Why did Zillow stop buying houses?

Many experts were taken aback by Zillow's surprise statement this week that it is temporarily suspending its home-buying activity. Some believe that more worrying developments are on the way.

The business, Zillow Offers, is an "iBuyer" - it buys and sells properties directly to clients, often remodeling them in the process.

Following a Bloomberg story, Zillow announced that its Zillow Offers subsidiary will not sign any new contracts to acquire properties until 2022.

In justifying the decision, Zillow stated that the corporation was contending with a backlog of repairs as well as operational capacity concerns.

Zillow's competitors continue to grow their businesses.

"We're working in a labor- and supply-constrained economy — inside a competitive real estate market, particularly in the construction, renovation, and closure spaces," Zillow's chief operating officer, Jeremy Wacksman, said in the statement.

She went on to say that the delay would allow the firm to "concentrate on sellers who are already under contract" as well as the company's current inventory of properties.

As of currently, no other iBuyers have followed suit. In fact, most of Zillow's rivals, including Redfin and Offerpad have re-emphasized their growth ambitions in response to the news.

Scarcity of labor and materials

However, several analysts and industry professionals have observed that the difficulties Zillow claims to be under are quite genuine.

According to a recent study by the National Association of House Builders, construction businesses are still encountering significant challenges in completing new home development, particularly a lack of building supplies and manpower. The same difficulties arise during remodeling initiatives.

"Labor shortages in the economy are genuine, and they are likely to result in bottlenecks along the supply chain," Truist analysts stated in a research note. "In such a scenario, the present halt, in our opinion, reduces inventory risk to Zillow."

Zillow's position in the iBuying environment differs from that of some of its competitors. Zillow, like Redfin, has other revenue streams on which it may rely.

"Because Zillow's business model is much more focused on aggregating eyeballs across the spectrum of real-estate transactions, it may make sense for them to periodically de-emphasize the riskiest or most capital-intensive parts of their business," said Michael Greene, co-founder and CEO of ResiShares, a residential real-estate investment company.