Shares in online real estate marketplace Zillow fell by 8.6% Monday as one analyst raised concerns that many houses the company bought could be worth less than what the company paid.
That report was followed by exclusive reporting from Bloomberg saying the company is seeking to sell some 7,000 homes for $2.8bn (£2.06bn), which would represent a slight premium over the company’s average selling price according to earnings.
The two reports combined to send Zillow shares 9.11 points lower to a price of $96.61 per share. Shares are still up more than 13% above its 52-week lows from last month but the stock is still down by nearly 30% year to date.
“Zillow may have leaned into home acquisition at the wrong time, and we believe earnings may be at risk due to its current homes inventory,” Ed Yruma, managing director at KeyBanc Capital Markets, wrote in a report obtained by Capital.com.
Zillow was known for its mortgage and rental listings, but in 2018 began buying up homes to become a one-stop shop for buying, selling and listing homes sales online.
The company bought more than 3,800 houses in the second quarter on the way to its stated goal of buying 5,000 homes a month by 2024. Then last month the company announced it would pause its purchases amid labour shortages that prevent the company from flipping the homes to go back on sale.
Following that announcement, the company’s shares fell to its 2021 lows of $83 per share, some 58% lower compared with its all-time high of $203 per share achieved in February.
Booming housing market
Zillow leaned into buying homes just as the market peaked and consumers were paying thousands over the asking price to outbid an eager pool of buyers willing to shell out for nicer homes amid the pandemic lockdowns.
Key Banc analyst Yruma analysed 650 Zillow homes and found that 429 were now being sold below the purchase price for an average discount of 4.5%. Some of the homes were discounted by as much as 15% with three Arizona cities Tucson, Mesa and Phoenix representing the areas with the largest discounts of 6.1%, 5.3% and 4.9%, respectively.
“While we do think that Zillow's issues are likely transitory in nature, we do think it highlights the importance of strong property level and market data,” Yruma said.
Given the homes that are already underwater and mounting renovation and labour costs, Zillow is reportedly looking to limit its losses and sell some 7,000 homes its accumulated for $2.8bn, according to Bloomberg.
The catalogue of homes is likely to be sold to multiple buyers as opposed to packaging them all together in one sale, according to the report.
In the second quarter, Zillow reported $772m of revenue from its homes business on the sale of 2,086 homes at an average selling price of $370,100 per unit. At that average price per home, 7,000 units would typically sell for a total of around $2.6bn.
Zillow reports third-quarter earnings after markets close on Tuesday.
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