What can Zillow's exit reveal about the health and viability of the iBuying marketplace? It is unlikely that much.
Zillow has announced that after 3.5 years of operation, it will be closing Zillow Offers. It also plans to exit the iBuying business. This news was not surprising, considering that Zillow had previously admitted to having stopped home buying at the end of the year. It was also reportedly looking for investors to buy 7,000 homes in its inventory.
Despite this, the market was shocked by the retreat: Zillows stock plunged more than 20% due to the news. Shares of Opendoor and Offerpad fell about 15% and 6% respectively. Those stocks have since recovered a little, but there is still some trepidation about iBuying as a business model.
Zillow admitted that its pricing model was at best a slow indicator. It is useless in a market where there is not much upward movement.
Opendoor and Offerpad will announce their third quarter earnings next week. They will be able to provide more information about the effects of slower housing sales and price appreciation on a broader market. There is plenty of evidence that suggests Zillow's large loss was not a problem with iBuying in general, but with Zillows algorithm.
iBuyers are essentially looking to buy homes at a slightly lower price than their market value and offer sellers the option of a cash payment in return. The iBuyers then repair or renovate the property, list it, and try to sell it for more money than the initial purchase price.
Zillow's fundamental problem, which was the reason it exited the business, was that the company paid more than the market value of homes in the third quarter and sold them at a lower price than the initial market price.