OOnline shopping can be dangerous, as US real estate site Zillow belatedly realized. While many of us wereted countless hours during the pandemic clicking real estate listings on Zillow and dreaming about the kind of notepads we would buy if we had deep pockets, the company was operating a side business, separate from his property finder website, where he deployed algorithms to help him buy homes himself and then return them.
He bought a lot, but was not as good at selling. This week, the company announced that its home buying division, Offers, has lost more than $ 300 million in recent months. Offers will now be closed and around 2,000 people made redundant. Zillow would have about 7,000 houses that he now has to unload; many for lower prices than he originally paid.
You’d be forgiven if you didn’t know that Zillow was even in the business of buying houses. For most of its 15-year history, the Seattle-based company has focused on publishing real estate listings online. Then, in 2018, CEO Richard Barton began aggressively moving the business to a business known as iBuying. The idea is that the algorithms would identify attractive homes to flip; Zillow would buy the house directly from the seller; minor renovations would be done; Zillow would quickly topple the house and pocket a profit. At one point, Barton had a goal of buying 5,000 homes per month by 2024.
iBuying is a nascent industry. A recent report from Zillow found that the four biggest iBuyers – Zillow Offers, RedfinNow, Offerpad and Opendoor – were responsible for just 1% of all home purchases in the United States in the second quarter of 2021 (although that number increases to 5% in some fast growing markets like Phoenix). But while it’s still in its infancy, there’s a lot of excitement among tech types about the future of algorithm-based home buying. “There is an arms race right now as to who will become the real estate Amazon,” a real estate professor at Columbia University recently told Marketwatch. “That’s why all of these companies like Zillow or Redfin want to have it all in-house.”
Huge companies with deep pockets and mounds of data bidding against ordinary people in an already absurd housing market? It sounds like a nightmare for anyone who isn’t a technology investor. And indeed, the news of what Zillow did caused a backlash on social media, fueled largely by a viral TikTok from a Nevada real estate agent called Sean Gotcher who claimed iBuyers were manipulating the housing market.
Gotcher didn’t explicitly name Zillow, but he hinted at it heavily and accused the company of using data collected from people browsing their dream home while bored on the website. Gotcher said this limited company then buys a ton of properties in the neighborhood that people are looking for and overpays for a few adjacent properties in order to artificially drive up prices. (Zillow and Redfin denied doing this, and real estate experts noted that they didn’t have enough market share for this strategy to work.)
Zillow may not have explicitly manipulated the market, but he was certainly trying to use technology to outsmart it. Ultimately, however, the market won. Zillow’s toggle should serve as a reassuring reminder that not everything can be automated. There are several reasons why Zillow was burnt down, including a labor shortage making it difficult to renovate homes. But the biggest problem is that the algorithm just wasn’t up to the job. This couldn’t cope with the intricacies of pricing in a volatile market and caused Zillow to overpay for a lot of goods.
While individual buyers may no longer have to compete with Zillow, buying a home is unlikely to get cheaper or easier anytime soon. Those 7,000 houses Zillow sits on? Bloomberg reports that they will likely be entrusted to institutional investors like BlackRock rather than ordinary people. And while Zillow may end its iBuying business, the financialization of housing is expected to continue. A lot of money is swallowing up real estate and leaving many first-time buyers in the cold.