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While no doubt Zillow made many of these mistakes, I think the reality is more sobering that the author of the article realizes. The more grim possibility, is

While no doubt Zillow made many of these mistakes, I think the reality is more sobering that the author of the article realizes. The more grim possibility, is that Zillow got out of the house buying business, not because they weren't good enough at it, but because they _were_ good enough at it to realize that it was at the top. If buyers want more now for their house, than it can be sold for in a few months time (which is necessary for renovations and other prep for sale), then there is no ML (and no non-ML) method to make money. Either you overpay and lose money, or you don't overpay and you don't buy any houses. In that situation, the only smart play, is to get out of the market. Zillow is, no doubt, not perfect. But they have a lot of knowledge of the housing market, and they thought it was time to get out entirely. I think the author of the article either isn't able, or doesn't want, to consider that Zillow might have been exactly correct in doing so.

dsizzle 5y ago
But they lost money last quarter while the market was still rising. Seems there was some problem with their prediction process.
- sudosysgen 5y ago
  Their plan wasn't to flip homes in a month or two as far as I'm aware so that's expected if they get out.
- rossdavidh 5y ago
  Rumor is that they had to put their thumb on the scales (i.e. tweak the model) to get enough sellers to sell to them. In other words, if paying what their model actually thought was the right price, not many people sold to them. Instead of saying "our division's whole business model won't work, you should fire us", they tried to cut the margin too close, resulting in losses which got the CEO's attention to the problem. This kind of thing is difficult to confirm from the outside, of course. But that they adjusted the model to pay more towards the end is pretty widely known.
  - dsizzle 5y ago
    Do you have a reference for this? Is part of the rumor that not everyone in the organization knew this was happening?
    - rossdavidh 5y ago
      No, the rumor was just that they put their thumb on the scale. https://ryxcommar.com/2021/11/06/zillow-prophet-time-series-and-prices/ https://ryxcommar.com/2021/11/06/zillow-prophet-time-series-... "Speaking of middle managers, word on the street is that Zillow Offers put their thumb on the scale of the algorithm to make it engage in more aggressive trades. Manually adjusting an algorithm isn’t necessarily a bad thing, but you need to do it for the right reasons. And clearly that didn’t end up working out..." That not everyone in the organization knew that, is just me speculating.
      - dsizzle 5y ago
        Ah, I was trying to find that article earlier today. (I searched "Sean Spicer data science Twitter" to no avail, ha.) Actually that piece also hints at an uneven understanding of these issues across the organization: > In one tweet, I semi-joked that what happened was lower and mid level employees convinced upper management that the algorithm was 99% accurate by hiding the caveats of what “99% accuracy” means.
axg11 5y ago
While this sounds plausible, I think there are a couple of factors that work against this theory: 1) Why layoff your data science division if they are predicting with accuracy? 2a) If you have enough conviction to call the top of the market, why sell off so much housing at a huge loss? Zillow are the only participant in the residential real estate market losing money right now. 2b) If you see signals of a forthcoming housing crash, why not short the housing market? The simplest explanation is that Zillow was poorly run.
- rossdavidh 5y ago
  It may have been poorly run, and nonetheless correct that: - they could not buy houses without overpaying (relative to what they could sell them for a few months down the line) - the housing market would not recover for several years (so no need to keep that extra 25% of your labor force, especially if you anticipate a decline in revenue from real estate agents coming soon)
- shitloadofbooks 5y ago
  What mechanism can you use to short the housing market? I thought most of the stuff used in 2008 don't exist anymore/will never be offered again?
  - axg11 5y ago
    I believe there are real estate ETFs that can easily be shorted. Many of the more complex contracts and instruments still exist, there are just more limitations on how banks can invest in them.
deleted 5y ago
[deleted]
asdff 5y ago
It's land, there is no top. It's a finite resource. Buy any property in the U.S. and hold for 15 years and I would be shocked if you didn't make out even if you had 2008 in between.
- rossdavidh 5y ago
  Perhaps, although I suppose there were Japanese property buyers who thought so also. But a CEO can't run at a loss for 15, 10, or probably even 5 years before getting booted, either by the board or a hostile takeover.
- lotsofpulp 5y ago
  > Buy any property in the U.S. and hold for 15 years and I would be shocked if you didn't make out even if you had 2008 in between. Vast swaths of rural Midwest and northeast with little industry and declining population definitely did not make out, especially factoring in property taxes and the opportunity cost of not investing in VOO as a near risk free alternative.
initplus 5y ago
Zillow wasn’t aiming to build a business making bets on the housing market. They wanted to become a market maker for housing, profiting off the spread and not caring about the underlying price movements. Being a (good) market maker is still profitable in a falling market. The issue is that the housing market is just unsuitable for this strategy. Houses aren’t fungible, and they are very slow to trade. So Zillow ended up in a position where rather than clipping the ticket on spread, they were actually quite exposed to house price movements.
- rossdavidh 5y ago
  You are absolutely correct. But, in a different situation where sellers were willing to sell at a price that was likely to still look like a good idea in a few months, they would not have realized that this wasn't a good idea (yet). It was, I think, inevitable that they would get out of this, because (as you point out) the housing market is not suitable for a market-maker business. But I don't think it was inevitable that they got out at the top; they could have held on and given in to the inevitable six months or a year after the slide had begun. I think it's to the CEO's credit that they got out sooner than that.

