Is The iBuying Model Doomed To Fail In The US Housing Market?

Zillow Group Inc Z shares have been crushed since the company announced a pause and subsequent shutdown of its U.S. home iBuying program.

At first glance, Zillow exiting the iBuying market might look like a win for completing iBuying stocks, such as Opendoor Technologies Inc OPEN, Offerpad Solutions Inc OPAD and Redfin Corp RDFN. However, Herb Greenberg, senior editor at Empire Financial Research, said this week that the problem with iBuying in the U.S. market may be bigger than just Zillow.

Greenberg said a recent conversation he had with Rohit Malik, CEO of Indian prop-tech startup Clicbrics, has him questioning the viability of a national U.S. iBuying program.

Related Link: Zillow Stock Sinks After Q3 Earnings: 7 Analysts React To iBuying Shutdown

India vs. U.S.: Malik said there are several reasons house and apartment flipping is much easier in India than in the U.S.

First, almost all the apartments for first-time buyers in India are virtually identical and sell in a range of between $70 and $250 per square foot. Second, Malik said high Indian interest rates make it difficult for developers to sit on properties and wait for the highest possible bid. Finally, India has no version of the U.S. Multiple Listing Service (MLS), making data on selling prices much harder to come by.

Greenberg said that data scarcity provides a critical barrier to entry for most potential Indian house flippers.

“In other words, it's a model with a moat — the exact opposite of iBuyers in the U.S., where anybody with the cash, connections, and/or risk tolerance can enter the business,” Greenberg wrote.

Data Is The Enemy: That abundance of U.S. housing data would seemingly be good news for iBuying algorithms, but Greenberg said it’s difficult to get accurate data on factors like upgrades, remodels and styling that can make two otherwise comparable houses sell for very different prices.

Malik says U.S. iBuyers will likely face major problems in the long term given home buyers and sellers will become savvier and have access to even more housing market data in the future.

“When housing starts to cool, Malik believes the iBuying model could find itself stretched,” Greenberg wrote.

Benzinga’s Take: In theory, iBuying could work well in U.S. regions or neighborhoods that are newer and have more uniform housing. When the next housing market downturn hits, investors will likely get a clearer picture of whether the real problem with Zillow’s iBuying business was Zillow’s algorithm or the iBuying business model as a whole.

Image by Mohamed Hassan from Pixabay