interested.
| alex504 wrote:
| When was the peak in your view? What market is this? Thanks
| lancemurdock wrote:
| Everyone in big tech knows product direction comes top down with
| tons of product reviews along the way. There is no way you have
| this big of a screw up without major culture issues or more
| likely, leadership wanted to gamble and didn't think it would be
| this bad.
|
| The workforce gets the consequences for leaderships decisions
| silisili wrote:
| I don't get Zillow's play here.
|
| They were for a long time the de facto neutral party everyone
| used to look at houses. Great. Then they got into doing contracts
| apparently, still OK.
|
| Then they started competing against people and overbidding
| everyone, at the height of what appears to be the biggest housing
| boom of my lifetime. This was not only apparently financially
| dangerous, but an act that puts them in a bad light, publicity
| wise.
|
| I cannot think of how anyone thought this was an OK idea.
| muttantt wrote:
| Crazy. I recently sold a condo to Opendoor for significantly more
| than I would have even thought to list it for. When I negotiated
| with Opendoor after their initial offer, I pointed out a recently
| sold condo (days before, in similar condition, layout and
| finishes) in the same complex that sold for much higher than they
| Opendoor offered. Within hours Opendoor came back matching that
| same selling price. The kicker? It was a unit that Zillow bought.
|
| The algorithms are fooling themselves... Opendoor matches Zillow
| who matches Opendoor and that's how you get ever increasing
| offers.
|
| Edit: oh, and now Zillow has that unit on the market, priced 14%
| lower than they paid for it, after 3 price cuts so far.
|
| Edit 2: Phoenix/Scottsdale AZ market
| onlyrealcuzzo wrote:
| TBF - wasn't the Phoenix metro up almost 40% in one year?
|
| After a 14% cut, that would still be an absurd YoY increase (I
| think still the largest single year increase in a major metro
| in the US on record?).
|
| I get that Zillow is losing 14% - but the market is not yet
| even back to normal appreciation - let alone "crashing".
| roland35 wrote:
| Here is the case shiller index for Phoenix - it is absolutely
| wild since 2020!
|
| https://fred.stlouisfed.org/series/PHXRNSA/
| roland35 wrote:
| You think Zillow would have one person take 15 minutes to do a
| quick look at the offer prices first!
| monksy wrote:
| Oh the new REITs playing the algro game. This is cute.
| qqqwerty wrote:
| This is an interesting lesson in algo trading run wild.
| Roughly, house prices have a fundamental ceiling, and it is
| determined by the size of the monthly payment that banks will
| allow the typical homebuyer to assume when approving a loan.
|
| If Zillow was the only iBuyer in a particular market, then that
| ceiling would likely have held, as all other non-zillow sales
| would still be operating under the loan approval constraint,
| and that would get reflected in the comps. But in a market with
| multiple ibuyers, none of which are capital constrained, it
| would make sense that they run up the prices against each
| other, past what the local homebuyers can afford.
|
| Not sure how much that actually played a role here. But could
| be fun to do some back of the napkin math to see if that was
| the case in some of these markets.
| AareyBaba wrote:
| I suspect the 'AI software' running these companies is using
| linear regression to predict housing prices and one of the
| inputs is the price of similar houses nearby.
| c141charlie wrote:
| What could possibly go wrong with that approach? :-)
| bombcar wrote:
| I've been noticing lots of "new lower price" emails from
| Zillow; I think the market has cooled off - but how much of it
| being hot was this investor competition?
| crackercrews wrote:
| It's also the last rush of sales before things slow down for
| the holidays. There's also a chance that interest rates will
| be higher next year. That would bring home prices down.
| datavirtue wrote:
| A lot of people were jumping in with their rundown old houses
| asking rediculous (lose your ass) prices and I'm seeing them
| all revise as of late. This was seen mostly in rural areas--
| Im looking for a farm.
|
| I saw quite a few houses that sold a few years prior for much
| lower prices. The disparity in estimated values and previous
| sales versus the list price was astronomical in most cases.
| The banks will happily give you a loan for whatever price so
| there is no check on the runaway prices except for your own
| personal knowledge of the historical market demand in an
| area.
| analyte123 wrote:
| If local real estate agents and developers can manage to
| manipulate the "Zestimate", and I'm pretty sure they are at
| least trying, you can imagine the payoff.
| selimnairb wrote:
| Gee, what could go wrong with over fitting incompressible
| models?
| monkeybutton wrote:
| Madness.. Its not like such a feedback loop hasn't been
| encountered before in systems. I like this example:
| https://www.michaeleisen.org/blog/?p=358
| stefan_ wrote:
| It's hard to tell if this is "tHe MaRkEt Is CoLlApSiNg" or just
| a Knight Capital 2.0. Leaning towards the latter.
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