Real estate website Zillow reported losses of up to $1.4 billion on flipping houses since 2019 and had to lay off a quarter of its staff members as stock prices plunge.
The company reported that it bought 9,680 houses in the third quarter of the year but sold only 3,032 of them. They also purchased 3,805 houses in the second quarter but sold only 2,086. The inventory of unsold houses ballooned to $3.8 billion in costs, up from $491 million in December 2020.
Zillow admitted to overpaying for the houses and blamed its AI-powered pricing machine. The company outlined how much it expects to lose on the houses, then threw in the towel as it closed its flipping business, laying off 25 percent of its staff.
In its reported losses, Zillow said that it went through a net loss of $328 million, with another $304 million in write-downs of houses that it paid too much for. For the fourth quarter, it expects additional losses of $240 million to $265 million on the houses that it bought since the end of the third quarter.
While the company stopped making offers on October 18, it will close the deals it made until then. Zillow is expected to show a huge write-down when it reports its third-quarter results, and continue its series of annual losses in the process.
"Zillow Offers," their house flipping business, and the "Homes" segment of its financial statement showed losses in 2019, losing around $109,000 per completed flip. Since then, the losses piled up and now total $1.42 billion – just for its house flipping. (Related: CDC contributing to housing market collapse by bankrupting property owners.)
"We've determined the unpredictability in forecasting home prices far exceeds what we anticipated," Zillow said in a statement. They ended the scheme as continuing it "would result in too much earnings and balance-sheet volatility."
Zillow said that the wind-down could take several quarters, as they still have thousands of houses to sell. Currently, it is pitching at least 7,000 of them to investors, By inflating house prices by overbidding for them, Zillow will now see pricing data points in reverse as it has to sell the houses at a lower price.
Algorithmic approach to pricing fails
Zillow's announcement suggests that its algorithmic approach to pricing homes has failed to accurately predict real estate prices at a time when housing values are rising. The company earlier halted its home-buying operations, citing difficulty in finding contractors to renovate the homes and flip them for buyers.
On Tuesday, Nov. 2, Zillow's board decided to stop using its AI-powered pricing machine. But the company didn't entirely put the blame on the technology.
It also blamed the "wind down" of Zillow Offers on home pricing unpredictability; capacity constraints; operational challenges; unprecedented housing market; global pandemic; and difficult labor and supply chain environment.
The decision to quit its businesses comes only weeks after executives touted that the home-flipping offers could eventually reach half of all the housing stock.
"We, over time, believe this can be a service that is offered to the majority, to over 50 percent of the housing stock. We will get there," said Zillow Chief Operating Officer Jeremy Wacksman in a virtual technology conference.
But it would be a struggle to get to that point.
Zillow's latest quarterly earnings report showed that homes are now worth less than the company's current estimates of their future sales prices. As for shares, Zillow's fell 11.5 percent on Tuesday and slipped another 6.4 percent in after-market trading, down 62 percent from its February 2021 high, which was fueled by Wall Street for its supposed flipping prowess.
Meanwhile, analysts are concerned about how the company is still trying to sell 7,000 homes. "The decision to abruptly sell 7,000 homes could point to one of two things that make us even more cautious," an analyst said.
Read more about how housing has been affected during the pandemic at DebtCollapse.com.
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