Zillow Is Just Getting Started
Zillow’s December results are evidence that the company is transforming residential real estate. Zillow beat expectations across the board and raised guidance for March. Most impressively, all indications suggest the company’s true growth driver, Zillow 2.0, a transaction-based model, is just getting started. Today, less than 1% of US homes are bought and sold online, and we anticipate Zillow to be a major beneficiary of the undeniable growth in iBuying over the coming decades. Loup is an investor in Zillow based on our opinion that the company can increase in value 3x over the next five years.
Takeaways from the quarter
- Honoring Zestimate wins consumer trust: Zillow indicated that going forward, the Zestimate will act as a standing offer on your home for homeowners looking to sell directly to Zillow. This is important for two reasons. First, it creates a direct link between Zillow’s large, vastly under-monetized audience and more iBuying volume. Essentially, Zillow hopes to leverage their ownership of the top of the funnel to drive a lower customer acquisition cost, which should lead to higher margins. Second, you need a clear price to transact online, and honoring the Zestimate will deliver on that requirement. Sellers are often counseled by real estate professionals that accepting an iBuying offer leaves money on the table, despite the fact that historical data suggests that the cash offers from iBuyers are within about 1% of the home’s value. Standing behind the Zestimate would alleviate that objection and win trust with consumers.
- Traffic = flywheel: Monthly users increased 16% y/y to 201m. This compares to 20% growth in Sep and 12% in June. In aggregate, Zillow had 9.6B visits across its websites and apps in 2020. For a fun point of perspective, that suggests every person in the US visited Zillow 29 times last year. The bottom line is that control of the top of real estate search funnel means Zillow can put money that they would otherwise spend on marketing and customer acquisition toward making better offers on homes and driving higher iBuying volume.
- Zillow 2.0, or iBuying, moving in the right direction. The company sold 923 homes in December, bringing the 2020 total to 5,337 homes. Additionally, Zillow purchased 1,789 homes, which is equivalent to the pre-pandemic levels of December 2019. Zillow went through a prolonged freeze on purchasing new homes in the middle of the year that resulted in significant inventory drawdown. Keep in mind these numbers are still nascent, given ~5.5m homes are sold in the US every year. Zillow Offers was the biggest factor for increased guidance in March, with the expectation that Homes revenue will nearly double q/q from $304m to $595m in March.
- Improving unit economics quickens iBuying flywheel: Starting from the top, the Homes (iBuying) segment includes costs of property acquisition, renovation, holding, and selling. Each of these costs showed a sequential decrease in December, marking the first time this segment’s return after interest expense was positive. The takeaway from the improving Homes unit economics is that the flywheel is working, driven by operational efficiencies that come with experience and scale. These efficiencies can squeeze costs out of the iBuying process, ultimately giving Zillow the opportunity to make better offers to sellers, which in turn speeds up the iBuying flywheel.
- Inventory: Zillow reiterated its in-house projection of 6.9m US homes sales in 2021, up 21% from an estimated 5.6m sales in 2020. This 21% growth is more aggressive than other industry estimates, which put the number in the mid-single digits. While national housing inventory is tight, Zillow is enabling faster property discovery and lowering the home time on market (an average of 17 days in December compared to 42 in December 2019). In the end, home sales can increase even in a tight inventory environment.
- IMT EBITDA margins expanded in December, but the company reiterated their September comments that they expect investments to weigh slightly on IMT margins going forward. We think this is the right move given the scale of the opportunity with Zillow 2.0 and expect them to use proceeds from Zillow 1.0 to fund the transition to Zillow 2.0.
- ShowingTime acquisition: Zillow acquired ShowingTime, the market share leader in scheduling in-person home tours, for $500m. This is an example of the subtle ways Zillow will continue to take friction out of the home transaction.
High level on Zillow 2.0
Zillow 2.0 is an end-to-end real estate transaction platform with the aim of providing “one-click trade-in Nirvana” for home buyers and sellers. This means taking the disjointed and friction-filled home buying and selling process, that involves numerous parties with various incentives, and bringing it all under one roof. The segments of Zillow 2.0 include discovery, brokerage, mortgage, closing services, renovation, and moving services. During the earnings call, CEO Rich Barton said all the pieces are in place for Zillow 2.0 and that the company is “just getting started.” We agree.
Our long-term thesis on Zillow
Residential real estate represents one of the largest markets that is virtually untouched by technology today. There are about 140M homes in the US, with a combined value of $33.6T. Each year there are roughly 5.5M residential real estate transactions, triggering an exchange of $1.9T in value.
The real estate transaction, which is really the hub of a group of transactions, including items like mortgage, title, escrow, and moving, is a byzantine, outdated, and inefficient process that ultimately hurts the consumers involved. We believe iBuying, which involves a company buying homes directly from sellers as is, making improvements, holding them as inventory, and re-selling them to eventual buyers, promises a radically simplified solution to this process and a potentially transformational investment area.
We’re investors in Zillow based on our belief that over the next ten years it will help reinvent the process of buying, selling, and financing residential real estate. From less than 1% of homes bought and sold in the US in 2020, we believe iBuying will account for about 10% of all transactions by 2030. The writing is on the wall that younger generations prefer digital solutions optimized for user experience. Millennials and Gen Z account for more than 40% of the US population, and over the next decade will be the prime segment of home buyers and sellers.
Why Zillow: Zillow owns the top of the real estate funnel and is leveraging its brand and gaining on Opendoor in iBuying. For the first three quarters of 2020, we believe Zillow accounted for about 25% of homes bought and sold online. In five years, we think they will surpass Opendoor in homes sold but believe Opendoor will continue to benefit from the transformation of residential real estate.