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Zillow's Taking a Break From Its Homebuying Business (But There's Good News)

Zillow (NASDAQ: Z) (NASDAQ: ZG) is trying to disrupt the home buying and selling market by doing the buying and selling itself, but the business has run into a bit of a snag. According to an announcement from the company on Monday morning, Zillow has so much demand from homeowners looking to sell their homes that it can't keep up.

The announcement is a double-edged sword for Zillow. Demand for Zillow Offers appears to be strong, but the company can't keep up with demand because it can't close homes or renovate them fast enough. It's a good problem to have short-term if Zillow can build out long-term capacity and grow into the disruptive housing stock it hopes to be.

Image source: Getty Images.

Zillow's "pause" on Offers

When Zillow picked up its home buying earlier this year, it seemed to indicate an aggressive growth plan for the company. Homes purchased increased from 86 in second-quarter 2020 to 808 in third-quarter 2020 all the way up to 3,805 homes in Q2 2021. We don't yet know how many homes the company bought in Q3 2021, but we'll find out in a few weeks when the company announces earnings. To fund the business, the company sold $1.15 billion in bonds to investors, which should ease any strain on the balance sheet.

Zillow would clearly like to grow the home buying and selling business quickly, but it's not immune to market challenges related to housing and renovations. In Monday's announcement, COO Jeremy Wacksman said:

We're operating within a labor- and supply constrained economy inside a competitive real estate market, especially in the construction, renovation and closing spaces. We have not been exempt from these market and capacity issues and we now have an operational backlog for renovations and closings. Pausing new contracts will enable us to focus on sellers already under contract with us and our current home inventory.

The pause won't last forever. Management said that new home acquisitions will be paused until the end of the year, but it could be turned on after the current backlog subsides.

An opening for competitors?

Zillow's competitors are seeing this pause as an opening. Opendoor Technologies (NASDAQ: OPEN) and Offerpad (NYSE: OPAD) released statements saying they were still open for business. Redfin's (NASDAQ: RDFN) home buying business could also see an incremental boost.

Shares of Zillow sold off on the news of the home buying pause, but before we react too much it's worth seeing what the numbers look like. Zillow may have simply gotten too much demand too quickly because of its name recognition. We'll want to compare the pace of growth for Zillow Offers to companies like Opendoor and Redfin. For perspective on their current scale, Opendoor is already the industry leader with 8,494 homes acquired in the second quarter of 2021, while Redfin sold 292 homes in the quarter.

This industry will take a long time to reach a mature phase, and Zillow may be having growing pains right now, which competitors could take advantage of short-term.

A buying opportunity for Zillow investors

The market may not like what it heard from Zillow on Monday, but when I dig into the release I see that Zillow has strong demand for the Offers business and needs to tighten up its own operations before expanding too quickly. The most important thing is that demand is strong, and if management can hire enough people and build out more automated systems, this could be a buying opportunity in a long-term growth journey for Zillow.

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Travis Hoium owns shares of Zillow Group (C shares). The Motley Fool owns shares of and recommends Opendoor Technologies Inc., Redfin, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends the following options: short November 2021 $65 puts on Redfin. The Motley Fool has a disclosure policy.


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