Zillow DD via /r/wallstreetbets #stocks #wallstreetbets #investing

Zillow’s unusually bad timing for buying homes in an attempt to flip them.

Q2 – 3,142 homes in inventory

Q3- 9,790 homes in inventory

Q4 – 10,031 homes in inventory

Zillow continues to aggressively purchase homes so it must be churning a profit….right? Well lets see!

Q2 – 2,086 Homes sold, averaging $19,636 per home

Q3 – 3,032 Homes sold, averaging $7,081 per home. Wait what just happened? More homes are being sold and we are making less money? Zillow is still asleep at the wheel.

Q4 – 8,353 Homes sold, averaging -$27,609 per home. Perhaps Zillow isn’t asleep at the wheel but rather closed its eyes and decided to YOLO it WSB style. It was doing poorly attempting to sell 3,000 homes. Let’s double down, no, no, let’s TRIPLE our inventory of dog shit wrapped in cat shit so we have even more shit by the end of Q3 so we lose more money by Q4

If anyone is to be a mod on WSB it should be whoever approved Zillow’s game plan for purchasing homes during such a volatile and unpredictable time.

Q3 should have been a massive red flag for Zillow. 50% increase in home sales, with a 50% decline in returns compared to Q2. How this wasn’t caught earlier on is beyond me. Zillow still doesn’t seem to know what kind of a ride it’s in for. Q4 results with forward guidance were very optimistic and seemed to downplay the very serious issue of its current inventory. 2021 created a very volatile period for housing with aggressive buyers willing to place bids significantly over asking price. Zillow played into this game purchasing homes at overvalued prices outbidding others. A direct quote from the Q4 shareholder letter:

“We’ve made significant progress in our efforts to wind down our iBuying business — selling homes faster than we anticipated at better unit economics than we projected. The wind-down process is running smoothly and efficiently, and we expect it to generate positive cash flow. We feel even more confident today that exiting iBuying and eliminating the housing market balance sheet risk to our company and our shareholders was the right decision. We remain focused on continuing to grow our core businesses as we deliver innovative new ways to help our customers move.”

A very quick change of attitude from just 3 months ago in the Q3 shareholder letter:

“Because of this price forecasting volatility, we have had to reconsider what the business might look like at a larger size. We have offered sellers a fair market price from the start of Zillow Offers, while also being clear that the business would only become consistently profitable at scale. We have determined this large scale would require too much equity capital, create too much volatility in our earnings and balance sheet, and ultimately result in far lower return on equity than we imagined. This home price forecasting volatility has also contributed to significant capacity and demand planning challenges, exacerbated by a difficult labor and supply chain environment, leading to our announcement 1 two weeks ago to suspend signing new contracts through the end of this year. We judge future significant volume volatility to be an impediment to ramp a scaled operation, and any interruptions in the supply chain like we’ve recently experienced could result in increased holding times, further increasing our exposure to volatility”

Zillow recognized its mistakes in Q3, and downplayed them or even avoided addressing the real issues at hand in Q4 in an attempt to please investors, and it worked.

Median days on market increasing by the month.

Number of home sales dropping

Active listings quickly dropping

Median sales prices declining…slowly for now

So how is Zillow planning on getting rid of over 10,000 homes in a hurry AND provide positive cash flow when there are fewer buyers, fewer sellers, and homes are stuck on the market for longer. The 8,000 homes sold in Q4 brought negative returns of about 7%. The overpriced homes purchased in Q3 at the pinnacle of the housing market paired with incoming rising rates and significant drop in home prices is bound to have drastic effects on future earnings and balance sheets as time goes on. Current home prices are in a downtrend but appear to be flatlined due to a lack of homes of being sold on the market. There is no demand or supply keeping the price steady where it is. An influx of homes on the market will send home prices into a downward spiral.

So, the market is in an itsy-bitsy gully right now. It’s like everyone said Okay that was crazy let’s just all calm down.

Let’s see what kind of a mortgage we can get.

Does anyone get rejected?

“The Great Recession, one of the worst economic declines in US history, officially lasted from December 2007 to June 2009. The collapse of the housing market — fueled by low interest rates, easy credit, insufficient regulation, and toxic subprime mortgages” …Sound familiar?

Lets search to see pricing of recently sold comps on Zillow in the area we want to buy in (My neighborhood in Los Angeles)

Hold up…Only 2 homes sold in the past 30 days? Let’s try 90 days.

Okay 14 homes sold in the past 90 days. (Excluding past 30 days) Not bad. Let’s see Past 6 months.

21 homes sold between 3-6 months ago. Now that’s much more like it.

Let’s see what’s up for sale.

Only three homes to choose from? Is nobody buying or selling?

Let’s take a quick look to see if overbidding is occurring in homes sold in Q2-Q3 2021.

https://preview.redd.it/vbqlxcwbmlh81.png?width=538&format=png&auto=webp&s=6d11f787f26c26037be5cb5d58fb0111090deae5

https://preview.redd.it/fsnu8y3dmlh81.png?width=540&format=png&auto=webp&s=21439d77e5acf795ce7dca2d9664a7c15fa9cccd

SURPRISE! Don’t worry Zillow, you’re not in this alone.

Here is someone who, like Zillow, overbid for a home trying to flip it for a quick profit. Sold it for an 11% loss by end of Q4. Sound familiar?

He was hoping to let it go for what he bought it for.

How does Zillow with access to all this information go ahead and make the decision to scale their house flipping business is a question I believe not even they can answer.

TL;DR – If you’re actually a member of WSB this is where you stop scrolling and start reading. Zillow is currently carrying a large high-risk portfolio of homes which will be difficult to unload contrary to the Q4 forward guidance issued by Zillow. The steps taken by Zillow to minimize the impact of is horrendous home purchasing policy such as firing employees and shutting down the home purchase program came far too late into game. All sectors of Zillow’s revenue stream will be hurt from the sudden drop in house sales and buyers.

I plan on purchasing puts at market open Monday and will be posting my position in comments.

Submitted February 13, 2022 at 07:25PM by zhor_thegreat
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