🏡 Zillow’s iBuying bust

Thursday, November 4, 2021 by Robinhood Snacks | Disclosures
The dog days of iBuying [JDC/Stone via Getty Images]

The dog days of iBuying [JDC/Stone via Getty Images]

Yesterday’s Market Moves
Dow Jones
36,158 (+0.29%)
S&P 500
4,661 (+0.65%)
Nasdaq
15,812 (+1.04%)
Bitcoin
$62,910 (-0.38%)

Hey Snackers,

Controversy erupted in New Zealand after the country’s “bird of the year” competition was won by a bat. Who could deny that face?

Stocks notched their sixth-straight day of gains after weekly jobless claims came in at the lowest level since the pandemic began — an encouraging sign for the labor market.

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1. Zillow’s house-flipping business flopped — then its stock dropped 30% in two days

Foreclosed… Zillow’s stock plunged this week after the company reported a $330M quarterly loss and said it planned to end its house-flipping business, Zillow Offers. Zillow’s OG biz links home sellers to buyers for a fee. But in 2019, Big Z branched into iBuying — aka making instant cash offers on houses based on "Zestimates" and cutting out agents in the middle. Zillow’s goal: Fix up properties and resell them at a profit. Zillow’s iBuying revenues soared to $1.2B last quarter, but profits tanked:

  • Big losses: Offers lost $420M last quarter, which pulled Zillow into the red after making $40M in total profit in the same period last year.
  • Empty houses: Zillow still needs to offload 18K houses. It expects to sell them at a 5% to 7% loss, and to lay off a quarter of its workers.

iBlunder… Since Zillow already calculated Zestimates, iBuying seemed like a natural expansion two years ago. But it soon discovered the market wasn’t that simple: Home prices soared during the pandemic, and labor and supply shortages raised the cost of repairs.

  • Veteran house-flippers Opendoor and Offerpad slowed their iBuying when the buying boom began to diminish in October, but Zillow bought more homes at above-market rates.
  • Blame the algo: Zillow said it ended up “unintentionally purchasing homes at higher prices” than the expected selling prices because of a faulty formula.
THE TAKEAWAY

Look before you pivot… Companies need more than a market opportunity to pull off new business lines — they need the right infrastructure too. Despite Zillow’s failure, others are still iBuying: Last month, tech-focused rivals Opendoor (which reports earnings next week) and Redfin said they planned to boost iBuying. High demand for real estate is expected to continue: home prices jumped 15% this summer from a year ago, after a five-year decline.

Jerome

I've got the Powell... Probably Fed Chairman Jerome Powell's morning pump-up song. Yesterday the Fed finally approved plans to start scaling back its economy-boosting bond-buying program. The Fed will start this month, buying $15B less in bonds — and will end bond purchases altogether by June. ICYMI: The Fed has been dropping a whopping $120B a month to buy Treasury and mortgage bonds, adding trillions to the money supply since the pandemic started. Quick refresher:

  • The Fed buys bonds from banks, and that cash flows through banks to consumers and businesses via loans. More money = fewer problems.
  • All that new cash helped bring us ultralow interest rates, which made borrowing easier and boosted spending — but also contributed to rising prices.

Feeling #flated... The Fed has been monitoring inflation, unemployment, and recovery — and decided the time was ripe to dial back economic medicine. While the Fed still expects inflation to be temporary, prices have been surging longer (and higher) than anticipated. Blame shortages, supply-chain headaches, and soaring consumer demand. Twelve-month inflation is at its highest level in decades, and oil prices have jumped 42% from last year. BTW: Fed officials don’t want to raise interest rates (by selling bonds) until they've fully ended bond purchases.

THE TAKEAWAY

Wall Street isn't sweating... Stocks jumped yesterday after the Fed’s announcement, and have been cruising around records for weeks. Investors aren’t surprised: The Fed has been signaling it would taper bond purchases for nearly the whole year. Wall Street also sees the move as a sign that the economy is strong and ready for less hand-holding. The unemployment rate fell to 4.8% in September, just 1.3 percentage points higher than the pre-pandemic rate. While the US's growth majorly slowed last quarter, the economy is expected to grow 5.6% this year as recovery continues.

What else we’re Snackin’

  • CO2: Negotiators at the UN’s climate conference moved closer to creating a carbon market, which would incentivize countries to reduce emissions.
  • Cyber: Biden signaled his commitment to cybersecurity by ordering federal agencies to fix security flaws and sanctioning ransomware enablers.
  • Dunk: Kevin Durant became the latest celeb to enter the SPAC market after his Infinite Acquisition Corp. filed for a $200M IPO.
  • Doc: CVS said it wants to add doctors to its staff, taking a big step toward becoming a full healthcare clinic instead of just a pharmacy.
  • Stay: Marriott’s quarterly profit more than doubled from last year as a boom in leisure travel offset biz-travel losses.
  • Sketch: A coordinated Twitter misinformation campaign reportedly backed Kenyan President Uhuru Kenyatta after leaked docs linked him to offshore accounts.

Snacks Daily Podcast

“Chocolate caramelicious cheesecake with Snickers” — one of the many items that Cheesecake Factory added during the pandemic.

Tune in to hear how doing the opposite of what other restaurants did helped Cheesecake surpass its pre-pandemic sales.

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Snack Fact of the Day

US-listed IPOs have raised more than $268B so far this year, more than all other full years on record

Thursday

  • Jobless claims
  • Earnings expected from MetLife, Moderna, Square, Airbnb, Duke Energy, Uber, Fidelity, Cigna, Cloudflare, and Bill.com

Authors of this Snacks own shares of: Square, Moderna, Uber, Twitter, and CVS

ID: 1906883