Zillow Offers’ Offload: Company Selling Houston Homes at Loss

Dated: November 15 2021

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Zillow Offers’ Offload: Company Selling Houston Homes at Loss
November 15, 2021

Zillow Offers’ Offload: Company Selling Houston Homes at Loss

Zillow Offers’ Exit May Bring Houston Homebuyers Relief

On 11/2/21, Zillow announced that they're shutting down their iBuying program, Zillow Offers, citing the unpredictability in forecasting home prices had exceeded what the company anticipated, and scaling the program would result in too much volatility — resulting in the company taking a $304 million write-down in the third quarter.

The company also announced that it will report additional losses of between $240 million and $265 million in the fourth quarter, mainly through the sale of its remaining homes.
In Houston, Zillow will sell 63% of its homes for a loss. Even if the company were to sell all listings for market value, Zillow Offers would lose an average of $12,576 per home. 

In the wake of this significant change, let’s examine the impact that Zillow’s iBuying arm had on the market, both nationally and locally.

Zillow’s Effect on the U.S. Real Estate Market

Zillow launched their iBuyer program, Zillow Offers, in 2018, and Houston was the first real estate market in Texas the program entered in 2019. Multi-billion-dollar companies like Zillow have the tech resources to purchase houses quickly via iBuying, which has gained traction in recent years. 

For those who aren’t familiar with the process of iBuying, homeowners disclose information about their property to an iBuyer program, which uses an algorithm to estimate the value of the home and generate an offer in 24 hours or less. While the convenience of iBuying appeals to many sellers, it comes at a cost.

iBuyers cost home sellers about 13%-15% of the home’s sale price, while an agent costs 5%-7%, according to a 2019 research report from the real estate data firm, Collateral Analytics.

These iBuyer programs target affordable homes with an average home price of $320,000, which is why cities like Houston were tested early on. The median sale price in Houston is $286,419, making it the perfect market for iBuyers looking to scoop up homes below the national median home price of $374,900 as of Q2 of 2021.

In shutting down Zillow Offers, the company has decided to try and offload roughly 7,000 homes, looking to earn back around $2.8 billion as a result. A report from KeyBanc analyst Edward Yruma uncovered that two-thirds of the Zillow homes available for sale feature an asking price below what Zillow initially paid for the property, and the average discount is 4.5%.

With that said, some experts believe that the demix of Zillow Offers will have a minimal impact on pricing or supply in the existing home market. Crystal Sunbury, senior manager and real estate senior analyst with RSM US, spoke with GlobeSt to share her thoughts. 

“The number of homes that Zillow purchased on a quarterly basis ranged from 86 to 9,680 homes,” Sunbury said. “To provide perspective, the most recent seasonally adjusted annual rate of existing home sales for the United States, according to the National Association of REALTORS®, was 6.29 million homes (with 5.59 million being single family homes and .7 million being condos/coops). This would put the average number of single-family homes sold on a monthly basis in the United States at 465,000, with Zillow representing a minimal portion of those.”

In other words, while real estate agents may be celebrating this change to the iBuying scene, homebuyers may not notice a lasting difference, particularly if Zillow Offers didn’t have a significant presence in their local market. 

But what about markets like Houston, which were once Zillow’s bread and butter? 

Zillow announced that they're shutting down their iBuying program

What Was Zillow’s Impact on the Houston Housing Market?

On a national scale, the iBuying market doesn’t raise concerns, but when you take a closer look at key markets like Houston, the market share is much more significant. Houston quickly became the fourth largest market for Zillow Offers, Business Insider reports.

Houston was a major market for the iBuyer “arms race”, with homeowners selling more than 2,100 homes to iBuyers in 2019. iBuyers went from purchasing 0.1% of the Houston homes sold in 2018 to 3% in 2019. The current active listing count in Houston is 15,742 homes on the market, which is almost a 50% decrease in listings compared to July 2019.

However, local experts aren’t worried and don’t think the sale of Zillow Offers’ homes will have much of an impact.

“Given the relatively small quantities of homes being sold by Zillow, we will not be seeing a large influx of inventory, and thus, this would have a minimal impact on pricing,” said Sunbury
Additionally, it’s unlikely that these homes will be sold to local buyers. In a recent report, Zillow said it will offload thousands of these homes to institutional investors.

However, there is a short-term bright spot in this housing supply offload for Houston homeowners. 

Rick Rudman, Chairman, President, and CEO of Curbio, also spoke with GlobeSt regarding Zillow Offers and said, “In markets where iBuyer presence is significant [such as Houston], we may see a dip in housing prices in the very short-term. iBuyer presence isn’t the same in all markets across the country, so we realistically wouldn’t expect to see any remarkable changes in pricing nationwide.”

Ultimately, all iBuyers will face a similar fate if they can’t find a solution to labor and supply shortages which halt the home renovation projects that these programs rely on to sell homes for profit.

How has iBuying impacted your market? Are you a fan of the programs, or are you relieved about Zillow Offers closing? Let us know in the comments below!

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