Zillow’s (Near) $1 Billion Blowout: What’s the Lesson?

March 14, 2022 Updated: March 14, 2022


According to the Wall Street Journal, Zillow Group said on Thursday that it lost $881 million on its algorithmic-driven home-flipping business last year in its first earnings report since the real-estate company shut down that operation in the fall.”

The emphasis is, naturally, mine because, frankly, it’s mind-boggling. Zillow accounts for nearly a third of real estate website traffic and has 135 million properties listed on its site. With that kind of data, how on earth can you run an algorithm that loses you nearly a billion dollars in one year?

Two possibilities.

One, they have the crappiest AI programmers in the world. But a company that makes $1.6 billion in profit on $3.34 billion in revenue can’t be that dense. So I doubt this is the case.

More likely, they fell into the same real estate trap that the world got caught up in prior to the 2007 housing bubble—the idea that housing is a national market.

High Prices Do Not a Bubble Make

When the real estate market collapsed in 2007 the impact was felt nationwide, a black swan event in the housing industry. Real estate was way overpriced. But that bubble was being inflated by criminal lending practices across the country.

The “low-doc, no-doc” loans. “Liar loans” (They always give the bad stuff cute names). The huge number of adjustable rate mortgages that let buyers live way beyond their means for three to five years (and then reset to realistic levels borrowers could never actually afford).

These widespread loans were what made that bubble such an outlier—a “nationwide” market. And when you sliced and diced those mortgages and sold them globally with a AAA rating on it, you had the recipe for a disaster. But viewing real estate as a “national” market is a mistake.

The saying goes that the three most important things in real estate are location, location, and location. That is the truth about real estate. Real estate is a local market and I suspect that somehow, Zillow’s algo team might have forgotten that.

Here’s what I mean:

Park City, Utah, is an expensive place to live. (I know first hand.) And real estate prices here have been rising dramatically for the last few years. Just a few years back you could buy a three bedroom house for somewhere in the neighborhood of $300,000 to $350,000. Pricey by any standards. Today that same real estate is selling for in excess of $1.3 million.

Are we in a bubble?

I don’t believe so.

When real estate brokers talk “comps,” they’re usually referring to the prices your neighbors’ houses have sold for. But that’s not really the way you want to think of “comps” when it comes to assessing a bubble. Here’s what I mean:

So real estate in Park City is up around 300 percent in the last few years. But it’s not a speculative mania when you compare it to other ski resort towns. Take Vail, Colorado. Prices are just as high as Park City. But Park City has better access to transportation, shopping, food, restaurants, medical facilities, and so on. In short, it’s a way more livable city.

So from that perspective, which market would you think is in a bubble?

I’ll say it again, real estate bubbles are local and “comps” shouldn’t be viewed as the house next door, but rather comparable living areas. Is Park City more expensive than “Nowheresville” Idaho? Absolutely, but real estate prices in “Nowheresville”—by the simple fact that’s it’s located out in the middle of nowhere—might actually be the bubble.

Remember that real estate is local, and that means its bubbles are too!

(And here’s a pro tip for you residents of popular, smaller cities: Make sure all your local city officials are all environmentalists. Environmentalists love preserving open spaces, i.e., taking land off the real estate market.)

That means the boom in real estate is probably going to continue on some trend or another. As an investor, your best bet is to look into the REIT market for opportunities. REITs can not only diversify you as far as locations go (like SLG Realty, which specializes in Manhattan-based commercial properties), but they can also focus your portfolio in specific sectors as well (Omega Healthcare Investors, for example, which invests in long-term healthcare facilities).

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Bob Byrne
Bob Byrne built a reputation as a daily columnist for TheStreet.com after trading billions of dollars over two decades in financial markets. He now co-authors Streetlight Confidential investment newsletter with Tim Collins that focuses on under-the-radar companies and investment opportunities often overlooked by Wall Street. To discover how to get his proprietary research in the paid newsletter service, go to Streetlight Confidential.