Zillow to stop flipping homes, loses more than $550M, lays off 25% of staff

Here is the case shiller index for Phoenix - it is absolutely wild since 2020!

https://fred.stlouisfed.org/series/PHXRNSA/

It's a huge pivot to go from flipping houses to becoming a landlord. It would essentially be a disaster for them. That's a high-touch business and probably the costs associated with it, and the legalities around it are too complex. That's basically turning into an Avalon or something.

The interesting question is around their bonds. They were basically convertible bonds which likely triggered, but now they have to pay back the cash. How much of a liquidity crisis will this introduce to the company?

The more interesting thing is that this business crisis won't be reflected in their last quarter 10-Q which should be coming out soon. I'm assuming this is going to be talked about in that earning call, so that will be an interesting one to listen to.

I think Opendoor's model is a lot better, but I guess we will have to wait to see if there are any repercussions to their business.

Anecdotally:

Zillow quoted a number for a house that I was selling right at the peak of all this, pending inspection. They couldn't come around and look at it though for about 6 weeks.

By that time the market had turned and they said they weren't interested.

I am not an analyst but this is my armchair understanding of the market:

1. The construction of new homes was limited in late 2019 early 2020. This was due to covid and labor shortages and supply lines being blocked.

2. Demand for homes rose to an all time high. The people in big cities said: "Why quarantine with nothing to do in my Manhattan apartment when I can buy a house and sell it when the pandemic is over. House prices always go up so I'll make money"

3. Zillow, banks, etc saw the fed start printing money which was going to lead us into an all-time high inflation rate. Their inflation hedge was simple: shift all liquids into long term stable solid assets. For most of human history this has been housing (single family and rental properties). Zillow specifically got a massive credit line via taking advantage of "zero risk" money from the fed via their bank.

4. Zillow + banks + the middle and upper class families start buying homes at a record high. This compounds with the lack of new supply.

5. Foreign speculators move in and see the increase in property value. The common wisdom of "prices only go up for homes" has encouraged them to invest in these properties. I know some people who have been doing this. Foreign speculators are concentrating on some limited markets (USA, Canada, and Australia).

Now that most of our liquid assets have shifted into properties any fluctuation in property value would have interesting implications so there will now be a large interest in keeping home prices high.

The core problem: properties are only worth what people are willing to pay for them. Regardless of what has been going on with inflation or how much money you have put into flipping it. If no one will buy the home for 200k over assessment then you have to lower the price. This is slowly causing a large reversal in the market. I've been seeing homes steadily creep back to what inflation would account for in price delta.

I don't get Zillow's play here.

They were for a long time the de facto neutral party everyone used to look at houses. Great. Then they got into doing contracts apparently, still OK.

Then they started competing against people and overbidding everyone, at the height of what appears to be the biggest housing boom of my lifetime. This was not only apparently financially dangerous, but an act that puts them in a bad light, publicity wise.

I cannot think of how anyone thought this was an OK idea.