Fallout from Zillow Catastrophe Hits Scottsdale

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Last week, Zillow formally announced what could only be seen as an unmitigated corporate disaster: it’s algorithm, which had been automatically purchasing thousands of homes around the country with the intent of selling them at a higher price, had misfired in a big way. The strong majority of its algorithmic sales were for less than what they purchased the homes for, leading to a $330 million loss last quarter.

As a result, Zillow has announced that it is shuttering it’s Zillow Offers division, its “iBuying” division which performed these buys and sells. This has generated a massive wave of uncertainty in the entire industry, as a major player in the market has gone from large buyer to larger seller.

The reverberations have already hit Scottsdale, as Zillow announced that it would be laying off 24 people from its Scottsdale office as a result. But with 300 Zillow employees in the Phoenix market and the company announcing a 25% reduction in their workforce, there may be more shoes to drop in the area.

These circumstances could also have a material impact on both homeowners and prospective homeowners around the Valley. iBuyers were estimated to be around 10% of recent purchases in the Arizona market, routinely winning bidding wars and driving up comps for all other homes. The absence of this large player in the market not only takes away a pricing support, but may spook other large buyers into selling off their properties as well. This could be good news for prospective homeowners priced out of the market, but obviously is not favorable for current homeowners.

While there are no indications that this is a repeat of the last housing crash, this is no doubt a concerning sign, and may very well kick off a housing slump in one of the most overheated markets in the country.