Whether you’re a buyer or a seller and regardless of what your product, service or asset is, for everything, there’s a price point that’s deemed fair. That’s the way all commerce works (it’s even implied in barters, right?).
Now, if I’m selling you something — let’s say a house, for example — and I have a price in mind for it that I think is beneficial to both of us and you agree, wonderful, done deal!
But let’s say I have this price in mind for my house, but then you come to me and offer me 5-10% more than I’d have accepted.
For me? Splendid! For you? Not so good.
Multiply that thousands of times over for tens of thousands of dollars each time and there’s a name for this kind of error: Zillow.
Zillow didn’t ask for my opinions, so I’ll share them with you instead
Before I go any further, let it be said that there are brilliant people at Zillow, from the top of the company through every corner and crevice, so this is not intended to rub salt in their wounds. Nor do I have any information beyond what I’ve heard and read in the news — I haven’t read the company’s annual reports, nor do I attend shareholder meetings. What I do have, though, is relevant professional experience that I believe can shed some additional insight on what went wrong, as there are lessons here that are valuable to just about every business operating today.
I think it’s worthwhile to explore it and I hope you do, too, because I’m approaching it as someone who is:
- A seasoned residential real estate professional and entrepreneur who built a multi-billion-dollar luxury brokerage;
- An experienced professional trader and market maker;
- A leader of a tech company that’s built a proprietary algorithm for the residential real estate market.
Problem #1: Data was used to fit the plan, rather than the other way around
“The first quarter delivered home-sale profits that were more than twice as high as anticipated, the company said…The company’s algorithm, which was supposed to predict housing prices, didn’t seem to understand the market. Zillow was also behind on its target for home purchases.
By the summer, it had the opposite problem, the company later acknowledged. It was paying too much money for homes, and buying too many of them, just when price increases were starting to slow.”
Just how far off was Zillow? The company’s market cap was more than $48 billion in February. Today, it stands around $16 billion.
Several industry experts and analysts who were interviewed for the article also back the point that AI can only account for so much right now although, in my opinion, Zillow would likely have done better had they stuck a little closer to what their data actually showed them, rather than manipulating their algorithms (as is proposed by sources quoted in the WSJ article). As the article says:
“Staffers grew concerned Zillow was paying too much, people familiar with the matter said. Analysts whose job it was to confirm the prices of homes found that they were routinely overruled, those people said, because the company had retooled the system to raise the analysts’ suggested prices. Automatic price add-ons coded into the company system, including one called the ‘gross pricing overlay’ that could add as much as 7%, would boost offering prices to get more home sellers to say yes.”
Given this, AI has gotten a bit of an unfair shake in the whole Zillow collapse.
Still, what it can’t do is an account for the nuances of human behavior which, as I’ve said ad nauseum in this blog, is the undeniable and unpredictable factor that has thrown every agent and every buyer and every seller for a loop at some point.
This brings me to our next point
Problem #2: They didn’t account for buyer emotions and behaviors
Friends, how many times do I have to say it? Read the tape! If only Zillow’s leaders had asked me, that’s what I’d have told them!
I spent 10 years building one of the world’s most successful luxury brokerages and I could never fully account for individual human behaviors. And every single real estate professional I’ve ever known will say the same: There’s simply no way to account for emotion, personal taste, individual likes and dislikes and the thousands of other nuances that determine whether someone will buy or walk.
But what we’ve gotten pretty good at is assessing the zeitgeist.
Folks, if you pay attention to what’s happening in the moment, signs are always there, the information is always right in front of you. Watch what people are doing, listen to what they say and you can do a pretty good job of assessing the general mood.
And it seemed clear that buyers were getting tired of spending so much on homes.
Problem #3: They may have let ego and greed lead
According to the article:
“In the spring, around the time that Zillow started worrying about the accuracy of its algorithm, company executives and managers came together for a tense meeting, according to a person who attended.
As first-quarter numbers trickled in, it became clear that even though it was making more money than anticipated, the company was on track to significantly miss its annual target for the number of homes it wanted to buy. Worse, it was falling behind its top competitor, Opendoor.”
You’d be hard-pressed to find a company as successful as Zillow that doesn’t have some measure of egotistical and even greedy leadership — it’s the nature of the beast. You’d also be hard-pressed to find major investors and shareholders who don’t also share those same characteristics. Still, if only I had a nickel for every brilliant leader that got tripped up by these qualities…
Zillow was an enormously successful company, a household word, as it built out its platforms and generated revenue hand-over-fist.
But I suppose over time, that kind of success can get boring. Instead, Zillow’s leaders wanted to be market makers (here’s a quote that was highlighted in the WSJ article
“Our observed error rate has been far more volatile than we ever expected possible,” Chief Executive Rich Barton told shareholders this month. “And makes us look far more like a leveraged housing trader than the market maker we set out to be.”
Zillow set out to be a market maker, but to do that you must have the ability to make the market and move it around or hedge. You can’t be a market maker unless you can make markets.
I don’t like to see smart people taken down, but I’ll be surprised if there aren’t calls for accountability in the coming weeks (there likely already are). What that means for Zillow and where it goes from here remains to be seen.
It begs a lot of questions: Didn’t they see that entering the buying game when the market was already overheated was a recipe for disaster? How big did Zillow have to get to finally be satisfied? When is enough enough? Is there ever such a point?
Conclusion: If I was King of Zillow, here’s what I’d have done
As they say, hindsight’s 20/20. Acknowledging how little I know about what really transpired on the inside, from my perspective, I still can’t understand Zillow’s knee-jerk reaction: selling off thousands of homes at a loss, laying off 25% of their staff and losing 65% of their market-cap value. It all seems extreme and makes me wonder if there’s even more here than we realize.
So, if I was King of Zillow, what would I have done?
To me, the biggest question is why Zillow doesn’t hold their assets (aka, the thousands of homes for which they’d already paid), keep them on the balance sheet and rent them out? They’re in volatile but high-demand markets like Phoenix and Las Vegas, so why not leverage that opportunity? And even if the argument is that they’re not in the rental business, how hard would it have been to buy or contract with some in those locations and have them run the operations for the company? To me, that seems to make a lot more sense, financially and logistically, than what they did.
Still, despite such enormous miscalculations, I believe that Zillow will rebound (to what degree, I can’t say yet) and its leaders will, too.
Here’s why: Because just as building enormously successful companies takes ego and greed, it also takes tremendous resilience.
And, most of all, it takes an appreciation and acceptance of failure. I was fortunate to learn that early in life from my parents and I have a feeling that Zillow’s team learned that lesson early on, too.
And, in truth, there can be no great success without it.