Zillow lost money because they weren't willing to lose money • Hacker News Board

Re: Zillow lost money because they weren't willing to lose money

#121

Post by jason-phillips » Sat, Nov 27, 2021, 4:10 PM UTC

h2odragon wrote: post #109

jason-phillips wrote: post #101

Earlier quoted context omitted.

> I think the housing market is so fucked no one really grasps the scale of the problem. I don't think I agree with this assessment. I live in a very rural area two hours northwest of Austin, literally in the middle of nowhere. I've studied the local economy and understand how things work here. I think the characteristics you've identified in the rural housing supply are not unusual and also not as serious in a pract…

I'm in rural TN; not that different a place at all. I'm not speaking of family owned homes tho. I'm talking about the Abandoned, uninhabited homes that are now owned by some out of state thing per county records... which is a lot of them. LLC's and INCs whom I believe have the properties valued highly on some book somewhere and haven't done anything to maintain them. Our local Craigslists always have "Property inspec…

I actually used to work with people from East Tennessee for the past 2.5 years. They described how the Knoxville area was growing like crazy with folks from the coastal states moving there.

I understand what you're saying. The ripple effect created by that dynamic would unjustifiably inflate local property values, reducing affordability for locals, creating synthetic demand by reducing supply as the land could otherwise be auctioned.

Re: Zillow lost money because they weren't willing to lose money

#122

Post by lordnacho » Sat, Nov 27, 2021, 4:10 PM UTC

pge wrote: post #99

skohan wrote: post #28

> They thought they needed to build a machine learning model when they really needed to build an entirely new organization, one that possessed the technical and cultural mindset necessary to succeed in this space. I totally agree. It's not impossible to imagine their model working: why couldn't you serve as a market-maker for homes at a large scale, especially with the unique insights Zillow could have based on their…

Isn't is also true that the original pricing algorithm was built for a very different purpose? It was useful for getting a ball park estimate of value, but it was hardly accurate in the underwriting sense (for the reasons you point out). The hubris of assuming that those prices were so accurate that Zillow was willing to buy at them sight unseen is mind blowing, particularly when one takes into account the adverse se…

Yes, you might discover that your average price is accurate, which is just fine for a reporting site. But beneath that there could be some structure, for instance there might be blobs of houses that your model makes too cheap vs reality, and blobs that are too expensive. If those are identifiable, eg via some sort of local knowledge, you might find that people will sell you houses that you've marked too high, but you can't buy the ones that you've marked too low.

Re: Zillow lost money because they weren't willing to lose money

#123

Post by throwhauser » Sat, Nov 27, 2021, 4:13 PM UTC

seoaeu wrote: post #53

throwhauser wrote: post #26

Earlier quoted context omitted.

I think the tone is appropriate, because the issue is a bit more subtle than that. Zillow was afraid to plan for the large losses necessary to gather the only data that counts, i.e. the data that is the outcome of their own processes. Planning to lose money takes nerve. Zillow tried to avoid avoid the pain, and ended up abandoning what might be a profitable enterprise (for someone else) in the future.

Zillow is passing on an infinite number of potentially profitable enterprises. The reason they attempted this one is because they thought they already had good enough models to avoid taking large losses . If you read their statements, it is clear the reason Zillow is abandoning the this effort is because of inaccuracies in their models not just because they were spooked by losing money. They were also spooked last qu…

> [T]hey thought they already had good enough models to avoid taking large losses.

That's a fair point; the essay doesn't do much to distinguish whether they didn't know they needed to take losses, or couldn't take the pain of the losses.

Nevertheless, it's a pretty good analysis of what a company needs to do, in order to build a model relevant to their own actual business. They need to both know about the pain involved, and be prepared to take it. (And even then it might not work!) Third-party data (and suffering) might not be a good substitute.

Re: Zillow lost money because they weren't willing to lose money

#124

Post by JumpCrisscross » Sat, Nov 27, 2021, 4:14 PM UTC

wpietri wrote: post #116

JumpCrisscross wrote: post #98

Earlier quoted context omitted.

> that's not what we did Archetypal, not predominant. > Simultaneous buying and selling is what the arb guys did. We'd buy and sell with generally short hold times The ideal market maker is arbitraging (and eliminating the arbitrage-able inefficiency). That’s why humans were replaced by faster-trading machines everywhere they could be. In most cases, the arbitrage is synthetic or approximate, e.g. hedging an options…

Sorry, what's your source for this archetype? I thought maybe the place I worked for was just weird, but I've just looked at a half-dozen sources and as far as I can tell, we were pretty typical.

> what's your source for this archetype?

I’d have to dig up the textbook sources, but the key bit is in the definition: market makers quote a two-sided market and make money from the spread [1], i.e. buying at the bid and selling at the offer. If it happens simultaneously, that’s ideal. Every second one is long or short, risk and cost are incurred. Market makers seek to minimise and manage these.

In practice, arbitrage is tough. So most market makers simulate simultaneity by hedging. For example, if longs are accumulating (e.g. due to specialist obligations) one might open shorts or buy positional puts or wing it by shorting SPYs.

An unhedged market maker is just day trading.

[1] https://www.investopedia.com/terms/m/marketmaker.asp#what-is...

Re: Zillow lost money because they weren't willing to lose money

#125

Post by jason-phillips » Sat, Nov 27, 2021, 4:15 PM UTC

conductr wrote: post #110

jason-phillips wrote: post #101

Earlier quoted context omitted.

