A blazing hot housing market served as a double-edged sword for the nation’s leading iBuyers in the third quarter, Zillow said in its first iBuyer report since sunsetting Zillow Offers in November.
Opendoor, Zillow Offers, Offerpad, and RedfinNow collectively increased their purchase volume 83.10 percent quarter-over-quarter from 14,961 homes in the second quarter of 2021 to 27,244 homes in Q3, which represented 1.9 percent of U.S. home sales from July 1 to September 30. On the sell-side, iBuyers sold 39.4 percent of their housing stock, a record high.
Phoenix nabbed the top spot from Atlanta as the nation’s iBuyer capital, with homesellers unloading a mind-blowing $1.47 billion worth of housing stock to an iBuyer, the first time a market has broken the $1 billion mark. In Greensboro (13.9 percent), Phoenix (12.1 percent) and Tucson (11 percent) at least one in 10 homesellers sold to an iBuyer.
Meanwhile, Colorado Springs (+266.2 percent), Austin (+184.4 percent), Fort Collins (+159.4 percent), Miami (+152.1 percent) and Cincinnati (+149.5 percent) experienced explosive growth in the number of homebuyers who purchased an iBuyer-owned home.
Although iBuyers scaled buying and selling capabilities to record levels, rapid home price appreciation meant iBuyers had to dig deep into their pockets to seal the deal with homesellers in an extreme sellers’ market. IBuyers purchased homes for a median sales price of $376,000 in Q3 — 13.9 percent higher than the overall U.S. median sales price ($329,970) and 12.9 percent higher than Q2 ($333,000).
The push to gain market share with hefty offers hurt iBuyers on the sell-side with the median markup, which Zillow defines as the difference between the purchase price and sale price, slid for the second consecutive quarter. From Q1 to Q2, the median markup declined from a record-high of 8.6 percent to 6.7 percent, and from Q2 to Q3, profits tumbled again to a mere 1.8 percent.
The culprit, according to Zillow, seemed to be longer purchase-to-sell timelines with iBuyers taking an extra 31 days to purchase, repair and resell a home. “The normal seasonal cooling of the housing market returned in Q3, contributing to the longer typical hold time,” the report explained. “Across the U.S., typical days on market increased, for-sale inventory finally began to rise, and price cuts became more common.”
Zillow made no specific mention of their iBuying woes, which led to the bombshell Nov. 2 announcement they’d be closing Zillow Offers and focusing their resources elsewhere. In the company’s Q3 earnings call, CEO Rich Barton revealed Zillow Offers often overpaid for homes, which made it difficult to turn a profit when it came time to sell them.
“Fundamentally we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in,” Barton explained. “Our observed error rate has been far more volatile than we thought possible.”
Over the past month, Zillow has made breakneck progress on the wind-down process, with the company announcing on Friday that it had successfully whittled its housing stock from approximately 18,000 homes down to 8,781. The company has struggled to hold up its promise to honor all of its homeseller contracts, with 400 homesellers awaiting new builds having their contracts canceled due to “late 2022″ closing timelines.
Despite those snafus, Zillow Group CFO Allen Parker said he’s happy with the wind-down, which now includes a $750 million stock buyback plan. “We are pleased with the significant Zillow Offers inventory wind-down progress we’ve made in such a short time,” he said. “We will continue to be disciplined in our inventory wind-down strategy and evaluate a variety of options to best optimize net cash flows to the company.”
Even with Zillow Offers’ dramatic ending and the return of seasonality among several other headwinds noted in Zillow’s iBuyer report, several real estate analysts have cited their continued confidence in the iBuyer model, as Opendoor, Offerpad and RedfinNow take a more balanced approach to growth.
“Just because Zillow didn’t get it right doesn’t mean Opendoor and Offerpad are not going to get it right,” real estate analyst Mike DelPrete said at Inman’s November Connect Now. “It doesn’t mean disruption is not going to work. It doesn’t mean billions of dollars of venture capital is not going to continue to flow in and subsidize new businesses and try new things and stress your existing model.”
“I don’t think it’s the end of iBuying,” he added.