Monday, November 9, 2009

The Zillow Effect

I have been watching with keen interest the development of a new class of web sites. As the Internet gathers into its web more and more terabytes of data, it is possible to gather some very valuable information about specific individuals.

Let's use Zillow as the example here. Zillow aggregates publicly available information on residential real estate such as taxes, sales prices, and a host of other things like lot size, number of bedrooms, bathrooms, etc., and makes that information available to anyone who might be interested in looking at it and it is already organized for each specific property. More importantly, Zillow also computes a market value based upon this information. They call it a Zestimate. I suppose, in a way, it is sort of like a FICO score.

You could argue, no, it's not like the FICO score because the FICO score is based upon accurate experience information on the consumers' use of credit. The FICO score can have a significant impact upon a consumers' life, every financial or credit decision involving that consumer usually boils down to what his or her FICO score is. It's like that pesky SAT score that was on your forehead when you applied to college.

If your home is your largest financial investment and the Zestimate is the alleged "score" that you have achieved with that investment, it could materially affect the decisions that are made that involve your financial condition. Zillow is the first to point out in their terms and conditions that financial institutions cannot use the Zestimate as a basis for loan. This makes me think of the porn sites that say that if you are under 18 years of age that you are not allowed to use the site. When was the last time you thought a teenager would heed such a notice?

Additionally, if the Zestimate is lower than it should be it could influence a potential buyer for your home should you want to sell it. If you are contemplating the purchase of a home it could impact your decision about whether to buy that home. Perhaps, you have applied for a business loan and as part of your Net Worth statement you list the equity in your home. No loan officer in the world is going to perform a CMA (Certified Market Analysis) on your home under those circumstances. It is too costly and takes too much time. A quick and easy Zestimate is available to check the number on that Net Worth statement.

Do we really believe that this computed value has any accuracy? This is easily measurable. Take a community and find every sale during a given period of time and compare the sale price to the Zestimate that was in effect at the time of the sale. Just how accurate can such a crude Zestimate actually be?

According to Carol Augustus, a Realtor with Pacific Union in Marin County California, Zillow itself cites the following figures as interpreted for Marin County:

1. 88% of Marin homes are in Zillow
2. 80% have Zestimates
3. 20% are within 5% of a recent 3 month sales price (80% are NOT)
4. 38% are within 10% of a recent sales price (68% are NOT)
5. 64% are within 20% of a recent sales price (36% are NOT)

I, quite frankly, don't know what to make of these numbers. Does this mean that a given home has a 20% chance that another home in the county sold within 5% of the price within the last 3 months? If so, what does that mean? It sounds almost meaningless.

Alternatively, if it means that 20% of the homes are within 5% of a hypothetical sales price, this would be dreaming of a dream. I don't have any other interpretations that could make sense of these cited statistics.

Look at this Zestimate chart below.  The line on top is the Zestimate from mid 2008 through 2013 for a home that I am familiar in my neighborhood.  You can see that it has fluctuated from a low of around $800k to a high of almost $1.4m.  What is most notable is the precipitous drop in 2012.  The coincident lines below are the Zestimate values for the town and Zip Code for this home.  Nothing dramatic there, and there was nothing dramatically different at this home.  How do you explain this kind of variation?

So, now the big question is, what if products like Zillow and their Zestimates become more pervasive and can meaningfully affect your daily life (either positively or negatively)?
Will you have the ability to redress your grievances if you feel you have been maligned? Will there be the equivalent of the Fair Credit Reporting Act to protect consumers from erroneous data being used negatively against them in these new financial marketplaces?

What other products are there out there now, or can reasonably be expected to appear on the web near you in the not too distant future? I'd like to hear from you. Please let me know your thoughts on this issue.