I used to pride myself on being the world’s dumbest buyer of real estate. I like to overpay for a house, overpay for renovations, contract at fictitious prices for non-existent products, fail to account for the risk that a state could revoke residents’ freedoms and necessitate a move, etc. It seems, however, that I’ve been unseated. “Zillow Quits Home-Flipping Business, Cites Inability to Forecast Prices” (WSJ, November 2):
Real-estate firm Zillow Group Inc. is exiting from the home-flipping business, saying Tuesday that its algorithmic+ model to buy and sell homes rapidly doesn’t work as planned.
In a statement Tuesday, Chief Executive Rich Barton said Zillow had failed to predict the pace of home-price appreciation accurately, marking an end to a venture the company once said could generate $20 billion a year. Instead, the company said it now plans to cut 25% of its workforce.
The move represents a big hit to Zillow’s top line. Home-flipping was the company’s largest source of revenue, but it has never turned a profit.
Zillow, which released earnings Tuesday, said its home-flipping business, Zillow Offers, lost $381 million last quarter, as measured by adjusted earnings before interest, taxes, depreciation and amortization. That resulted in a combined adjusted Ebitda loss of $169 million across all of Zillow.
They were using the fraudulent EBITDA measure, which excludes the interest they had to pay to hold onto these houses. So $381 million/quarter would have been the minimum loss.
How is it possible for people who do nothing but real estate all day every day to lose their own money in this spectacular fashion? It isn’t surprising when some big developers go bust. They are in an arrangement where they keep the upside if a high-risk project goes well and stick a bank with the downside if the economy tanks (1990 calling!). But Zillow didn’t have this incentive to take crazy risks. And the real estate market did not tank. To the contrary, we’re in a period of inflation not seen since around 1980. A monkey should have been able to make money buying houses in this market since the cost of borrowing is lower than the rate of inflation in house prices.
- If Zillow is right about inflation, is everyone who rents stupid?
- Did the Zillow icon become a rainbow flag on your phone?
- Zillow welcomes me to the gayborhood
- Coronavirus will make the suburbs cool again? (April 2020; I wasn’t completely wrong! Maybe the American suburbs aren’t cool, but they’re certainly now far too expensive for most Americans to live in.)