Steve Eisman, the Neuberger Berman portfolio manager who famously profited during the financial crisis by betting against subprime mortgages, criticized Zillow’s business model in a CNBC interview last week. Eisman disclosed he’s shorting the stock, which means he makes money if the share price declines.
Eisman’s lucrative short-selling position a decade ago was chronicled in Michael Lewis’ bestselling “The Big Short” and was depicted by actor Steve Carell in the 2015 movie based on the book. Eisman’s former hedge fund at FrontPoint Partners more than doubled in size during the financial crisis.
Currently, Zillow is Eisman's "largest short," he told Bloomberg in May.
During the CNBC’s “Power Lunch” last week, he said:
Zillow has one of the most flawed business models I’ve seen in a very, very long time.
The part of it I find the most problematic is what they call, I believe, their iHome business, their internet buying business, where they actually go out and buy homes and flip them. I actually think the company doesn’t understand the real risks of this business, which are massive.
There are thousands of mini-markets all over the United States. They’re all local. They’re all extremely different. They all have incredibly different risks.
This is a capital-intensive business. I know only one thing for certain. Between now and five years from now, assuming the company has some level of success, there will be massive problems that they will uncover. I’m sure there'll be write-downs, I’m sure there’ll be impairments. And I’m convinced that the investor base doesn’t have a clue about what this business is really all about.
Of course, Zillow knows a bit about local markets being different. It was founded in 2004 as a data service aggregating information about local markets and providing a “Zestimate,” an estimate on the value of a home, based on comparable sales – meaning, sales of similar homes in the same neighborhood.
And, the business model as laid out by CEO Rich Barton, including on the company's earnings conference call last week, isn’t a replication of traditional home-flipper speculation where properties are purchased with the idea of wringing as much profit out of them as the current market will bear. Instead, Barton describes it as a “market-making” position in which Zillow earns fees for buying and reselling a house, much as a stock broker earns a fee for buying or selling a stock.
“Demand from consumers for our Zillow Offers service is overwhelmingly positive,” Zillow Director of Corporate Communications Emily Heffter said, responding to Eisman's comments for HousingWire. “Our market-making approach to buying and selling homes for the benefit of consumers who want to move is working. We remain confident in our long term strategy to create a seamless, integrated real estate transaction for consumers.”