What Happened with Zillow?
I’ve always been enamored with the concept of value. It’s a marriage of math and art. You can write it down on a contract and it’s tangible. However, the level to which you and I perceive something as valuable will most likely vary. It’s absolute and fluid, depending on the circumstance. That’s one of the things I’ve always loved about working in real estate; everyone has a different approach and definition of value. Because of this fascination, I’m also intrigued by the idea of approaching value from an algorithmic and data-heavy standpoint. Simply put, I’m fascinated by the Zestimate: perhaps the internet’s most famous automated number! Everyone knows the Zestimate on their house, and probably their neighbor’s house, too. It’s just too easy...open Zillow, type in your address, and there’s your house with a number assigned.
It’s so easy, in fact, that home buyers began to see the Zestimate as gospel; a tried and true number to base sales and purchases. The Zestimate became publicly accepted as a trustworthy and useful fact. As it turns out, it wasn’t. In a twist of fate, Zillow itself revealed the incredible unreliability of the Zestimate, and lost a ton of money doing so.
“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,” said CEO Rich Barton in a statement.
In 2018, Zillow decided to monetize their Zestimate and begin buying properties outright. The idea was that they could determine the value of a home without ever seeing it, make an offer slightly underneath this number, and then resell it at a slightly higher price, making a small profit. Sounds like a lot of work for a little profit, but when you have a Zestimate on practically every house in the country, imagine how those small profits would add up when you deployed this strategy in mass! Over the last three years, Zillow bought thousands of homes (including many in Tarrant County) based on their Zestimate. In October, the buying ended abruptly. Zillow had a 70,000 home backlog and costs were spiraling out of control. They were bleeding money! Three weeks later, Zillow abandoned their foray into purchasing altogether. They put their trusted Zestimate into practice and it led them astray--to the tune of over $500 million dollars and 25% of their workforce.
In a way, the failure of the Zestimate reflects our need to stuff the square technology peg into every round hole we can find. In the case of home values, Zillow was all math and no art. Real Estate Appraiser, Don Lowe, said it well: “Real Estate will never be valued accurately by algorithms. It is local, emotional, and subjective.” You just can’t automate curb appeal, or monetize the attention to detail in workmanship on a home. Those values exist in the eye of the beholder and will always require an artist's touch. This is a value that I believe we’ll never be able to automate away, and why hiring an agent to help you buy or sell really is crucial!
The math is easy.
