It seemed like a firm that should be in rude health. So why is Zillow’s i-buying business in the morgue?
CoreLogic Case-Shiller suggests prices are still galloping ahead. Both are published with a lag , which means the evidence is inconclusive.
The next suspect is the mathematical models. A handful of firms offer i-buying services, the first and biggest of which is Opendoor, founded in 2014. They charge a fee for the services they provide: buying and selling homes immediately, with zero fuss. The quick in-and-out makes them more like marketmakers than property investors, who buy to hold.
Zillow’s boss, Rich Barton, said the big problem was with the firm’s forecasts. He claimed it had found itself unable to predict prices three-to-six months into the future. In particular Zillow seems to have projected much rosier conditions than materialised. In Phoenix, where house-price appreciation has been particularly rapid but seems to be slowing, Zillow is listing homes for an average of 6.2% less than it paid for them.
This problem is exacerbated by the fickle economics of adverse selection. Even if the algorithms of i-buying firms are excellent at pricing homes at a fair value on average, they only need to be a little off for the risk to skew to the downside. Homeowners will probably not sell their home for much less than they think it is worth, but they will happily settle for a higher-than-expected price.
This may have been a Zillow problem, not an i-buyer one, however. Some of Zillow’s competitors seemed to realise before Zillow that the market was losing steam. OpenDoor and Offerpad, an i-buyer founded in 2015, both began making more conservative offers relative to their models’ valuation around July as price appreciation began to cool. When they reported their earnings on November 10th neither Opendoor nor Offerpad exhibited anything like the problems suffered by Zillow.
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