The company, through its Zillow Offers unit, buys homes from homeowners and performs light repairs on them, requiring the services of inspectors and contractors. It then lists the homes for sale on its platform.
Zillow shares fell as much as 11.4% to $93.54 in early trading, their lowest since September 2020.
The U.S. housing sector that earlier witnessed a boom has lost its momentum in recent months, hurt by a tight jobs market, supply chain issues and shortage of raw materials.
That has sent property rates soaring, with the median U.S. house price in August up nearly 15% from a year earlier.
"We believe Zillow's decision might be affected by slowing homes sales and the company's inability to sell through at the same rate at which it is acquiring, as buyers take a step back", BofA Securities said in a note.
Zillow, which operates the popular home valuation model 'Zestimates', said it would clear a backlog of properties on its platform. The company bought 3,805 homes in the second quarter.
Analysts, however, said Zillow's move might open the door to rivals such as Opendoor Technologies Inc to grab market share.
Opendoor can gain a significant share if it just generally operates more efficiently, Wedbush analyst Ygal Arounian said in a note.
The company, which went public through a merger with a blank-check firm led by venture investor Chamath Palihapitiya last year, bought 8,494 homes in the second quarter.
Opendoor shares were up 2.6% in afternoon trade, while Zillow shares were down 8.5%.
(Reporting by Nathan Gomes in Bengaluru; Editing by Ramakrishnan M.)