2 Reasons Zillow Selling 7,000 Houses Is 'A Clear Negative' For Investors

Zillow Group Inc Z shares dropped another 9.7% on Tuesday morning and are now down 32.5% overall in the past six months after the company reportedly sold 7,000 houses to institutional investors.

What Happened? Just weeks after Zillow announced it would be pausing its iBuying of U.S. houses, Bloomberg reported Zillow has actually sold 7,000 homes from its inventory. The asset sale seems to contradict Zillow’s initial claims that the iBuying pause was due to high demand and operational constraints.

Related Link: Why Zillow Homebuying Halt 'Might Be Beneficial' In The Near-Term

Why It’s Important: On Tuesday, Bank of America analyst Nat Schindler said the decision to sell 7,000 houses could be a bad sign for Zillow investors for one of two reasons.

First, it could be a signal Zillow is concerned about the trajectory of the U.S. housing market and is willing to dump homes quickly to reduce its exposure. Schindler also said it could be a sign Zillow has taken an undisciplined approach to its iBuying execution and is taking the drastic step to sell inventory at a potentially discounted price.

Schinder notes that the $2.8 billion sales price for the 7,000 houses reported by Bloomberg represents an average sales price of $400,000, below the $426,000 average listing price in Bank of America’s sample Zillow portfolio.

“We do not know whether the decision to sell 7,000 homes represents an extended pause or outright exit from the iBuying business but we see it as a clear negative for ZGs execution and capital discipline (homes purchases are typically funded through debt) as well as the iBuyer market as whole,” Schindler wrote.

Bank of America has an Underperform rating and an $85 price target for Zillow.

Benzinga’s Take: This type of news is the last thing investors want to hear from Zillow right before it reports third-quarter earnings on Tuesday afternoon. At this point, investors are hopeful some clarity from management could trigger a relief rally once the market knows more about why Zillow has seemingly reversed course so aggressively on its iBuying.

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