Zillow is almost done selling homes, but inventory has fallen because the hard part is still to come

Zillow Group Inc. is nearing the end of a firestorm for its eBay business with a flash sale of all the homes it has bought, but plans for the future sent shares tumbling in extended trading Thursday.

Zillow ZG
+ 0.21%

+ 0.59%
Last Thursday, second-quarter revenue was down $8 million, or 3 cents, on revenue of $1.01 billion from $1.31 billion a year earlier. After adjusting for stock compensation and other effects, the real estate services business reported earnings of 47 cents a share, up from 44 cents a year ago.

Analysts on average expected Zillow to report adjusted earnings of 35 cents a share on sales of $985 million, according to FactSet. Shares fell more than 8% in afternoon trading after the results were released Thursday, after closing up 0.2% at $38.13.

Zillow is expected to continue to experience significant revenue declines as it exits the Ibbing business, and to continue a period of frenetic sales of homes it bought at high prices last year. At the end of the second quarter. For the third quarter, executives forecast revenue of $431 million to $461 million, a sharp decline from $1.74 billion in the same period a year ago and well below analysts’ average estimate of $563 million.

Zillow executives’ plans for recovery after abandoning the iBuying effort will focus on building a “super app” that can help its two other divisions — Internet, Media and Technology, or IMT, as well as the mortgage business — and help buyers. Sellers navigate the entire home buying and selling process. But the decline in existing home sales and the rise in home loan rates are creating a housing market that managers believe is “uncertain,” saying on Thursday that they should do so in a less positive way.

“Homes today are very hard to afford,” Zillow executives said in a letter to shareholders Thursday. “Rapidly rising mortgage rates have exacerbated supply challenges created by unprecedented home price appreciation. This has pushed buyer sentiment to a 20-year low, and dampened buyer demand, cooling an already red-hot seller’s market.”

“Ultimately, when all of these factors combined, the housing industry’s year-over-year total dollar volume in Q2 was disrupted by various leading indicators. Although demand indicators were more stable in July compared to June, we expect the second half of 2022 overall industrial transaction dollar volume to be meaningful.
“Contract from year to year.”

Zillow showed off how it expects to execute on its “super app” plans Thursday in two separate announcements — from iBuyer Opendoor Technologies Inc. A multi-year partnership with OPEN,
And a new tool that lets home shoppers browse five different markets at once.

Zillow’s problem in trying to create its “super app” depends on advertising costs and the activity of other real estate professionals, who may want to reduce their own costs as the housing market cools during the pandemic. That’s why RBC analysts warned last week that this could be a truckload quarter in which Zillow executives dish out bad news and “definitely reset” Wall Street estimates.

The analysts said two-thirds of the agents they spoke to had cut their spending with Zillow, or planned to, up from 56 percent in April. With summer over and macroeconomic conditions picking up after months of stagnation, the situation could get worse before it gets better.

“Lead rates are declining by the quarter (most) and conversion is finally taking its toll.
agents and is driving bigger cuts than we’ve had in the past,” the analysts wrote, maintaining an outperform rating but cutting their price target to $46 from $50. “We trust some. [Premier Agents] The 3 months of declining homebuyer spending that we think started in February haven’t stopped, but the pain of that continuing trend is now in its 6th month.
These improved findings.”

IMT segment revenue was flat in the second quarter at $475 million, missing the average analyst estimate of $482 million, and loans generated $29 million in revenue, down from $57 million a year ago, and $36 million below the average analyst estimate.

Forecasts for those two segments also fell short of analysts’ expectations. Zillow executives forecast third-quarter IMT revenue of $409 million to $434 million, compared with an average of analysts modeling $433 million, and mortgage revenue of $22 million to $27 million, about half the average analyst estimate of $45 million.

Zillow’s stock has fallen 65.9 percent in the past year, as has the S&P 500 index SPX;
It decreased by 4.2 percent.

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