Zillow and Zestimates

Don't get me wrong. Sites like Zillow and Trulia are a fantastic resource for the public. Sites like this offer the public a great tool to view pertinent information about properties. These sites provide virtually the same information as a tax record that you would find down at the courthouse. However, the estimated property prices and projected list prices that are furnished on these sites has been very problematic for everyone in the real estate industry. One nice thing about real estate and real estate transactions is that almost every detail of a typical real estate transaction is recorded as public records. These are accessible by anyone with the time and desire to sift through the data at their county courthouse or their websites, if you're lucky enough to live in an area that provides web records. Because this information is public, sites like Zillow and Trulia have affiliates in local market areas that allow them direct access to their records. Many individuals with MLS access are also Zillow affiliates and provide MLS information to Zillow for a nominal fee or for other services. These records are what are then used to populate the property information (e.g. bedrooms, sq footage, lot size, last sold price, etc.) to their sites. That is al fine and good. The most problematic information that is provided here would be the sold price. From this information, Zillow will then project the value of that specific home onto others in that general vicinity. That sounds just fine, too. However, this site does not take into account the condition of the property or the nature of the transaction. Not only do Zillow's prices often reflect sold prices from YEARS ago, they can also project the price of foreclosures and short sales onto a conventionally listed property. I have personally encountered Zestimates being terribly askew due to foreclosures and short sales being compared to traditional transactions. The problem here is that homeowners or asset managers that are trying to liquidate a property due to defaulting payments are obviously in a dire situation and are willing to sell their property at a deep discount to to take that asset off of their ledger. Such transactions should not be compared to those of traditional sellers who are not in a dire situation and will be selling their home according to market value. This causes a massive disparity in prices.

According to this article by LA Times, entitled Inaccurate Zillow 'Estimates' a source of conflict over home prices, the disparity of prices from Zillow to actual transactions is shockingly different. As stated in this article, the median error nationwide is 8%! That may not sound like much, but when dealing with large assets an 8% disparity is a very large one! And that's just the national average. In many markets, the disparity can be up to 42%! And as Rascoff says, these Estimates should really be more of a starting point in the home buying/selling process.

What many people do not know is that the real estate industry is one of the most affected by larger economic factors and home prices do not maintain an equilibrium. The price of real estate is completely dependent upon the market. What this means is that the price of a home is affected by the overall health of the economy, supply and demand, comparable sales and the motivation of the seller. The one price valuation that you will almost always see when dealing with residential real estate is the "comparable sales approach." What this means is that when you are ready to list your home for sell, you will try to find the most comparable properties in your area that are both actively on the market, are pending or have sold. Once you have found these, you will base your price upon those prices. Those prices- especially sold prices, reflect how the market is performing and what your property is worth according to the activity of the market. Just because you bought your home 10 years ago for $100,000.00 does not mean that it will always be worth what you payed.

The best recent example of these overriding market factors is our recent economic recession. In the early 2000s, bank slacked up on their lending criteria and began approving much more loans than they should have. Not only were the approving more home loans than they should have, they were also lending far too much to borrowers in relation to their income, credit, debts, etc. Because the banks were giving money away so indiscriminately, the market became flooded with people looking for homes (demand) and the number of people selling homes (supply) was not proportionate. The demand grew and the supply stayed the same. This inflated the price of homes for sale because the sellers could ask for more due to the increase of competition. Hence, people over paying for their homes and having immense difficulty making their payments in the years to come. Eventually, many of the people who did over pay for their homes end up defaulting on their payments and losing possession of their homes. This causes the market to be flooded with foreclosures and forces the banks that repossess them to liquidate them at a deep discount to keep their ledgers manageable. Fortunately, we have just recently escaped this last phase and are now in a more typical real estate climate that has turned upwards. But, real estate markets fluctuate! They always have and they always will! And guarantee that we will see another "crash" of some type in the next 20 years. 

I know that was very long, boring and redundant. The reason that I say all of this is to emphasize that these radical market shifts are STILL projected on Zillow and are what largely compose the Zestimates because of how recently the real estate market went sideways. Zillow's automated formulas are projecting prices from the mid-2000s that are grossly inflated and prices from the late 2000s until now that are often foreclosed properties, short sales or sellers that were under water on their mortgage all at the same time. These estimated prices cause kinks and they do not represent the current real estate market nor do they adhere to the market principles that create the markets. 

One of the jobs of a real estate professional is to access the correct and applicable data through their local MLS or tax records to decipher what prices are consistent with their market while being favorable for their clients and client's needs. A good real estate agent will sift through the CORRECT and CURRENT data in order to valuate a home properly. I will say that there are many agent out there can manipulate this data to serve their purpose, but they are few. And they will not be around for long. The main job of your agent is to represent you and your financial needs in the most favorable and ethical way possible.

I know this was a long post, but it is important to know the distinction between the estimated prices on sites like Zillow and that they are just a starting point in the home buying/selling process!

As always, please feel free to contact me if you have any question!