Zillow, (Dis) Continued

(Photo from Star Tribune)/td>

Last week we opined that Zillow's house-flipping business failed because it placed too much faith in its computerized decision-making programs:

The algorithm needed to incorporate additional data--the kind of data that's hard to obtain--and Zillow needed to test the program on a much smaller scale before it bet the farm. They had the courage to pull the plug before it took down the company, and it's likely they'll be back some day, probably with a "money" partner that will provide the risk capital while Zillow provided the smarts.

A WSJ follow-up story confirms that the algorithm failed to take into account market nuances and adds that these flaws were exacerbated by the rapid shifts--both up and down--in real estate markets brought on by COVID-19: [bold added]

Computer-driven analysis has become mainstream in stock and bond markets, but buying and selling single-family homes has proved a trickier proposition. The real-estate market varies widely by city, region and type of property, with a range of aesthetic, social and other factors playing into Americans’ home-buying decisions.

Zillow also overstretched its staff as it tried to catch up to competitors and disregarded internal concerns that it was overpaying for homes, according to former and current employees. It operated in an unpredictable housing market, with the pandemic fallout helping to spark the biggest housing boom in a generation. And Zillow suffered from supply-chain and labor issues that slowed its ability to renovate homes quickly...

An unexpected surge in home prices and sales during the pandemic made it harder to predict the market. Buyers began giving priority to space and location in unusual ways.

“That shift in buyer preferences is extremely hard for a machine-learning model to incorporate,” said Dave Meyer, vice president of data and analytics at BiggerPockets, a real-estate investing website.

The final nail in the coffin was trying to catch up to the competition just as the market was turning:

Zillow put together a plan to speed up the pace and volume of home purchases, dubbing it Project Ketchup—which employees took as a play on the team’s mission to catch up to Opendoor. Zillow planned to buy more homes by spending more money, offering prices well above what its algorithm and analysts picked as market value, people familiar with the matter said.

In the second quarter, Zillow Offers bought more than 3,800 homes—more than double the previous quarter. In the third quarter, it bought 9,680 homes. The company was buying so many homes that its overstretched staff started running behind on closings and renovations, people familiar with the matter said.

It struggled to find contractors and renovation materials amid a broader labor and supply shortage. That meant Zillow was in danger of sitting on homes for longer, adding to insurance and debt bills. It also meant many homes bought during the summer would likely have to be sold in the winter, when the housing market is usually weaker.

As for damage to the overall company,

The company’s market cap, which closed at a peak of $48.35 billion in February, is now around $16 billion.

Their misguided efforts to improve matters led to a disaster in less than a year. Fortunately Zillow had the courage to face up to its mistake and change course before it lost everything.

Zillow: Too Early, But They'll be Back

(Photo from Star Tribune)/td>

We've been regular users of Zillow since 2016. It has a trove of real estate information, useful for checking on the value of one's own home, the cost of homes in areas that we might want to move to, or market rents in every zip code.

However, one would be crazy to make a purchasing decision based solely on Zillow's algorithms. One can't know the "feel" of a house or a neighborhood, or whether the roof might leak or the pipes need replacing, without a viewing by a real human being and/or inspector.

Zillow thought that its valuation algorithm could be relied on to buy houses en masse to build a house-flipping enterprise. Now it's getting out of the business.

Zillow Group Inc. reached a deal to sell about 2,000 homes from its ill-fated house-flipping program, the company’s biggest bulk sale as it starts unloading thousands of homes and terminates the business...

Zillow’s home-flipping practice involved buying homes, lightly renovating them and then selling them quickly, making money on transaction fees and home-price appreciation. The company and other iBuyers used an algorithm to make home-price estimates and determine what to pay home sellers.

Zillow said last week that it was shutting down the business because it couldn’t accurately predict future home prices and was losing too much money. The company expects to record losses of more than $500 million from home-flipping by the end of this year and is laying off a quarter of its staff.

I confess to feeling a bit of schadenfreude that a successful (up to now) tech company got a little too big for its britches, but I think they were on the right track.

The algorithm needed to incorporate additional data--the kind of data that's hard to obtain--and Zillow needed to test the program on a much smaller scale before it bet the farm. They had the courage to pull the plug before it took down the company, and it's likely they'll be back some day, probably with a "money" partner that will provide the risk capital while Zillow provided the smarts.

Note: here we know all about being too early. Foster City was the headquarters of Webvan, the highly-touted grocery delivery business that failed nearly 20 years ago.