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Zillow's home flipping hits are caught because the market exhibits indicators of cooling

The Zillow Group's decision to stop buying new homes comes as the U.S. housing market appears to be cooling slightly, showing the challenges for an emerging high-tech spider in home flipping.

The online listing giant has bought and sold thousands of homes in the past few months through its iBuying program, which relies on the company's ability to use number crunching software to predict where house prices are going.

The company made its decision to stop new acquisitions for the remainder of the year due to the labor shortage that was upsetting the US economy. But two of his main rivals are pushing forward, raising questions about why Zillow is withdrawing his pivot to homeflipping.

"It feels like they've bought way too many homes and are trying to work off that oversupply," said Jonathan Miller, president of valuation firm Miller Samuel. "It's like McDonald's saying," We're having trouble filling vacancies, so we're going to close all of our restaurants. "No, you might limit your hours or warn people that it will take longer. "

Zillow stock plunged more than 11% at one point on Monday as investors reacted for the company to take a break from the central initiative. Opendoor Technologies, an iBuying competitor, rose early in the day after the company said it was "open for business".

Zillow's iBuying business is losing money, so stopping purchases should improve bottom line results, Wedbush analyst Ygal Arounian said in a note. But it is "a huge drawback to sales growth and a huge setback for the strategic initiative that has been launched over the past few years".

This is due to the labor shortage, says Zillow. After the company makes an initial bid on a home, it sends a human appraiser to examine the property. Once it closes the house, it sends contractors to do light repairs. There is a labor shortage across the US industry, and Zillow is competing for labor with other iBuyers, single-family homes, and others.

Also crucially, the company often allows its customers to plan closings months in advance. The company plans to keep shutting down already-signed houses, which means it will keep supplying its iBuying machine with raw materials for at least a while longer.

"We now have an operational backlog for renovations and closings," said Jeremy Wacksman, Zillow's chief operating officer, in a statement. "Pausing new contracts will allow us to focus on sellers who are already under contract with us and our current home inventory."

"We operate in a labor and supply constrained economy in a competitive real estate market, particularly in construction, renovation and closure," said Wacksman. "We were not exempt from these market and capacity problems."

It's not the first time Zillow has stopped buying. The company and its main competitors stopped buying homes in March 2020 when the pandemic brought the US economy to a standstill.

Then the locks were lifted and the real estate market boomed, which gave Zillow's business a major boost. Selling a home on a website allows Covid-wary consumers to host open houses. And rising property prices are making iBuyers disregard their appreciation as the property gained in value during the repair period.

"IBuyers' recent profitability is being driven by a record rise in home prices – a temporary artifact of a hot real estate market," said Mike DelPrete, a real estate tech strategist, in a September report. "When the market subsides from scorching highs, slowing price increases can have a detrimental effect on iBuyer's profit margins."

Zillow has said in the past that his iBuying model is designed to work regardless of how the real estate market evolves. While stopping new purchases can give the company time to adjust to the changing market, moving can lead to home buying.

Offerpad announced plans to begin buying homes in three California markets, and said in a statement that “expansion will be driven by our company's operational excellence and our strong real estate background enables us to sell homes in changing real estate cycles in many markets to buy, renovate and sell. "

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