What happened with Zillow and what’s next?

By now you’ve probably heard about Zillow huge news last week. After the closing bell on Tuesday November 2, 2021 Zillow revealed huge quarterly losses connected to their homebuying program, announced the closure of the homebuying arm of their business AND let go of 25% of their labor force. Wow, that’s a pretty bad day. It makes us wonder:

When did they know it was turning bad? Will this effect only them? Who else might have exposure to this? What will their Q4 look like? What does this mean for real estate looking forward?

This article will break down each of those answers and provide some insiders insight to how we see this all shaking out.

When did they know it was turning bad?

This simple question has 2 answers. First, they must have known there would be a temporary problem with uncertainty of home values when the pandemic first hit in 2020. We can ascertain this because they announced they were suspending their home buying program citing so! At the end of March 2020 Zillow announced they would temporarily stop buying homes in 24 markets where it was operating at that time. Due to local health orders and restrictions in those jurisdictions, they felt it was the best move to temporarily suspend their efforts until it was deemed “safe” to return to their home buying practices. Competitors OpenDoor and Redfin had also paused their acquisition efforts for the same reason.

The second answer is, they must have known something was seriously mechanically wrong weeks in advance if their Q3 earning call. Take a step back, a company doesn’t just wake up one morning and decide to close an entire department while firing 25% of their staff overnight. It is ultimately how it sounds during an earnings call, but the writing had to be in the wall weeks in advance of making this devastating decision. With the end of the forbearance program in September along with millions of people falling off the unemployment rolls, corporations had to be thinking about the ripple effect this would have throughout the consumer driven economy. Housing would be no exception. With rising inflation cited by the Fed, tapering forcing interest rates to increase eventually, it looks like Zillow was due to face the music as some point or another. Q3 turned out to be that moment.

Who else might have exposure to this, will this only effect Zillow?

According to Glenn Kelman the CEO of Redfin, the disappointing Zillow earnings, staff layoffs, and struggles to offload inventory they purchased are only a Zillow problem. In an statement just 2 days after the Zillow made headlines, he commented “The answer is that Redfin isn’t an iBuying company at all; it’s part of what we do, but it’s not who we are. The way we define ourselves is as the company that offers homeowners the most complete set of options for selling one home and moving to another, where iBuying is one of those options.” But that begs the question: Didn’t Zillow claim the same thing? From our seat at the table Zillow’s buying program was just ONE of many streams of revenue they relied on to scale their business and provide even more services direct to consumer. Just like RedFin does. Afterall, Zillow, RedFin, OpenDoor and others are commonly referred to in the same conversation circles when it comes to real estate, their business model, their market disruptor status, etc…It is entirely possible that RedFin is in a much more financially health situation based on their size, risk tolerances, nuances within their business model and the like; however, won’t they be subject to the same real estate trends that every other buyer and seller face in the market, whether you are transacting 1 home or 1,000? Maybe they know something we don’t still.

What will Zillow’s Q4 look like?

Quarter 4 2021 will be one you might want to put an asterisk (*) next to. The financials might look way better than Q3, but will that be because they laid off 25% of their workforce which massively cuts their overhead and makes revenue appear stronger? Will they be able to offload the “dead-weight” inventory to the market(s) without buyers savagely underbidding them while there’s “blood in the water”? It remains to be seen; however, the idea of putting an asterisk next to quarter 4 is important because even though the financials might come out better than Q3 we are left to wonder how much of that is a direct result to the gutting they are currently taking to their stock value and the offset of massively cutting costs to give the appearance that the worst is over vs. yet to come.

What does this mean for real estate looking forward?

November 2021 could be an inflection point in the history of real estate and mortgage once the ink dries in the history books. There are many variables converging within the same window that will likely cause ripple effect to be felt months and even years ahead. The Federal Reserve beginning their tapering, inflation concerns, real estate values at their all-time highs, more equity in homes than at any other time in history, highest year of mortgage originations ever in 2020, and now Zillow biting off more than they could chew & laying off 25% of their staff…Stepping back from all this we’re willing to bet that November 2021 will be referred to as a change point in the real estate market in the future. A lot of that impact will fall at the feet of current homeowners and aspiring homeowners.

First, current homeowners – People who own homes are less likely to list their home now if they refinanced into a historically low rate during the last 12-18 months. This is especially true for those who did a rate & term, FHA streamline, or VA IRRRL refinance. Even those who did a cash out refinance will likely be thinking long and hard about listing their home in order to go on a house hunt right now, unless there is a life circumstance or job change that necessitates that move. Since the mortgage industry experienced an all time high for volume of loans financed in 2020, these ongoing owners are most likely to hold their property for many years ahead.

Second, aspiring homeowners – Rent is increasing at an alarming rate which is causing many to consider buying a home, even if the price is at an all time high. While conventional loans can be obtained for as little as 5% down, that 5% on $600,000 is still $30,000 not including closing costs. Even a FHA purchase with 3.5% down or VA home loan 0% leaves aspiring buyers analyzing whether they want all the responsibilities of homeownership when renting affords a peace of mind of not having to worry about upkeep, maintenance, landscaping, etc. for the same monthly price. This group of consumers will likely tell the tale of real estate and mortgage in 2022. Those eager and willing to take on homeownership for the first time will mark the success or struggle of real estate in 2022 when we look back at history. It is highly likely that aspiring homeowners who want to buy and hold for the long term will still do so while the cost of money is low and less and less buyers out bid one another. Watch this key demographic in the coming months as it will be a predictor or how “hot” real estate will be in 2022.

Before you think we forgot, what about the people who are moving up in the market? Yes, there are still plenty of current homeowners looking for that move up dream home, and there is still inventory for that as high end owners seek the max cash they can get from selling now. It’s just that there are a lot fewer of these situations than there was 6 months ago. In parts of the country where most society has returned to “normal” or at least come close to achieving that, families are returning to a sense of what life was like pre-lock down / post moving to a new city or state. Barring vast changes to employment law, mandates, and enforcement of health code restrictions, the financial status of these folks is likely to remain the same or get better over the next year. Well qualified buyers are almost always qualifiable for a VA purchase or conventional purchase no matter what the landscape looks like.

As we look towards the end of 2021 and make projections into 2022, this commentary about Zillow and the overall housing market will be in clear focus as we watch how banks, lenders and real estate companies alike absorb this information, look for clues as to what it’s telling us, and jockey for position to win in the coming weeks and months ahead.

As a leading VA mortgage lender in San Diego, Mortgage Heroes is able to help you digest all market variables in order to make your best choice in real estate and mortgage. Whether that is a cash out refinance, interest rate reduction refinance loan (VA IRRRL), or that move up dream home purchase, we’re ready to help you make sense of this market.

If you would like to speak with our team about your home loan questions, please complete the form below. You can also start your loan application online by APPLYING NOW.

Rates & Fees Disclosure:
^‡ The payment on a $300,000 30-year fixed-rate VA loan at 3.000% with a 80% loan-to-value ratio is $1,292.01 with 0 (zero) origination points due at closing. The annual percentage rate (APR) is 3.235%. Payment does not include tax and insurance premium impounds. The actual payment amount will be greater. By refinancing your existing loan, the total finance charges may be higher over the life of the loan. Some state and county maximum loan amount restrictions may apply. Appraisal fee of $600, Processing Fee of $895, Underwriting Fee of $795 included in APR calculations with borrower paying 0 (zero) loan origination points.

^‡ Based on Mortgage Heroes internal data.