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Original Article By Jon Swartz At MarketWatch.com

‘We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,’ CEO tells investors.

Zillow Group Inc. is calling it quits on the home-flipping business, while disclosing expected losses of more than $550 million on homes purchased in the second half of this year for which the company admits it paid too much.

The real-estate giant on Tuesday blamed a faulty algorithmic model for ditching its iBuying business of buying and selling homes quickly, and said it will lay off about a quarter of its staff. The surprising exit, announced with pedestrian quarterly profits, thrashed shares in another rough trading session Tuesday, a day after an analyst said two-thirds of the homes it bought are underwater.

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“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,” Zillow Group Z, -24.92% ZG, -22.95% co-founder and Chief Executive Rich Barton said in a statement.

In an interview on CNBC, Barton called the decision “tough but necessary” after determining the business was “too risky, too volatile” and addressed too few customers. “Sure, there are those wagging their fingers at me,” he acknowledged. “Predicting the price of homes six months ahead is really hard” in the COVID age, he added.

Zillow’s exit “calls into question whether Zillow is just really bad at this, or whether they see stuff in the data — keep in mind Zillow’s got access to a lot of unique data,” D.A. Davidson analyst Tom White told MarketWatch.

“Maybe Zillow is seeing something in the data that suggests this is going to be a tough business year over the near term or the longer term,” White said. “It’ll be interesting to see how Opendoor OPEN, -1.23% reacts, especially because it’s just been on an absolute tear.”

Dissolving the flipping business will take several quarters and include a reduction of Zillow’s workforce by approximately 25%, Barton said. Zillow disclosed that it wrote down $304 million in losses due to houses purchased for too high a price in the third quarter, and expects losses of $240 million to $265 million in the fourth quarter for the same reason, pushing total losses on those houses to more than $550 million after third-quarter gross losses in the segment of $245 million.

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During the third quarter, Zillow said it bought 9,680 homes and sold 3,032 of them, with the sales producing an average loss in gross terms of more than $80,000 per house. The purchase of nearly 10,000 houses marked a significant jump from the 3,805 homes Zillow purchased in the second quarter, which itself was a record amount by more than 1,500 houses.

Shares fell more than 20% in Wednesday trading, following Zillow’s announcement of a net loss of $328.2 million, or $1.29 a share, compared with net income of $39.6 million in the year-ago quarter. Revenue rose 164% to $1.74 billion from a year ago. Analysts surveyed by FactSet had expected net income of 16 cents a share on revenue of $2 billion.

Zillow Group’s stock is down 34% in 2021; it declined 10.3% in regular session trading Tuesday, to close at $87.20. The broader S&P 500 index  SPX, +0.65%  has gained 23% this year.

Speculation about the future and viability of Zillow’s home-flipping business grew grim this week as Bloomberg reported the company is selling about 7,000 homes to recoup $2.8 billion, and Keybanc analyst Edward Yruma warned that two-thirds of the homes Zillow bought were underwater.

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