How accurate are Zillow’s Zestimates?
During the pandemic-spurred housing boom, Zillow Offers emerged as a particularly aggressive iBuyer, or instant buyer, of homes in Sun Belt markets, offering homeowners more than the market value of their properties, with no catch. Zillow has now conceded that it has been paying too much for properties, even in a market characterized by soaring home values. Saying it had lost $1 billion on iBuying, Zillow has shut down its Zillow Offers unit.
“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,” Chief Executive Rich Barton said.
Zillow used an algorithm to make home price estimates, called the “Zestimate,” and determine what it would pay home sellers.
Are Zestimates accurate?
Zestimates are somewhat like the National Hurricane Center’s projection for a hurricane’s path: both provide a single price or point, but those prices and points are actually the median of a range.
Here’s an example for a house:
If the homeowner looks just at the top of the screen she sees the $505,000 estimate. Even if she scrolls down and sees the range it is extremely likely that she leaves with the idea that her house is worth $505,000, whereas the range given varies from 11% below that number to 11% above it.
Zestimates have been probably the biggest bone of contention that Realtors have with Zillow. Were I as a Realtor to come to your house in the hope of getting the listing contract and I said to you: “I think your house is worth between $449,000 and $571,000” would you give me the listing? No, I didn’t think so.
But if I said: “I think it is worth $505,000” – which incidentally is about 10% more than I think this house is actually worth, then my chances of getting the listing improve dramatically.
Now it seems that Zillow has believed its own algorithms and has been paying the $505,000 for properties like this one.
I will answer my question in the same way that I have for over a decade. In estimating the value of a condo in a block of 20 then the Zestimate is likely to be quite accurate – but that is because it is pretty easy to value a property when there are multiple others just like it.
But when it comes to a single family home, which may be untouched since it was built 100 years ago or beautifully renovated from top to toe, and may be in an area close to a proposed new school, or conversely an area where there are plans which put it close to a busy new road, I do not believe that an algorithm can price that accurately.
It would seem that Zillow has finally agreed with me. Had they called me back when just think how much money they could have saved!
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Andrew Oliver, M.B.E., M.B.A.
Real Estate Advisor
800 Laurel Oak Drive, Suite 400, Naples, FL 34108
Licensed in Massachusetts