Market makers also typically make money on their spread, paying slightly under market rate for an asset and selling for slightly over. They can do this in, say, stock trading because people want to make trades right now to capitalize on moment-to-moment conditions, so that's the price of convenience and liquidity.
Zillow SAID they wanted to be a market-maker, but they ACTED more like a flipper or investor, expecting to make a profit on the houses themselves, not just on the spread. When they started making above-market offers on homes they pretty much left any pretense of market-making behind: at that point, you need to either sell at a loss or hold inventory and go (a little) long on your investment. Zillow realized they didn't want to hold inventory.
It doesn't help that houses aren't nearly as liquid or fungible as stocks: buying a house, prepping it for sale, accepting and offer, and closing takes months, and all that time can eat into your spread. Zillow would probably always have ended up in a situation where they were more concerned with the sale price 2-4 months down the line rather than their spread.
Zillow SAID they wanted to be a market-maker, but they ACTED more like a flipper or investor, expecting to make a profit on the houses themselves, not just on the spread. When they started making above-market offers on homes they pretty much left any pretense of market-making behind: at that point, you need to either sell at a loss or hold inventory and go (a little) long on your investment. Zillow realized they didn't want to hold inventory.
It doesn't help that houses aren't nearly as liquid or fungible as stocks: buying a house, prepping it for sale, accepting and offer, and closing takes months, and all that time can eat into your spread. Zillow would probably always have ended up in a situation where they were more concerned with the sale price 2-4 months down the line rather than their spread.