Zillow Proves a Hypergrowth Model Won't Work in Housing
The company learned a harsh lesson when its starry-eyed promises to investors ran up against a volatile real estate market.
It’s harder than it looks.
Photographer: Saul Loeb/AFP via Getty Images
Zillow Group Inc.'s decision to exit its home-buying business reflects a tension between investors who are expecting tech-like growth and scale from a disruptive business model, and the basic nature of a volatile real estate market. Home-valuation models respond to market conditions, sometimes recommending to buy more homes, while pulling back at other times. When that guidance conflicts with its mission, what's the right decision for a company to make?
Zillow has blamed its blunder on bad algorithms, but it's more likely that the algorithms just didn't agree with its growth plan, so the company chose to override its pricing model and go for the scale that its investors craved and expected — a decision that turned out to be a mistake. And they paid the price.
When the company announced its ambitious "Zillow 2.0" plans in February 2019 to buy and sell homes in a major way, it targeted $20 billion in revenue in three to five years, with profitability only coming once the company had hit a certain scale. That's the lens to use when viewing their errors over the past several months. Zillow's stock soared almost 500% over the ensuing two years as the business line began to grow.