Opinion: Zillow believed he could rule the housing market. It was very bad.

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The Zillow Group had a wealth of data, access to millions of dollars of capital and executives with the pride of believing that they could use these tools to outsmart both a volatile housing market and startups specializing in buying and selling homes.

They failed and lost over half a billion dollars in the process.

Zillow Z,
-10.24%

ZG,
-11.52%
announced on Tuesday that she would be leaving the so-called iBuying business for good, after embarking on an unprecedented home buying spree that saw the internet-based real estate services company buy more than 14,000 homes in just six month. It was only after this frenzy that the executives at Zillow realized they had overspent and were sitting on massive losses in the months to come.

The result is more than $ 550 million in combined losses for the third and fourth quarters, and the dissolution of a company that had grown rapidly – layoffs will reduce 25% of all Zillow staff. The board decided on Tuesday to kill the nearly four-year-old Zillow Offers company and sent its co-founder and chief executive to the field.

“Our goal was to become a market maker, not a risk taker in the market, and this was underpinned by the need to accurately forecast house prices three to six months into the future,” said the CEO of Zillow, Rich Barton, on a conference call. Tuesday.

The algorithm that Zillow used to forecast house prices going forward – in a real estate market that has been volatile amid the pandemic – has proven problematic. Bloomberg recently reported that Zillow tweaked its algorithms to make higher bids as the real estate market continued to heat up, but the move turned out to be fatal.

Barton described the real estate market as initially frozen during the pandemic, then turning into a problem of supply and demand, resulting in sharp price swings. The company said it experienced “higher conversion rates than previously seen in Zillow offers due to the unintentional purchase of homes priced higher than our current estimates of future sale prices,” resulting in a depreciation of $ 304 million in the third quarter.

“Our observed error rate has been much more volatile than we expected and makes us look a lot more like a leveraged real estate trader than the market maker we wanted to be,” he said. declared.

However, these comments sound much less like problems in the real estate market and more like a problem with Zillow’s algorithms and / or those who run the business.

“My feeling is that this is a Zillow problem,” Jason S. Helfstein, head of internet research at Oppenheimer & Co., said bluntly in an email to MarketWatch.

Some rivals have sought to capitalize on Zillow’s woes, with Opendoor Technologies Inc. OPEN,
-14.67%
tweet that he’s open for business.

“We have demonstrated strong growth and the economy of unity, and we are motivated to help homeowners nationwide move with ease, certainty and speed,” the company said, looking confident ahead of its own profits. on November 10, the same day as its rival Offerpad Solutions. Inc. OPAD,
-2.75%.

Redfin Inc. RDFN,
-4.93%
Told MarketWatch in a statement that he remains committed to iBuying, while avoiding saying much ahead of its profits Thursday afternoon. Redfin also noted that while the competition is still fierce – Opendoor’s offerings being particularly aggressive in 2021 – its biggest problem has been hiring labor to renovate homes.

Investors will continue to monitor the market for the next few days to see if Zillow’s move is a precursor to further bad news in the property market and other iBuyers. But Zillow’s news is also a warning against over-adhering to algorithms. Facebook FB,
-0.58%
is already under attack for its algorithms that prefer posts that sharpen users and elicit emotional responses, while Zillow’s algorithms appear to be driving decisions that cost hundreds of millions of dollars and over a thousand dollars. jobs.

But people are writing and controlling these algorithms, and one of the two components of this formula has gotten way overconfident this year. If the current volatility in the real estate market is leading other iBuyers with similar algorithms – and perhaps even less data than Zillow – to more “black swan events,” as Barton described it, investors can blame humans in charge.

MarketWatch reporter Jacob Passy contributed to this report.

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