Home prices are so high even Zillow (NASDAQ: Z) (NASDAQ: ZG) is throwing in the towel.
Zillow just announced it will cease buying homes through its Zillow Offers business, which operates as an iBuyer, or instant buyer. In the second quarter, Zillow bought 3,800 homes and just announced it will not buy any more for the rest of the year. Zillow will honor its commitment, however, to buy all the homes currently under contract.
Why did Zillow make this decision? House flippers, take note
Zillow says it made the decision to stop buying homes because it "has hit its capacity for buying homes for the remainder of the year." This statement came from a Zillow homebuying employee's email that was viewed by Bloomberg [subscription required].
But is that the only reason? Probably not. If Zillow could make money by flipping homes, it would. Here are a couple of other possible reasons why Zillow made this sudden change, which all house flippers should note.
Houses are expensive
Housing supply has never been this low. That means there's never been so much competition to buy homes, which has been driving up prices. Any house flipper or real estate investor understands this is not the ideal time to buy. The ideal time is when there's a glut of houses on the market, as was the situation that drove the house-flipping business after the 2008 housing crash. We're in a housing fiasco now, but it's the opposite of what went on then.
Even if a house flipper (or Zillow) can get a good deal on a house, there's still the "fixing" part of the fix and flip. Although Zillow uses algorithms to determine how much to pay for a house, it still relies on real people to complete the job. And it's getting harder for Zillow to get the people it needs, from house inspectors to determine whether Zillow should buy the home to contractors who can make those light repairs.
Zillow stopped buying once before
Zillow stopped buying homes once before, in the early days of the pandemic when there was great uncertainty about the housing market. Once people started to demand homes, however, Zillow jumped back into the ring. The big difference between then and now is that then the other top iBuyers -- Opendoor, Offerpad, and Redfin -- stopped buying as well. Now they're still buying while Zillow has stopped. That should make one wonder why.
Is Zillow in trouble?
In August, Zillow borrowed $450 million in a bond offering. And on Oct. 18, Zillow shares fell 6.8% in premarket trading after the announcement it would stop buying homes. This year, its stock fell about 27%. If companies need to borrow money to finance homebuying operations, they're exposing themselves to great risk in a volatile market. It's still unclear whether the iBuying business is sustainable during a recession.
Also troubling for Zillow was a viral TikTok video that accused Zillow of market manipulation. Basically, the theory goes, if Zillow could buy 30 houses in a neighborhood, it could buy the 31st house for more money, thereby, setting the overall prices higher when it comes time to sell its inventory. Zillow, Redfin, and Wharton real estate professor Gilles Duranton pooh-poohed that theory: "If you could rig the residential housing market that easily, the Realtors would have done it long ago," Duranton told MarketWatch.
Perception is often more important than reality, however, and many real estate agents (who have no love for Zillow anyway) and the public at large believe (at least partly) that iBuyers are manipulating the housing market, making them part of the reason housing prices are so high. Of course, the main reason for these high prices is the housing shortage, which Realtor.com figures to be in a deficit of 5.2 million homes. It just isn't a great time to be a house flipper overall.
The Millionacres bottom line
Zillow Offers is an institutional house flipper, offering homeowners instant cash if they sell their home to Zillow. Zillow then makes minimal fixes to the home, such as new carpet and paint, and immediately markets the house for sale. The profit margins are slim for this business model, and Zillow has suddenly pumped the brakes on buying more houses, at least for the time being. Real estate flippers, take note.