Zillow will stop buying and renovating homes and cut 25% of its workforce

The real estate company Zillow announced it's throwing in the towel on a program in which it bought, renovated and resold homes itself.

The iBuying, or instant buying, service called Zillow Offers had recently been bogged down by a backlog of renovations and closings caused by labor and supply shortages in the U.S. housing market.

The company disclosed Tuesday that it lost about $304 million in the third quarter from the program, after purchasing homes at higher prices than it now expects to sell them. It bought 9,680 homes in the third quarter, but sold only 3,032, the company told investors.

"We've determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility," Rich Barton, Zillow Group co-founder and CEO, said in a statement.

The closure means the company will cut 25% of its workforce of more than 6,400 employees, Zillow said. The program, which Barton said served only a small portion of the company's customers, is expected to wind down over several quarters.

Housing prices have skyrocketed during the pandemic, creating lucrative opportunities for sellers as well as a competitive atmosphere for buyers who are vying for a small, pricey group of homes for sale.

Zillow announced late last month that it was hitting pause on the purchase of any new homes through its iBuying program until the end of the year, citing the unpredictability of the housing market. It also noted that it would continue to sell homes it had already bought.

iBuyer companies try to buy your house for a bit less than you otherwise might get, but save you the hassle of showing your home to dozens of people. Economists say the companies' pricing algorithms work better in places with thousands of similar cookie-cutter type homes. But in places with more variation, it's much harder to figure out the right price.

And there's another big problem. Much of the time big companies have more information than everyday people when it comes to buying and selling things. But in real estate, that asymmetric information situation is reversed. In other words, homeowners know a lot more than the iBuyers about problems that make their homes tricky to sell.

"The owners know what skeletons lie in the house and what the local market is like," says Bill Wheaton, a housing economist at the Massachusetts Institute of Technology. "The people coming in from Zillow don't know squat." And that, he says, presents a major challenge for Zillow or any other iBuyer company.

He says health insurance companies run into a similar challenge. People self-select to sign up for insurance because they have a health problem.

It's the same thing, he says, with homeowners who decide to sell to an iBuyer. "The ones who self-select are people who have houses that are difficult to sell."

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