Zillow Getting Sold! Today As It Pauses Home Buying For Now To Clear Out Backlog
3:05 pm Monday, October 18th, 2021
Zillow (NASDAQ:ZG) is getting SOLD! today after announcing that its Zillow Offers segment will not sign any new contracts to buy homes through the end of the year. Zillow is citing a backlog in renovations and operational capacity constraints, mostly due to labor shortages.
A pause of new contracts is expected to enable Zillow to catch up on its backlog of renovations already in the works. Investors should understand that this affects only Zillow’s home flipping segment, known as Zillow Offers, not its other businesses. Even the Zillow Offers segment will continue to market and sell homes during this period; it just will not be buying homes itself. Zillow will refer sellers to a local Premier Agent partner.
What are the implications of this policy?
It’s likely to put a dent in revenue in Q4-Q1. Zillow Offers buys homes, renovates them, and sells them at a profit. Zillow recognizes the entire home sale in its revenue, not just the profit it makes. As a result, Zillow Offers is the company’s largest revenue segment by far. Cutting back on purchases will hurt the company’s overall revenue numbers. It probably will not be an issue immediately, as Zillow is working through a big backlog, but early 2022 could see an impact. The change could also affect margins. Zillow has been on a hiring spree, aiming to increase its workforce by 40% in 2021, mostly to bulk up its Zillow Offers segment.
Many people questioned whether getting into the business of buying/selling homes was a smart idea for a technology company like Zillow. News like today’s makes those people look prescient.
This decision could lead the company to cede some market share to its direct rival Opendoor (OPEN +4%), which is trading higher on the news. However, if the market/pipeline is as robust as Zillow says it is, there seems to be plenty for everyone to eat, so this should not be a long-term concern. Also, it sounds like Zillow had little choice given the tight labor conditions for renovations.
Despite the near-term pain, this probably is the right thing to do. It makes sense to pause home buying, clear out the pipeline, and improve positioning for spring 2022, which is the key selling season.
We think this news has a lot of the people who questioned Zillow’s decision to get into the weeds of home renovations saying, “I told you so.” Their point is that Zillow would have been better off focusing on the IT/marketing side of the housing market — focusing on offering a great app experience for listings and matching buyers/sellers with realtors. We are not ready to go that far just yet; in our view, the jury is still out, but this news is certainly a setback. Hopefully, though, this sets up Zillow well for Spring 2022.
