Next time someone quotes Zillow as a reliable source for property values, send them this link so they can see this screen shot.
Without even going into whether we know if the sale listed is a market or trustee sale (which Zillow doesn’t bother to differentiate between), it’s truly amazing that this site with their famous Zestimates can even stay in business. To their credit, Zillow has disclaimers all over the site about how their Zestimates are just guesses, but still, this is just bad.
I wrote this piece earlier this year, but it still holds true and sheds some light on why big banks missed the home price crash until it was way too late.
This post first appeared on Minyanville on February 13, 2009.
Americans finally get it: Home prices are falling.
This may seem like a preposterous statement, what with the entire global financial system in disarray after the collapse of the US housing market, but we Americans are stubbornly optimistic people, content to ignore calamity as long as we possibly can.
A study released this week by Zillow, a real estate information website best known for its wildly inaccurate estimates of property valies, shows Americans have finally succumbed to the notion that home prices aren’t going up anymore. 57% of homeowners polled believe their own home lost value during 2008, up from 38% who felt that way just 6 months earlier.
Interestingly, when asked about the future, respondents were upbeat: Only 30% estimate the value of their house will decrease in the next 6 months. Of course, their neighbors aren’t so lucky: Forty-seven percent believe home values in their local markets will fall during the same time period.
Zillow has become something of a cult phenomenon in the past few years, as it allows homeowners to go online and see how much their house is “worth.” By its own admission, Zillow’s values are merely estimates based on amalgamating sales data from nearby homes, comparing bedroom counts, living area, lot size and other salient characteristics.
What few people realize, however, is that Zillow’s valuation algorithm isn’t just used by John Q. Homeowner: Every big lender in the country uses a similarly opaque formula to price real estate.
Wells Fargo (WFC) — now the biggest US home lender in the country after its acquisition of Wachovia — holds tens of thousands of mortgages on its books, each backed by a unique house. It’s impractical to regularly review each home for a fresh value, so Wells and other big banks like Citigroup (C), JP Morgan (JPM) and Bank of America (BAC) rely on analytics firms to provide property values churned out by what are called Automated Valuation Models, or AVMs.
AVMs rely heavily on recent sales data to drive their valuation estimates. This works reasonably well in a vanilla market, one where home prices move uniformly in a single direction – namely up. Even rapidly rising prices are well accounted for, since liquid markets provide reliable, normal data sets upon which calculations can be made.
AVMs are a bit behind the curve in an appreciating market, offering a conservative estimation of a home’s value. But in a declining, choppy, illiquid market like the one we’re in now, AVMs fall apart.
As sales volume dries up and prices gap down, transactions that are even 3 months old become woefully out of date. Even in distressed markets that are now seeing frenetic buying activity, active listings — and therefore true market prices — are well below all but the most recent sales.
By using AVMs to value housing assets, banks are constantly underestimating losses in a declining market. Unfortunately, there isn’t much of an alternative.
Small, independent valuation firms offer the most reliable estimations of value, but they specialize in local markets by definition, which limits the scale with which huge lenders can effectively use their results to evaluate nationwide portfolios of loans.
Next time you laugh at Zillow’s estimation that a home that just sold for $250,000 is really “worth” between $315,000 and $375,000, remember that your bank is looking at the same data. No wonder they keep asking Uncle Sam for so much money.
The following example shows a Text control that gets its data from an HSlider control’s value property. Commercial Property
Hey Andrew- Sara from Zillow here. Just wanted to make a quick note about the property you show here, 32 Read Street (http://www.zillow.com/homedetails/32-Read-St-New-Haven-CT-06511/57965359_zpid/).
If you scroll to the bottom on the main property page, near where you see the Zestimate, you’ll see the $20,000 sold price. This is information we get from public records. You’re right it is probably some sort of arm’s lentgh transaction or trustee sale.
However, also please note the * that is by the number and the text below it that says “* Transaction not included in Zestimate.”. When we know the transaction is out of the ordinary, like this obviously was, we do not include it in the Zestimate calculations and we designate that fact on the site.
Final point, Zillow is one of the only automated valuation sites that actually publishes our accuracy numbers, down to the county level. Here are the number for CT – http://www.zillow.com/howto/DataCoverageZestimateAccuracyCT.htm .
Hope that helps!
Hi Sara,
Appreciate the response, and also the backup information on Zillow’s methodology.
My primary gripe with the concept of automated valuation algorithms is the perception they create that such analysis is useful on a house-by house basis. It’s not.
Data and AVM-type analysis is very helpful when it comes to examining broad trends, and even localized trends when the analysis is done correctly. But when you attached a value to a single home that’s generated automatically, it becomes misleading.
Having worked in the industry, specifically running a company where we sell property valuation analysis, I am acutely aware of the shortcomings of such techniques on a home-by home basis. Unfortunately, the general homebuying public is not.
I appreciate that Zillow has made the effort to exhibit transparency and explain your algorithms, but most homeowners understand the concept of how a trustee sale works and how that price may be different than a market sale no better than they understand the intricacies of a mortgage backed security. I believe strongly that to claim any ability, however transparent, to value a single home with a computer model is disingenuous.
As I said, I do appreciate your firm’s attempt to be self-critical and open about the shortcomings of the Zestimate, but it has become a bit of a phenomenon, and as such has gained credibility I do not believe is warranted.
Thank you again for the explanation, my goal is to educate home buyers, nothing more, nothing less.
Andrew
I find this interesting. Someone who is a great writer, but involved in both the mortgage industry AND the real estate industry, is trying to call Zillow’s bluff. I think you should give the general public a little more credibility…we all know that you need to look at multiple sources when evaluating a home’s value and the process of buying a home is a very important decision for most. The problem is, the general public cannot trust many realtors (who are making commissions on our sales) OR mortgage banks…leaving us with the internet to do our own research from home. I think the end result of all the missteps that the mortgage industry has taken over time, has brought the general public to a place where they are smart enough to DO their own research. Zillow is a great springboard to start with — a tool to look at regarding your home and neighborhood value, knowing that it is not on point to the dollar, but in general, ebbs and flows with the economy.