Explaining iBuying and Zillow's Failed Offers

If you talk to any real estate agent, or anyone trying to buy or sell a home, you'll hear, "The housing market is crazy now." Houses are selling for above the asking price, quickly, and often without inspections. It's the law of supply and demand. There are not enough homes for the people who want a place to live, which explains supply. But there are also buyers who are not people, which skews the demand. An example of this is Zillow, who until recently was buying up inventory with their Zillow Offers division, using a concept called iBuying.

Here's the short version of iBuying: Zillow (or any other company) uses a “automated valuation models,” or AVM, to figure out what a house is worth. These are algorithms that consider many data points like the location, size, and age of a property. It also needs to be tweaked by humans who keep an eye on the housing market and predict what property will be worth, say, six months from now. They company buys up any house it can in a booming market, then sells those houses at a higher price to Wall Street investors, like hedge fund managers, who have plenty of money to spend and don't mind paying inflated prices because their plan is to rent these houses out, which is more profitable than selling them.

You can see how this plan can be both a driver of the volatile housing market and a victim of it. While iBuying accounts for only about 1% of the overall housing market, its effects vary by location. About 10% of homes in Phoenix, Arizona, are currently being bought through iBuying.

Zillow announced earlier this month that it was closing Zillow Offers and laying off 2,000 employees, which is a quarter of Zillow's entire workforce. Their predictions in the volatile market led the company to buy way too many houses, which tied up cash and then then lost money when those houses ended up selling below their cost. Read a further explanation of iBuying and what went wrong for Zillow at Gizmodo. 

(Image credit: alanharder.ca via Wikimedia Commons)

#realestate #housingmarket #iBuying #Zillow

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