What does Zillow’s Exit tell us About the Health of the IBuying Market?

What does Zillow’s Exit tell us About the Health of the IBuying Market?

Zillow stated this week that it is closing Zillow Offers and exiting the iBuying business after 3.5 years; the revelation was not entirely unexpected. As the firm had previously stated that, it would halt home purchases until the end of the year and that it was looking for investors to acquire the 7,000 properties it had in its inventory. Nonetheless, the market taken aback by the retreat: 

Zillow’s stock dropped more than 20% on the news, while doubts about the iBuying market sent shares of competitors Opendoor and Offerpad down by roughly 15% and 6%, respectively. Although those stocks have since rebounded, there still appears to be considerable skepticism about iBuying as a business strategy.

In essence, Zillow admitted that their pricing model is at best a trailing indicator and is useless in a market that is not actively heading up and to the right. When Opendoor and Offerpad report their third-quarter earnings next week, we will learn more about the impact of slowing housing sales and price appreciation on the larger market. Meanwhile, there is plenty of anecdotal evidence to imply that Zillow’s significant loss was not so much due to an issue with iBuying as a whole as it was due to a fault with Zillow’s algorithm.

iBuyers, at their most basic level, attempt to purchase homes at a little discount to their market value in exchange for the convenience of a cash offer. They then do any necessary repairs or modifications, advertise the property, and try to sell it for a higher price than they paid for it, profiting from the spread. The basic issue that Zillow encountered, and the cause for its decision to depart the industry, was that in the third quarter, the company was paying above market value for properties and selling them for less than their initial market value.

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