Why Zillow Can’t Make Algorithmic House Pricing Work
Zillow’s Zestimate of Home values have become a reference for US homeowners. But when Zillow tried to use it algorithm in buying and selling homes, it is a misreading of the market.
The company’s iBuyer (or “instant buyer”) arm, where tech-first companies use algorithms to quickly buy, buy, and sell homes, launched in 2018 in Phoenix. It’s part of a busy Arizona town market: Opendoor, Redfin, and Offerpad have been buying and flipping homes there since 2014.
The principle behind iBuying is simple: Taking advantage of the power of big data, tech companies estimate the price at which they think they can sell a property, announcing their purchase offers. They tend to offer lower prices than traditional buyers, but attract sellers by promising faster, all cash deals.
Once an iBuyer owns a home, it will immediately act to repair the property and relist it — in theory for profit. An analysis of millions of home sales across the U.S. between 2013 and 2018 academics at Stanford, Northwestern, and Columbia Business School found that iBuyers earned about 5 percent of revenue by flipping houses.
Zillow believes it has a secret in the iBuying world: the Zestimate. Launched in 2006, the preferred algorithm trained millions of home appraisers across the U.S. before it was employed to estimate the possible price of the property purchased by Zillow itself. In theory, this is a natural encounter of two things: Zillow’s expertise in pricing homes, and a new approach to buying properties that relies on accurate estimates.
For three years it worked, according to John Wake, who has been a realtor and real estate analyst around Phoenix since 2003. During that time, he saw the market collapse several times, including during the 2008–09 financial crisis, triggered by subprime loan problems. But he hasn’t seen anything like it in the past 18 months.
“I don’t know anyone in the spring of 2020 who predicts the market will do what it does,” he said. “No one has seen it fly and be so strong.” In March 2020, almost all activity in the Phoenix housing market stopped as the world closed and economic uncertainty reigned. By October 2021, sales have dramatically increased, including with iBuyers.
Tech companies chose the Phoenix area because of its abundance of cookie -cutter houses. Unlike Boston or New York, identical streets make properties easier. Phoenix’s iBuyers market share grew from nearly 1 percent in 2015 — when tech companies first entered the market — to 6 percent in 2018, according to Tomasz Piskorski of Columbia Business School, who is also a member of the National Bureau of Economic Research. Piskorski believes iBuyers — including Zillow — have grown their share since then, but are still involved in less than 10 percent of all transactions in the city.
Real estate people are scared of the arrival of iBuyers, Wake said. In early October 2021, Zillow recorded the most active week buying homes in Phoenix, part of its goal to buy 5,000 a month in 2024. Then suddenly stopped buying. Wake has a question: “What happened?”