Zillow will resume iBuying, but pause raises questions over model

After ramping up in Q2, investors were betting on Zillow’s continued success in high-growth sector

National /
Oct.October 20, 2021 08:30 AM
Zillow will resume iBuying, but pause raises questions over model: analysts

Zillow CEO Rich Barton (Zillow, iStock)

Zillow’s withdrawal from iBuying will weaken its second-place position in that sector, but its absence will likely be short-lived, according to analysts.

The market punished Zillow’s stock and rewarded that of its primary competitor, market leader Opendoor, after Zillow’s announcement Monday that it would cease buying homes through its Zillow Offers program for the rest of the year as it works through a backlog of inventory.

Zillow’s leadership cited challenges operating in a “labor- and supply-constrained economy inside a competitive real estate market.” But that rationale leaves several unknowns, analysts said. While investors see quarterly home sales figures, they don’t have much insight into how Zillow or its competitors decide what homes to buy, or how they source labor and materials for renovations.

Zillow, Opendoor and other iBuyers such as Offerpad and Redfin allow customers to request instant offers for their homes. The iBuyer then buys the property, renovates it and re-lists it for sale, aiming to profit on the flip.

U.S. home prices have smashed records this year, but investors wonder whether Zillow, with its deep data resources, might see warning signs others do not, said D.A. Davidson & Co. analyst Tom White, who rates Zillow at “buy.”

“The big debate for this group over the last few months has been, how does this business model fare when home prices do something other than just go up, up, up?”

Zillow’s announcement ahead of its third-quarter earnings is likely an attempt to “control the narrative,” said Oppenheimer analyst Jason Helfstein, who rates Zillow at “perform.”

Opendoor, Offerpad and Redfin do not seem to be encountering the same challenges sourcing labor and materials for renovations and closing sales, he said.

Indeed, Offerpad announced shortly after Zillow’s statement that it will soon be launching in California for the first time.

“Offerpad is continuing business as usual on our iBuyer side and with our other Offerpad offerings,” a company spokesperson said in an email. “There is no slowdown here.”

Opendoor, meanwhile, is “open for business and continues to scale and grow,” the company said.

Opendoor and Offerpad are pure-play businesses and have been in the iBuying sector a few years longer than Zillow, which entered in 2018. But Zillow’s estimated 34 percent market share is now second only to Opendoor’s 48 percent, Helfstein said.

Zillow bought 3,805 homes in the second quarter, a record high for the company and more than double its first-quarter figure, and sold 2,086. Opendoor bought 8,494 homes and sold 3,481.

Many Zillow investors were betting on the company’s continued success in the high-growth iBuying market, which, in the early days of the business, seemed to hinge on its borrowing capability, Helfstein said.

“In a higher interest rate environment, that might be the case,” said Helfstein, who cited Zillow’s “very healthy” balance sheet. “But in the current environment, where money is basically free, it looks like the limiter to growth is your ground game — your ability to refurbish these homes quickly and cost effectively.”

Zillow’s temporary withdrawal represents an “execution error” and a “lost opportunity” for the company, but it is a problem that can be resolved, Evercore ISI analyst Mark Mahaney said.

Mahaney, who rates Zillow at “outperform,” still likes the company’s core advertising business and the opportunities its dominant residential real estate platform affords. iBuying was a natural strategic pivot for Zillow, and he expects the company to revamp the business by early 2022.

“It’s better to stop something because you can’t keep up with the demand than to stop something because there is no demand,” Mahaney said. “Maybe that point got lost yesterday.”

After taking a 10 percent hit Monday, Zillow’s stock price rebounded 4 percent on Tuesday, closing at $88.86.





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