Eight years ago I headed up NAR’s Public Affairs Division, a job that included promoting the Realtor brand. One day in January, our phones rang off the hook with reporters wanting our reaction to a new website with a strange name that promised to change online real estate forever.
“Why would a buyer or a seller need a Realtor if he or she could just go to Zillow and find out how much a house is worth?” several asked me.
“Why would a buyer or seller need a Realtor…?”
Now those were fightin’ words, especially in 2006, the very peak of the housing boom. In those days, a homeowner could stick a “for sale” sign in a front window after breakfast and have a dozen offers by dinner time. We fought for ways to show the value professionals bring to the transaction.
I wanted to say the automated valuation module (AVM) hasn’t been invented that can walk a shaky first-timer through a mortgage application or save thousands on closing costs with the right vendors. But I didn’t need to. The questions inexplicably stopped. Later, I realized that real estate reporters were entering their own homes in the Zillow Zestimator and scratching their heads when the results didn’t jive with reality.
It’s no secret that Zillow’s AVM was a work in progress in its early years.
To their credit, Chief Economist Dr. Stan Humphries and the folks at Zillow worked tirelessly to improve accuracy— a massive job when you consider the challenge of obtaining the most current data affecting values and then manipulating it.
Today Zillow says it has a median error rate of 7 percent, which means half of the estimates in an area are less than 7 percent and half are greater. I’m not aware of any other AVM that publicly shares its error rate. Just a few months ago, Zillow took a huge step forward by introducing a 12-month forecast to augment its valuations of 50 million properties.
Today, everybody’s doing it
Zillow wasn’t the first AVM for public consumption, but it has been successful, not only at valuing property but also at capturing leads from curious homeowners who want to be updated on changes in their homes’ value. This fact did not escape competitors. Aggregators, brokerages, franchisors — even individual agents today feature AVMs on their sites to bring in business.
In fact, in doing research on different AVMs for this article, I was called by two agents within 20 minutes.
Take four AVMs and get valuations for the same house. It’s reasonable to expect that price variations would be similar to a car or computer online. It’s more likely you’ll find variances from $60,000 to $90,000. Their accuracy varies and is complicated by MLSs that refuse to license brokers the data feed they need to create AVMs.
So, I have finally answered the question reporters asked me eight years ago!
Online AVMs have created not less but a great deal more work for real estate professionals. Every day, buyers and sellers are discussing with their agents the property values they have found online, ignoring warnings and disclosures.
With four or five numbers to choose from, sellers pick the highest when they think about pricing. Buyers pick the lowest when they think about making an offer or applying for a loan. Agents have their hands full educating customers and clients about AVMs and market realities. Untangling the mess can leave everyone confused, exasperated and frustrated.
Enter the Zestimate forecasting model
Zillow’s Zestimate forecast predicts the estimated change in a home’s value over the next 12 months in both dollars and percentages. For example, if a home at 123 Main St. has a current Zestimate of $200,000, the Zestimate forecast for that home in one year might be $210,000, which means Zillow is predicting that home’s value will increase by 5 percent.
This new feature helps consumers and real estate professionals better understand how local housing trends can affect the future value of specific properties. The forecast also adds another layer of information to Zillow’s living database of all homes, which includes rich data, Zestimates and Rent Zestimates on more than 100 million homes nationwide.
“When Zillow first launched its Zestimate home valuation in 2006, we introduced an important layer of transparency to the real estate market to empower consumers to make better decisions. Today, Zillow lets you see historical Zestimates over the previous 10 years, and now the new Zestimate forecast provides a unique glimpse into the future never before possible at the home level,” said Dr. Humphries, who created the proprietary Zestimate algorithm. “There are many very important reasons to choose to buy or sell a home, and this new tool helps shed light on one of those considerations.”