Zillow-Reopens-the-Door-to-iBuying

Zillow says it will team up with Opendoor to help fight the impending downturn of the real-estate market

Zillow is getting into bed with recent archrival Opendoor—or is it the other way around? Either way, both platforms could use somebody to lean on.

After disclosing it would exit its own automated home-buying and -selling business last year, Zillow Group is now essentially getting back into iBuying virtually risk-free, leveraging Opendoor’s technology in order to do so. The two online real-estate giants both said in conjunction with their respective earnings Thursday that they have entered into a multiyear exclusive partnership such that home sellers on Zillow’s platform will be able to request an offer on their home directly from Opendoor.

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It could be a smart move for everyone involved. Opendoor wants to be a nationwide, all-markets company. To get there, it certainly can benefit from Zillow’s market-leading 234 million unique users. Meanwhile, after sunsetting its own iBuying business, Zillow has pivoted to a “super app” strategy and is now looking to own both sides of home transactions. It has historically been a place where home buyers come to start their journey, but Zillow can leverage pure-play iBuyer Opendoor’s home sellers to get a bigger piece of the other side.

Much like how Uber Technologies has been adding taxis and travel bookings to its platform, generating a referral fee, the hope is that by baiting new customers with other platforms’ solutions, Zillow can ultimately serve them as well. But it is still a somewhat painful validation to offer Opendoor, a company that has thus far succeeded in a risky business where Zillow failed spectacularly.

Meanwhile, both companies issued underwhelming guidance for the third quarter Thursday afternoon. And at this point, the unknown is really just how quickly and how sharply the housing market will fall. In its first-quarter shareholder letter, Opendoor had tried to reassure investors by saying that, while the market may moderate “beyond what is normal from seasonal trends,” real-estate prices have tended to move slowly in market declines. Just three months later, the company is saying the pace of deceleration in home-price appreciation is already steeper than expected. Managing the current volatility, Opendoor said, will require “a highly dynamic and rigorous approach to managing risk and overall inventory health.”

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Meanwhile, both companies issued underwhelming guidance for the third quarter Thursday afternoon. And at this point, the unknown is really just how quickly and how sharply the housing market will fall. In its first-quarter shareholder letter, Opendoor had tried to reassure investors by saying that, while the market may moderate “beyond what is normal from seasonal trends,” real-estate prices have tended to move slowly in market declines. Just three months later, the company is saying the pace of deceleration in home-price appreciation is already steeper than expected. Managing the current volatility, Opendoor said, will require “a highly dynamic and rigorous approach to managing risk and overall inventory health.”

Zillow offered a starker outlook Thursday, noting that buyer sentiment is now at a 20-year low and that it expects total industry transaction dollar volume in the second half of the year to “meaningfully contract” year over year. That is bad news for both businesses since, as Zillow candidly pointed out, they are “ultimately driven by transactions.”

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How bad will things get? Opendoor said, in part because of how broadly it is reducing the prices of its existing inventory in line with the market, it now expects third-quarter revenue to come in 43% below Wall Street’s forecast. The company also said it expects to swing to a loss on the basis of adjusted earnings before interest, tax, depreciation and amortization. Analysts had been expecting another quarter of profits on that basis. Zillow, meanwhile, called for Premier Agent revenue, its agent ads business which is now its largest source of revenue after ditching iBuying, to come in 22% below Wall Street’s expectations during the quarter at the midpoint with adjusted Ebitda 53% below analysts’ forecast at the midpoint.

YipitData hints at just how precipitously market conditions already have begun to deteriorate. The firm estimates 68% of Opendoor’s listings saw at least one price cut in July—up from 17% in February. Opendoor, meanwhile, said it ended the second quarter with over 17,000 homes on its balance sheet, up 143% from the same period last year and 27% even from last quarter.

It might need to reduce inventory quickly, but that could be tricky: Despite record-low home-inventory levels in the U.S. last year, consumers transacted at a rate 15% higher than they had in the previous 11 years. Data from the U.S. Census Bureau suggests Americans move just once every six to seven years, on average. All that implies a natural slowdown in transaction volumes is coming, even without elevated mortgage rates and a possible recession.

With all that as a backdrop, it is no surprise online real-estate competitors are cozying up to take on whatever the market is about to throw their way.