Incident: Scaling a price the forecast could not carry

Module 12 · Incident file · About 35 minutes

What happened

On 2 November 2021 Zillow Group, the US property website, told shareholders it would wind down Zillow Offers, its business of buying homes directly from sellers and reselling them (Zillow Group, Q3 2021 Shareholder Letter, SEC Form 8-K exhibit 99.3, 2 November 2021). The letter explains the original bet: "our aim was to become a market maker, not a market risk taker, underpinned by the need to forecast the price of homes accurately three to six months into the future." Zillow had set "unit economic target guardrails publicly of +/- 200 basis points of breakeven economics", that is, within 2% of breaking even on each home.

The figures below are from that letter and the press release filed with it (Zillow Group, press release, exhibit 99.1, 2 November 2021), in US dollars. In the third quarter Zillow recorded "a $304 million write-down on inventory", "as a result of purchasing homes at higher prices than our current estimates of future selling prices". It sold 3,032 homes and ended the quarter with 9,790 in inventory and 8,172 under contract. It expected further losses of "$240 million and $265 million" in the fourth quarter, mainly on homes it was already committed to buy, and the wind-down would include "a reduction of Zillow's workforce by approximately 25%". Two weeks earlier it had suspended signing new contracts to the end of the year.