dsizzle 5y ago

But they lost money last quarter while the market was still rising. Seems there was some problem with their prediction process.

sudosysgen 5y ago
Their plan wasn't to flip homes in a month or two as far as I'm aware so that's expected if they get out.
rossdavidh 5y ago
Rumor is that they had to put their thumb on the scales (i.e. tweak the model) to get enough sellers to sell to them. In other words, if paying what their model actually thought was the right price, not many people sold to them. Instead of saying "our division's whole business model won't work, you should fire us", they tried to cut the margin too close, resulting in losses which got the CEO's attention to the problem. This kind of thing is difficult to confirm from the outside, of course. But that they adjusted the model to pay more towards the end is pretty widely known.
- dsizzle 5y ago
  Do you have a reference for this? Is part of the rumor that not everyone in the organization knew this was happening?
  - rossdavidh 5y ago
    No, the rumor was just that they put their thumb on the scale. https://ryxcommar.com/2021/11/06/zillow-prophet-time-series-and-prices/ https://ryxcommar.com/2021/11/06/zillow-prophet-time-series-... "Speaking of middle managers, word on the street is that Zillow Offers put their thumb on the scale of the algorithm to make it engage in more aggressive trades. Manually adjusting an algorithm isn’t necessarily a bad thing, but you need to do it for the right reasons. And clearly that didn’t end up working out..." That not everyone in the organization knew that, is just me speculating.
    - dsizzle 5y ago
      Ah, I was trying to find that article earlier today. (I searched "Sean Spicer data science Twitter" to no avail, ha.) Actually that piece also hints at an uneven understanding of these issues across the organization: > In one tweet, I semi-joked that what happened was lower and mid level employees convinced upper management that the algorithm was 99% accurate by hiding the caveats of what “99% accuracy” means.

axg11 5y ago

While this sounds plausible, I think there are a couple of factors that work against this theory: 1) Why layoff your data science division if they are predicting with accuracy? 2a) If you have enough conviction to call the top of the market, why sell off so much housing at a huge loss? Zillow are the only participant in the residential real estate market losing money right now. 2b) If you see signals of a forthcoming housing crash, why not short the housing market? The simplest explanation is that Zillow was poorly run.

rossdavidh 5y ago
It may have been poorly run, and nonetheless correct that: - they could not buy houses without overpaying (relative to what they could sell them for a few months down the line) - the housing market would not recover for several years (so no need to keep that extra 25% of your labor force, especially if you anticipate a decline in revenue from real estate agents coming soon)
shitloadofbooks 5y ago
What mechanism can you use to short the housing market? I thought most of the stuff used in 2008 don't exist anymore/will never be offered again?
- axg11 5y ago
  I believe there are real estate ETFs that can easily be shorted. Many of the more complex contracts and instruments still exist, there are just more limitations on how banks can invest in them.

deleted 5y ago

[deleted]

asdff 5y ago

It's land, there is no top. It's a finite resource. Buy any property in the U.S. and hold for 15 years and I would be shocked if you didn't make out even if you had 2008 in between.

rossdavidh 5y ago
Perhaps, although I suppose there were Japanese property buyers who thought so also. But a CEO can't run at a loss for 15, 10, or probably even 5 years before getting booted, either by the board or a hostile takeover.
lotsofpulp 5y ago
> Buy any property in the U.S. and hold for 15 years and I would be shocked if you didn't make out even if you had 2008 in between. Vast swaths of rural Midwest and northeast with little industry and declining population definitely did not make out, especially factoring in property taxes and the opportunity cost of not investing in VOO as a near risk free alternative.

initplus 5y ago

Zillow wasn’t aiming to build a business making bets on the housing market. They wanted to become a market maker for housing, profiting off the spread and not caring about the underlying price movements. Being a (good) market maker is still profitable in a falling market. The issue is that the housing market is just unsuitable for this strategy. Houses aren’t fungible, and they are very slow to trade. So Zillow ended up in a position where rather than clipping the ticket on spread, they were actually quite exposed to house price movements.

rossdavidh 5y ago
You are absolutely correct. But, in a different situation where sellers were willing to sell at a price that was likely to still look like a good idea in a few months, they would not have realized that this wasn't a good idea (yet). It was, I think, inevitable that they would get out of this, because (as you point out) the housing market is not suitable for a market-maker business. But I don't think it was inevitable that they got out at the top; they could have held on and given in to the inevitable six months or a year after the slide had begun. I think it's to the CEO's credit that they got out sooner than that.