ALGORITHM APOCALYPSE: Zillow's Robo-Real Estate Meltdown

By ex_artist @ Shutterstock.com

You have heard that Zillow is desperately trying to offload the inventory of homes it built up throughout the pandemic buying spree. It turns out, Zillow’s plan to dominate the real estate market with data-driven algorithmic buying and selling was “too risky, too volatile,” and “too narrow.” Those aren’t adjectives investors want describing the operations of the businesses they own. With more detail on what happened at Zillow, Will Parker and Konrad Putzier report at The Wall Street Journal:

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When executives at Zillow Group Inc. Z -4.01% pored over the company’s earnings in the spring, they saw a problem: The real-estate firm was making too much money.

Zillow, which rose to prominence with online listings, had bet its future on an algorithm-based home-flipping outfit called Zillow Offers, which would buy houses, make minor renovations and sell quickly.

The first quarter delivered home-sale profits that were more than twice as high as anticipated, the company said. Zillow expected to make money primarily from transaction fees and from services such as title insurance—not from making a killing on the flip. The company’s algorithm, which was supposed to predict housing prices, didn’t seem to understand the market. Zillow was also behind on its target for home purchases.

By the summer, it had the opposite problem, the company later acknowledged. It was paying too much money for homes, and buying too many of them, just when price increases were starting to slow.

This month, Zillow conceded failure in what amounts to one of the sharpest recent American corporate retreats. It said it would close Zillow Offers, which was responsible for the majority of the company’s revenue but none of its profits; cut about 2,000 jobs, or a quarter of its staff; and write down losses of more than a half-billion dollars on the value of its remaining homes.

The company’s market cap, which closed at a peak of $48.35 billion in February, is now around $16 billion.

Technology has in many ways transformed the hidebound real-estate industry. But Zillow ran into some of the limits of technology in a business still informed by emotional attachments, personal tastes and other intangible factors. Some current and former employees say the company’s missteps made matters worse.

Computer-driven analysis has become mainstream in stock and bond markets, but buying and selling single-family homes has proved a trickier proposition. The real-estate market varies widely by city, region and type of property, with a range of aesthetic, social and other factors playing into Americans’ home-buying decisions.

Zillow also overstretched its staff as it tried to catch up to competitors and disregarded internal concerns that it was overpaying for homes, according to former and current employees. It operated in an unpredictable housing market, with the pandemic fallout helping to spark the biggest housing boom in a generation. And Zillow suffered from supply-chain and labor issues that slowed its ability to renovate homes quickly. That was the breaking point for a business that executives once predicted would generate $20 billion in annual revenue.

Action Line: Don’t get caught up in the “risky,” “volatile,” or “narrow,” areas of the stock market. Focus on dividends and income, and sticking to your plan. If you’re serious about building a plan for your retirement future, click here to sign up for my free monthly Survive & Thrive newsletter. I’ll help you defeat inertia and execute on your goals. But only if you’re serious.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.