🏠 Is Zillow The Canary In The Coalmine?
Workers reject Exxon offer; Smaller loss for United Airlines.
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🏠 Zillow: Troubled On The Home Front?
Online real estate marketplace Zillow Group Inc. (ZG) announced on Monday it will not sign any new contracts to buy homes until the year-end. The reason: backlog in renovations and operational capacity constraints. Has the US Housing market started cooling off a bit? (Tweet This)
The Inveterate Arbitrageur
Zillow was founded in 2006 by Rich Barton and Lloyd Frink, founders of Microsoft spin-off Expedia. In its earlier Avatar as a media company, it generated revenue by selling advertising on its website. The company went public in 2011, pricing its shares at $20 apiece.
The company introduced "Zestimate," an algorithm that estimated home prices, and back then, it was the only website with such capability. It assigned a value to every home, attracting users to their site who were interested in knowing the value of their own homes, as well as those of others.
In 2011, it upgraded "Zestimate" to "Rent Zestimate" by adding a rent component and providing estimated rent prices for 90M homes. Since then, Zillow has gone on to become the largest viewed real estate website in the US.
In 2018, Zillow started buying and selling homes directly. The "Zillow Offers" program allowed homeowners to request instant offers from the company. It would then buy those homes, make the needed renovations before listing them on the site for sale again.
As of Q2 2021, Zillow Offers contributed to half of its overall topline. In Q2, Zillow purchased 3.8K homes, twice the number compared to Q1 and the largest number yet by the company. In comparison, it managed to sell only 2K homes. The story is similar to its rival Opendoor, which bought a record 8.5K homes but sold only ~3.5K.
While it pauses any new signings until the end of the year, it will continue to market and sell homes for which contracts have already been signed through Zillow Offers.
“S” For Seasonality? “S” For Slowdown?
As people got used to working from home, they started moving out of the cities to the suburbs and the countryside. Concomitant housing surge and demand-supply dynamic sent prices soaring. In August, contracts to buy previously owned homes rebounded to a seven-month high even as prices remained high.
Pending home sales across 400 metro areas were up 6% year-on-year in the four weeks that ended on September 5. The median home sale price increased 14%, implying the supply-demand was reasonably tight. At the same time, houses remained unsold for a longer time compared to earlier in the year.
In another ominous sign, applications for loans to buy a house fell 12% last week as mortgage rates increased. Also, the share of first-time homebuyers was the smallest in over two-and-a-half years in August, courtesy of the higher prices. Moreover, consumer sentiment towards home buying also weakened for the third straight month in September.
All of this does not bode well for companies like Zillow that rely on people purchasing homes through its platform to generate revenue. A slowdown in the US housing market seems to be factored into Zillow’s share price, which has more than halved from its peak at over $200 in February this year.
Considering all these factors, Zillow announced its halting purchases of new homes until the end of the year. That was enough for shareholders to dump the stock, which fell 9% on Monday. The stock has fallen 35% YTD.
Will Zillow be the proverbial Willow that’ll spring back to life amid the uncertainty? Or is it ready to hit the bed and the pillow and ready to hibernate? That’s the $22B question!
Market Reaction
ZG ended at $88.86, up 3.98%. Shares are down 35% this year.
Company Snapshot 📈
ZG $88,86 +3.40 (3.98%)
Analyst Ratings (21 Analysts) BUY 66% HOLD 24% SELL 10%
Newsworthy 📰
Say No: Texas refinery workers overwhelmingly reject Exxon contract offer (XOM +1.50%)
Capex: Micron to build $7B plant in Japan's Hiroshima, as per reports (MU -1.14%)
Status Quo: United Airlines posts smaller loss, sees recovery from pandemic gaining traction (UAL +2.27%)
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Today's Market Terminology: Alpha
Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations. Alpha of greater than zero means an investment outperformed, after adjusting for volatility
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