Why Zillow couldn’t make algorithmic home pricing work

Zillow’s Zestimate of Home values ​​have become a favorite reference for US homeowners. But when Zillow tried to use a file algorithm To buy and sell homes, the market has been badly misread.

The company’s arm, iBuyer (or “instant buyer”), where leading tech companies use algorithms to quickly appraise, buy, and sell homes, launched in 2018 in Phoenix. She joined a crowded Arizona market: Opendoor, Redfin, and Offerpad have been buying and flipping homes there since about 2014.

The principle behind iBuying is simple: By leveraging the power of big data, tech companies estimate the price at which they think they can sell a property, which then informs their offers to buy. They tend to offer lower prices than traditional buyers, but they attract sellers by promising all-cash deals.

Once iBuyer owns a home, they work quickly to renovate and re-register the property—in theory to make a profit. Analyze millions of home sales Across the United States between 2013 and 2018 by academics at Stanford, Northwestern and Columbia Business School they found that iBuyers made a profit of nearly 5 percent by flipping houses.

Zillow thought she had a secret to the world of iBuying: Zestimate. The algorithm, which was touted in 2006, was trained on millions of home appraisals across the United States before being run to estimate the potential price of properties that Zillow herself had purchased. In theory, it was a natural confluence of two things: Zillow’s expertise in home pricing, and a new way of buying real estate that relied on accurate estimates.

It worked for three years, according to John Wick, who’s been a realtor and real estate analyst around Phoenix since 2003. In that time, the market has crashed several times, including during the 2008-2009 financial crisis, which was set off by high mortgage problems. Risks. But he hasn’t seen anything like the past 18 months.

“I don’t know anyone in the spring of 2020 expecting the market to do what it does,” he says. “No one expected that she would take off and become so strong.” In March 2020, nearly all activity in the Phoenix housing market came to a halt as the world shut down and economic uncertainty prevailed. By October 2021, sales had accelerated dramatically, including among iBuyers.

Tech companies chose the Phoenix area due to the predominance of their homes in cookie cutters. Unlike Boston or New York, Identity Streets make pricing properties easier. iBuyers’ market share in Phoenix has grown from about 1 percent in 2015 — when tech companies first entered the market — to 6 percent in 2018, says Tomas Pesikorski of Columbia Business School, who is also a member of the National Bureau of Economic Research. Piskorski believes that iBuyers – including Zillow – have grown their stake since then, but are still involved in less than 10 percent of all transactions in the city.

People in real estate fear the arrival of online buyers, Wake says. In early October 2021, Zillow recorded a file Most active week Buying homes in Phoenix is ​​part of their goal Buy 5,000 per month by 2024. Then suddenly I stopped buying. Wake had one question: “What the hell happened?”

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