> I think the housing market is so fucked no one really grasps the scale of the problem. I don't think I agree with this assessment. I live in a very rural area two hours northwest of Austin, literally in the middle of nowhere. I've studied the local economy and understand how things work here. I think the characteristics you've identified in the rural housing supply are not unusual and also not as serious in a pract…

My observations passing through rural Texas matches this. You frequently see houses that probably only served 1 maybe 2 generations and then they are in a poor condition uninhabitable by even those folks used to roughing it. Housing stock in rural areas just doesn’t last long.

Finding good carpenters out here who can do structural repairs is effectively impossible.

Re: Zillow lost money because they weren't willing to lose money

#126

Post by zionic » Sat, Nov 27, 2021, 4:16 PM UTC

SteveGerencser wrote: post #117

skohan wrote: post #28

> They thought they needed to build a machine learning model when they really needed to build an entirely new organization, one that possessed the technical and cultural mindset necessary to succeed in this space. I totally agree. It's not impossible to imagine their model working: why couldn't you serve as a market-maker for homes at a large scale, especially with the unique insights Zillow could have based on their…

Or a house full of cats. I had a 'cat lady' friend who struggled to sell her home because she had 13 cats. 13 'indoor' cats. Even at a great price the house would not sell. Enter the wonderful folks at Zillow that bought her house based purely on the numbers. Last I heard they still hadn't been able to move that house at any price.

Toxoplasmosis is a scary thing.

Re: Zillow lost money because they weren't willing to lose money

#127

Post by tinyhouse » Sat, Nov 27, 2021, 4:19 PM UTC

If you have a good business with high margins, why not grow that business instead of starting a new low margins business of flipping houses?

Re: Zillow lost money because they weren't willing to lose money

#128

Post by EMM_386 » Sat, Nov 27, 2021, 4:19 PM UTC

skohan wrote: post #28

> They thought they needed to build a machine learning model when they really needed to build an entirely new organization, one that possessed the technical and cultural mindset necessary to succeed in this space. I totally agree. It's not impossible to imagine their model working: why couldn't you serve as a market-maker for homes at a large scale, especially with the unique insights Zillow could have based on their…

> I.e. the price per square foot might make a property look like a steal, while something like a sewer main nearby, or problematic neighbor

This is the real problem.

Even if they have the historical data for that exact house/unit, it won't help them in cases such as:

* That nice view of the woods out the window is now blocked by a massive radio antenna that was just built there

* The river running through the back yard is now heavily polluted by something up-stream

* The new neighbor across the street is a huge nuisance and says they will never move

* The house just had a mass-murder event in it

Just because something is now cheaper than "comps" at price/sq ft and other metrics doesn't mean it's comparable.

Re: Zillow lost money because they weren't willing to lose money

#129

Post by hogFeast » Sat, Nov 27, 2021, 4:20 PM UTC

skohan wrote: post #51

loeg wrote: post #41

Earlier quoted context omitted.

Quite a lot of regulations have nothing to do with safety. Minimum set-backs, minimum parking requirements, maximum building heights, etc. All of these add cost and reduce density. Single-family zoning is another local government policy that is absolutely intended to constrain development, not improve safety.

Well as someone who lives in a fairly regulated housing market (Berlin) I'm happy about all the regulations you've mentioned as they prevent negative externalities which would benefit real-estate developers at the cost of everyone else. Imo targeting a specific population density is within the mandate of local government, as too-high density causes all sorts of issues from traffic to health and everything in between.…

Seriously? Berlin's tower blocks are the favelas of the developed world.

Also, the reason why Berlin hasn't had the same pressure is because it is one of the few cities in the developed world that has actually shrunk over a multi-decade period. It is very easy to limit population density when there is no pressure on housing. And, ofc, the historical division of the city meant that it had to develop more than one centre. These factors aside, afaik, the development of Berlin hasn't been exceptional...they built suburbs when there was pressure on housing in the early 20th century, built public transport, those suburbs eventually integrated into the city...very few cities have grown through greater intensity in the centre because cost is prohibitive, regardless of regulations.

Nothing to do with regulations, everything to do with historical circumstance (also, the guy you replying to is quite correct...if you actually look at housing regulations in the US, they have been a tool for racial/economic segregation...being real, that is why the limit on multi-family housing exists, the US has very low population density, saying they will become Delhi if they reduce regulations is hysterical).

Re: Zillow lost money because they weren't willing to lose money

#130

Post by encoderer » Sat, Nov 27, 2021, 4:22 PM UTC

hogFeast wrote: post #114

encoderer wrote: post #70

Earlier quoted context omitted.

Sellers don’t have perfect information about the value of their home. They get a market value estimate from a realtor but that is just an estimate. Of course iBuyers can’t perfectly forecast the market but that is why they add 3-7% fees, a very large buffer on a house purchase. Again, this is where Zillow ran into problems: they reduced or eliminated that fee to win more deals versus opendoor.

They didn't eliminate their fees (fee is the wrong term to use). Their model was built, maybe this changed, on being within 200bps of breakeven. Obviously, they only bought when the model would say: this will make money. Or are you saying they looked at the model, the model says you will lose money, and they decided to do it...that makes no sense, even for SV. Flip this around, are you saying that if the model was co…

Look up their “project ketchup”. Their managers overrode the models and cut both fees and reno cost to win more deals. The WSJ and Business Insider wrote about this. I was at Zillow for many years and the insiders I know tell me the articles are correct but just lacking some nuance.

Many people leap to their own reasons why Zillow offers failed but the most proximate cause really does seem to be management and operational failure.