Zillow: Being A 'Market Maker' Can Cost You

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How much? Say, around 881 million dollars. 

Yes. Zillow made real estate headlines last week as it reported a loss of USD881 million on its house-buying business in 2021, and what's most impressive about its black-to-red journey is that home prices rose dramatically for much of 2021.

How On Earth?

Zillow's iBuying initiative went kaput in the middle of October and it stopped flipping houses for the remainder of 2021, and as it's core money spinner halted, profitability sank like a stone in a lake.

FYI, flipping, akin to turning over an omelette on the pan, refers to buying a house for X, doing some repairs or changes if needed and on a better day, selling it at a higher price, say 1.25X, turning a quick profit. 

But iBuying, with all the tech and big data powering it, is still not a fully automated process, and that’s where Zillow got into a soup. 

The firms that do the iBuying engage a representative to physically inspect the property and do a gut check on the offer. Zillow didn't have the requisite manpower to keep the valuation process accurate and running. The rest is in the P&L statement. 

Market Maker Aspirations

“Our aim was to become a market maker, not a market risk taker,” Zillow founder Rich Barton said in a letter to shareholders, addressing the failure, and Barton’s quote hints at another problem with iBuying, per Alan Cole. 

Market makers don’t want to invest in their market, in the sense that someone like Warren Buffett might. 

Instead, they want to trade with impatient buyers and sellers, and earn a sort of patience premium rather than develop a deep thesis about the future of the assets they’re holding. They want to keep minimal inventory, sabotaging their own market making ambitions.