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Real estate site Zillow, which is known for predicting home values, said on Tuesday that it will quickly exit the business of buying and selling homes due to heavy losses and plans to lay off about 25 percent of its employees.
The announcement was a major strategic retreat and a black eye for Zillow CEO Richard Barton, who founded the company 16 years ago and has long talked about turning Zillow’s popular website into a marketplace. Last year, Mr. Barton estimated that Zillow Offers, which delivers instant offers to homes through an app known as iBuying, could generate $20 billion a year.
On Tuesday, Zillow, which says it has 8,000 employees, said the division caused huge losses and made the company’s overall profit unpredictable. Zillow Offers lost more than $420 million in the three months ended September; this is roughly the same amount the company earned during the previous 12 months.
“We have identified the unpredictability in forecasting house prices much more than we anticipated,” Mr Barton said in a statement accompanying his quarterly financial statements.
Speaking on a conference call with analysts on Tuesday afternoon, Mr Barton said the decision had “heavily affected” him. “We can attribute the current losses to external market events,” Mr. Barton said. “But it would be naive to predict that unforeseen events will not happen in the future.”
The entire company lost nearly $330 million in the third quarter, much worse than Wall Street analysts had predicted. The company had a profit of $40 million in the same period a year ago.
Shares of Zillow fell more than 50 percent from a high of nearly $200 in February, when the housing market was still hot with investors as the housing market warmed up. The stock fell 11.5 percent to about $85.50 on Tuesday and rallied another 7.5 percent before publishing the financials. (Still, Zillow’s stock is worth twice as much as at the start of the pandemic.)
Three years ago, the company announced plans to use its price forecasts to buy and sell homes. Now Zillow lives in thousands of homes that are worth less than the company is paying for. Last month, Zillow announced it would temporarily stop buying new homes. At the time, he blamed the lack of workers to repair and sell the homes he had bought. But on Tuesday, Mr. Barton said using his algorithm to buy and sell homes did not yield predictable profits. Now he wants to vacate his remaining 7,000 homes.
It seems that the company underestimated the risk of owning housing between transactions, unlike its low-risk, high-margin advertising business. And in a housing market that was already low in inventory and starting to cool, he quickly sought to increase the domestic sales business to 5,000 transactions per month, which Mr. Barton had set as a goal.
Zillow’s stumble also raises questions about its core product, which is built around value estimates. Aaron Edelheit, who started buying a home after the Great Recession, tweeted his thanks For paying Zillow an “extremely high price” for one of their properties this summer. “They looked like they were buying panic,” Mr. Edelheit, who left the real estate market to focus on marijuana, told The New York Times’ DealBook. “I didn’t get it. I should have shortened the stock.”
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