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Why Zillow Might Not Buy Houses Again Even After the Pandemic Ends

By Rich Duprey - Apr 13, 2020 at 12:15PM

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Its Zillow Offers iBuying program will be difficult to restart.

Zillow (Z -6.52%) says new home listings plunged over 27% by the beginning of April compared with last year as the coronavirus pandemic upended the traditional start of the homebuying season.

Having seen the trends develop, the online real estate specialist stopped making offers to buy homes for sale through its Zillow Offers program and began canceling contracts it already had in place to purchase houses.

Although CEO Rich Barton said the company plans "to restore Zillow Offers' full operations once health concerns pass and local health orders are lifted," it's possible the real estate giant's homebuying program might not be resurrected for a very long time.

Couple with moving boxes sitting holding their heads

Image source: Getty Images.

A shaky foundation

The Zillow Offers program was always a risky proposition for the company because it opened up the potential for Zillow to be holding large amounts of housing inventory if and when the market soured.

The program let Zillow make instant cash offers on houses that were listed for sale. Through a combination of internal computations, owner-supplied information, local real estate agent contacts, and an on-site inspection, Zillow came up with an offering price on a home. 

It was a potentially attractive option for sellers because they had the surety of selling their home without the rigmarole of waiting for qualified buyers to make an offer and come up with financing. They might not be getting top dollar (sort of like selling your car back to a dealer rather than through a private-party sale), but sellers could be out of their homes and into new ones quickly.

The risk for Zillow, though, was that it required a rising housing market. Finding buyers in a down market becomes difficult, and when housing collapses, as it just did, it's all but impossible to find them.

No easy way out

Even if the pandemic begins easing up, as many experts say should start happening soon, Zillow might not start ramping up the program right away despite data from Freddie Mac indicating mortgage rates sank to just 3.33% in the most recent period.

The pandemic has created tumult not only in the housing market, but also in most industries. Massive numbers of people are suddenly unemployed, and though most companies have merely furloughed workers, meaning they should get their jobs back once the crisis passes, their finances have been dramatically upended.

Worse, many small businesses might not survive, and even some large companies, like retailers and department stores that were already financially strapped, might not be able to come out of it.

As consumers struggle to get their lives back in order, buying a new house is going to be far down the list of priorities. Even those who have fared well through the crisis will only reenter the market timidly at first. It's doubtful all segments of the economy will roar back to life once the all-clear signal is given, and not all housing markets will revive at the same rate.

And a hard road back

That suggests Zillow won't restart its iBuying program anytime soon, and if the housing market remains moribund for a prolonged period (which is quite possible), it might not restart it at all.

Zillow had 2,700 houses in its inventory at the end of the last quarter, but wanted to be buying as many as 5,000 homes a month through the iBuying program. Had it been able to ramp up Zillow Offers to that level and run on it for a while before disaster struck, it would be left holding a lot of inventory that would be costly to unwind.

Luring new sellers back to the program may not be easy, either, as they may be leery of being left in the lurch should times turn tough again, and depressed pricing will also make it more difficult to find sellers.

All of which means Zillow may survive its first real test and become a growth stock again, but the iBuying trend that had sprung up in response to the housing boom may not.

 

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (C shares). The Motley Fool has a disclosure policy.

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