Homeowner Estimates as Good as Zillow? Appraisal Academics Think So

When it comes to using the Zillow.com automated valuation model (AVM) to get a free listing price on a house, users may be getting what they paid for, according to a report published by the Appraisal Institute that finds the Web site overestimates the values on homes almost as often as the actual homeowners. And as the authors’ allegation is fairly strong against the leading online real estate marketplace, Zillow is responding in kind, calling the report, published in the winter 2010 issue of The Appraisal Journal, “misleading” in its dismissal of the claim, saying the results are based on outdated and narrow information. The report, “Zillow’s Estimates of Single-Family Housing Values,” was authored by Daniel Hollas, Ronald Rutherford and Thomas Thomson, doctors in economics, real estate and business, respectively. The report was published in the quarterly technical and academic publication of the Appraisal Institute, the nation’s largest association of real estate appraisers. The report examined Zillow AVMs, called “Zestimates,” for the city of Arlington, Texas, and compared it to Multiple Listing Service (MLS) sales data. The study found Zillow overestimates value for approximately 80% of the houses in the sample by at least 1%. The study said 59% of the Zestimates fell within ±10% of the sale price and only 0.88% of values are underestimated by more than 10%. On average, the Zestimate was 11.66% overvalued, or $13,576 with a median of $9,717 or 7.92%. “If this were an automated appraisal district model used to estimate values for tax purpose, this would cause considerable concern,” the authors wrote. The report’s authors said Zillow’s magnitude of overestimation is higher than other studies that have shown average homeowners overestimate the values of their homes by 5.1% and new owners overvalue their homes by about 8.4%. According to the report, Arlington was selected based on the availability of housing sales and Zillow’s indication that the Zestimates for this location are at its highest accuracy level because it has the best data for this area. Looking at data from the last six months of 2006 and during the last week of January 2007 and the first two weeks of February 2007. In addition, the authors said Arlington was a stable market during the sample period, with house price growth of approximately 1% per year in 2006 and early 2007. In an e-mailed response to HousingWire, Zillow spokesperson Jill Simmons questioned the scope of the study. “This study examines Zillow’s Zestimate values in one city in Texas more than three years ago. In addition to being limited to only one city in the US, the study does not compare sales and Zestimate values during the same time period…[it’s] apples and oranges as it’s two separate periods of time,” Simmons said. “It’s unfortunate that this study has been structured in such a misleading, and limited fashion.” “It’s also unfortunate that they did not reach out to Zillow to learn more about our approach to home valuation for this study,” Simmons added, saying that Zillow’s valuations are intended for use “as a starting point for learning about home values.” The report, however, addresses possible causes for the discrepancy between the Zestimates and the sales prices the authors said they revealed. “There is no doubt that appraisal districts track occupancy and use it in their estimations; Zillow appears to leave this out of its model even though this information is accessible through both appraisal district data and some MLS data,” the authors wrote. In addition, the authors claim Zillow prices some housing characteristics differently than the market, specifically in overvaluing vacant properties. “It appears that Zillow does not track the occupancy of a property, yet vacancy is known to affect value. The other variables that are priced differently — garage spaces and number of stories — may be the result of measurement error or perhaps failure to include these variables in the Zillow’s algorithms,” the authors wrote. Write to Austin Kilgore. In April’s edition of HousingWire, be sure to look for HW Focus, a supplement to the magazine that will explore property valuation in-depth.