Shiller price index

The housing market is so hot it broke Zillow’s algorithm


  • Zillow said on Tuesday it would shut down its iBuying unit and lay off 25% of its staff after huge losses in the chaotic market.
  • He was using algorithms to find homes for a quick turnaround, but the wild price changes in the market were just too unpredictable.
  • The volatility “far exceeds what we expected,” said CEO Rich Barton, adding that this made algorithmic buying too risky.

Zillow believed he revolutionized the home buying experience with advanced algorithms. But it was no match for the pandemic-era market.

Zillow Offers was supposed to be the company’s secret weapon for knocking down houses. Launched in 2018, the company used algorithms to value homes, buy certain properties, and sell them soon after for a healthy profit. The company aimed to turn this instant buy arm, or iBuying, into a new cash cow. He was aiming for annual sales of $ 20 billion.

But maybe Zillow should have paid attention to how the house flip got smaller and smaller during the pandemic. Of the hundreds of homes listed through Zillow’s listings, nearly 64% were priced below what Zillow bought them for, according to Insider’s analysis of Zillow’s inventory in October. The company announced on October 17 that it suspend the purchase of homes for the rest of the year. A few weeks later, Zillow said it would shut down the iBuying business entirely.

The problem: Zillow’s formula couldn’t beat the white-hot market.

“Basically, we haven’t been able to predict future home prices with a level of accuracy that makes it a safe business,” Zillow CEO Rich Barton said on an earnings call Tuesday, hinting at how prices went up so quickly, the algorithm actually ended up paying too much for full scale homes.

In the company’s third-quarter earnings report, Barton noted that the unpredictability of the price predictions “far exceeds what we expected” and that the growth of Zillow offerings “would result in too much profit and balance sheet.


. “

As a sign of the existential risk that this unit was becoming, Zillow also announced its intention to lay off 25% of its staff. Barton said this algorithm had “a high probability, at some point, of putting the whole company at risk, not just the [iBuying] Business.”

Predicting the market for the pandemic era is no easy task. Prices have risen at an all-time high for much of 2021 as buyers rush to take advantage of low mortgage rates. Decades of under construction have left the market with a massive housing shortage. When new homes hit the market, intense competition has fueled bidding wars that only increase prices.

The rally has calmed down in recent months. Prices rose a record 19.8% year-on-year in August, according to the S&P CoreLogic Case-Shiller Home Price Index. This matched the inflation seen in July, marking the first time in five months that price growth had failed to accelerate.

Month-over-month readings show a more dramatic slowdown. US home prices rose 1.2% in August, the fourth consecutive month of slower price growth and the smallest one-month jump since February.

Data suggests Zillow suspended its instant buy arm as the price spike began to ease. His third quarter report reflects this. The company will write down approximately $ 304 million in the segment that includes Zillow offerings. The sum reveals how badly the business has taken a hit by buying homes at higher prices than it expects to sell.

But Barton said the problem is bigger than that: The housing market is just too crazy. “We have been unable to accurately predict future home prices at different times in either direction by much more than we have modeled possible.”

The damage is not expected to end in the third trimester. Zillow also projects between $ 240 and $ 265 million in fourth-quarter losses for homes it plans to buy, the company said in its earnings report.

Underestimating the chaos in the real estate market will cost the company dearly. Zillow expects to lose nearly $ 500 million from its Homes segment in just six months. But with

big banks

expecting volatility to last until 2022, it could be “better late than never”.


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