Zillow stock dives ahead of earnings; analyst report says 66% of homes it bought are now ‘underwater’

Zillow Offers is the company’s “iBuyer” service that aims to digitize the homebuying experience from start to finish. (Zillow Photo)

A day ahead of its third quarter earnings report, Zillow Group’s stock took a hit on Wall Street as a new analyst report highlighted how many homes purchased by the company are now underwater.

Class A shares of Zillow Group stock were down 8.6% on Monday to close at $96.62.

The latest dive comes two weeks after the Seattle-based real estate company announced that it would not sign any new contracts to buy homes via its home-buying and selling service Zillow Offers. The company blamed a “backlog in renovations and operational capacity constraints” and stock dropped more than 10% on Oct. 18.

KeyBanc analyst Edward Yruma said in his new report that most of the homes the company had purchased — to fix up and flip — were now worth less than what Zillow paid for them.

“Zillow may have leaned into home acquisition at the wrong time, and we believe earnings may be at risk due to its current home inventory ($1.17 billion at 2Q21),” Yruma wrote in a note to clients, as reported by MarketWatch.

Yruma’s note said an analysis of 650 homes in Zillow’s inventory found that 66% are currently listed below the purchase price at an average discount of 4.5%. Cities with the highest percentage of homes in this situation include San Diego (94.3%), Phoenix (93.4%) and Mesa, Ariz. (92.6%).

Zillow Offers is the company’s “iBuyer” service that aims to digitize the homebuying experience from start to finish and accelerate the entire process. It competes with other iBuyer services from Opendoor, OfferPad, and Redfin, among others.

Bloomberg reported Monday that Zillow is looking to sell about 7,000 homes as it seeks to recover from a fumble in its high-tech home-flipping business which saw it buy too many houses. The company is seeking roughly $2.8 billion for the houses.

Wedbush analysts Ygal Arounian and Chad Larkin said last month that the Zillow’s pause in home buying “leaves many unanswered questions in the near term” and as a result, Zillow will “cede material market share to its peers.”

Zillow — now valued at $24 billion — will report third quarter earnings Tuesday afternoon. Check back with GeekWire for details.

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