How Accurate Is Zillow’s Estimate of Values?

More than 90% of homebuyers begin their search online. The overwhelming site they rely  on is Zillow which today produces over 100  million “Zestimates’ of home values  based upon available public information and reports from the real estate industry on sales.  The system they use is called an ‘automated valuation model” –AVM for short—using  sophisticated algorithms to predict value.   Go on line and you can probably find an estimated value  of your personal residence even though it may not be for sale. But, like most internet information not all of it is reliable. Depending upon the region of the country, these  ‘Zestimates’ can vary widely from the real fair market value of a home.   For example, recent comparisons show that in some rural counties in California, error rates range as high as 26%.  In the  Charlottesville, Virginia, area of 17 reported sales Zillow overestimated values, including two houses that sold for 61% below the ‘Zestimate’. 

               In a recent interview on ‘CBS This Morning,’ Zillow CEO Spencer Rascoff acknowledged that ‘Zestimates’ are a ‘good starting point’ but that nationwide ‘Zestimates’ have a ‘median error rate’ of about 8%.   In Anchorage, where the average sales price of a home is $352,500 that margin of error equates to almost $30,000.  Whether the Zillow estimate is high or low, local buyers and sellers frequently use it as a bench mark for establishing the listing and final selling price for their home. Buyers drive through subdivisions comparing Zillow values without always accurate information about square footages and amenity packages in each home.   One significant problem with the Zillow site is the slow response to changes, including price adjustments,  in  Multiple Listing Service  on individual listings, making the algorithm obsolete.  Another challenge is in tracking new construction homes.  Zillow only includes new construction homes that have a street address, not a lot and block, which prevents some new homes from being part of the ‘ATV’.  This can result in lower values because new homes generally cost 8 to 10% more than resale. Zillow gives buyers an estimated mortgage payment but it does not include the cost of mortgage insurance, local taxes and homeowner’s insurance.   This lack of information can lead to a buyer’s unrealistic expectations as to what they can pay for a new home.  

               Anchorage is a community where homes sell for 98.62 percent of  listed price.  Selling below real market value will create a fast sale but no seller wants to leave an unreasonable amount of equity on the closing table.   With Zillow acknowledging their estimates off by as much as 8%, sellers are prone to take the high road when it comes to establishing value which means longer time on the market in communities like Anchorage which is not known to be a negotiating community like Florida or southern California.  

               Zillow, which was created in 2005 just before the real estate crash of the mid 2000s, defends their position by stating on their website, “Zestimate is not an appraisal and you won’t be able to use it in place of an appraisal….Our data sources may be incomplete or incorrect; also we have not physically inspected a specific home…and does not consider all the market intricacies that can determine the actual price a home will sell for.”  Well said as a disclaimer.  However, buyers driving around with their app in hand, aren’t likely to find the disclaimer buried on the Zillow website, and so may lose out on a property that fits their needs by simply proclaiming it too far above market.  In that regard, Zillow may be no better than photo shop where looks, like price, can be deceiving.