Zillow’s iBuying division, Zillow Offers, will stop buying new homes for the rest of the year.
Zillow Offers has been operating in house flipping for more than three years, buying, renovating, then selling homes. However, it has announced that it will switch gears and focus on its backlog of existing contracts and selling the homes it currently owns.
In response to this news, Zillow stock plummeted 10% on Monday.
The company cited challenges related to construction and labor contracts.
“We’re operating within a labor- and supply-constrained economy inside a competitive real estate market, especially in the construction, renovation and closing spaces,” Chief Operating Officer Jeremy Wacksman said.
“We have not been exempt from these market and capacity issues.”
Homebuilders have been hit with soaring material costs and labor shortages this year, which have impacted construction. However, homebuilder confidence in the market is on the rise as these conditions slowly improve.
Home sales have cooled slightly, but the market remains white-hot. The typical home in September stayed on the market for just 18 days, a week faster than the same time last year.
The prevailing view is that Zillow has mismanaged its home-flipping arm and is finally feeling it. Zillow Offers’ competitor OpenDoor Technology said it is still operating with no delays, despite the fact that it purchased 4,689 more homes in Q2 than Zillow and is active in 44 markets, compared to Zillow’s 25.
In an analysis, Mike DelPrete, a scholar at the University of Colorado Boulder who studies the iBuyer market, said that iBuying companies have been running with a “free-for-all, acquire at any cost” homebuying strategy. But that strategy might have grounded Zillow Offers early. When DelPrete looked at Zillow, Offerpad, and OpenDoor, he found all of them were paying more for houses at roughly the same rate, in line with current housing prices.
But while Zillow is hitting the brakes, OpenDoor is “open for business and continues to scale and grow.”