When you think of the Zestimate, for many, it gives a false anchor for what the value actually is.
The Zestimate is just one of a slew of automated valuation models that are increasingly used by banks, investors, and laypeople to estimate the value of homes. No other model, however, has wormed its way into our culture like the Zestimate. The model, like other consumer-facing AVMs, is prone to errors that render it more of an amusement than a serious pricing tool. But while the algo's price-guessing skills may be suspect, it's undeniably elite at one thing: luring people to Zillow-dot-com.
The Zestimate is both everywhere and an enigma. About 104 million homes, or 71% of the US housing stock, have a little dollar figure hovering above them on Zillow's website.
In Seattle, only about 69% of these "off-market Zestimates" come within 10%
Just how accurate are those numbers, though? Until the house actually trades hands, it's impossible to say. Zillow's own explanation of the methodology, and its outcomes, can be misleading. The model, the company says, is based on thousands of data points from public sources like county records, tax documents, and multiple listing services — local databases used by real-estate agents where most homes are advertised for sale. Zillow's formula also incorporates user-submitted info: If you get a fancy new kitchen, for example, your Zestimate might see a nice bump if you let the company know. Zillow makes sure to note that the Zestimate can't replace an actual appraisal, but articles on its website also hail the tool as a "powerful starting point in determining a home's value" and "generally quite accurate." The median error rate for on-market homes is just 2.4%, per the company's website, while the median error rate for off-market homes is 7.49%. Not bad, you might think.
But that's where things get sticky. By definition, half of homes sell within the median error rate, e.g., within 2.4% of the Zestimate in either direction for on-market homes. But the other half don't, and Zillow doesn't offer many details on how bad those misses are. And while the Zestimate is appealing because it attempts to measure what a house is worth even when it's not for sale, it becomes much more accurate when a house actually hits the market. That's because it's leaning on actual humans, not computers, to do a lot of the grunt work. When somebody lists their house for sale, the Zestimate will adjust to include all the new seller-provided info: new photos, details on recent renovations, and, most importantly, the list price. The Zestimate keeps adjusting until the house actually sells. At that point, the difference between the sale price and the latest Zestimate is used to calculate the on-market error rate, which, again, is pretty good: In Austin, for instance, a little more than 94% of on-market homes end up selling for within 10% of the last Zestimate before the deal goes through. But Zillow also keeps a second Zestimate humming in the background, one that never sees the light of day. This version doesn't factor in the list price — it's carrying on as if the house never went up for sale at all. Instead, it's used to calculate the "off-market" error rate. When the house sells, the difference between the final price and this shadow algorithm reveals an error rate that's much less satisfactory: In Seattle, only about 69% of these "off-market Zestimates" come within 10% of the actual sale price. A 10% error in a market like Sammamish would average about $170,000 difference.
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Without sellers spoon-feeding Zillow the most crucial piece of information — the list price — the Zestimate is hamstrung. It's a lot easier to estimate what a home will sell for once the sellers broadcast, "Hey, this is the price we're trying to sell for." Because the vast majority of sellers work with an agent, the list price is also usually based on that agent's knowledge of the local market, the finer details of the house, and comparable sales in the area. This September, per Zillow's own data, the typical home sold for 99.8% of the list price — almost exactly spot on. That may not always be the case, but the list price is generally a good indicator of the sale figure down the line. For a computer model of home prices, it's basically the prized data point. In the world of AVMs, models that achieve success by fitting their results to list prices are deemed "springy" or "bouncy" — like a ball tethered to a string, they won't stray too far. As a brokerage we have seen this in action with Zillow's model: A seller lists a home and asks for a number significantly different from the Zestimate and then watches as the Zestimate moves within a respectable distance of that list price anyway. Zillow itself makes no secret of the fact that it leans on the list price to arrive at its own estimate.
At the end of the day, AVMs are tools that provide information, but they should not be used in a vacuum to make decisions.
Other sites have their versions of the Zestimate, too — there are actually about 25 different AVMs in the market. Realtor.com will show you three estimates, each from a different AVM provider. Redfin, a Zillow competitor, also has its own model. Consumer-facing AVMs, like the Zestimate or the Redfin Estimate are meant to be used informally, as casual starting points before consulting real experts. They're not supposed to be used for real pricing, which should be left to the homeowners along with a broker with detailed knowledge of the local real estate market.
Santa too should check his Zestimate twice to see if it’s naughty or nice.
All kidding aside, the hazards of the Zestimate are most obvious when a seller actually decides to list their home. For real-estate agents, we have a complicated relationship with the Zestimate: "We love it, and we hate it." A lofty estimate might jolt a homeowner into action — "I could sell my house for what?!" — and drive more business our way. But the number can also make it hard for an agent to do their job. Brokers have definitely lost clients over a pricing disagreement involving the Zestimate. It can be difficult enough to pry a seller away from their unrealistic expectations without a number on a screen confirming their hopes for a bigger payday.
"I hate it when they tell me, 'Well, this is what Zillow tells me my house is worth,'" one of our brokers at The Cascade Team recently expressed. "Because it's very rarely accurate."
For those sellers still clinging to the absolute certainty of their Zestimate, consider this.
No misstep stands out as more damning than the implosion of Zillow's homebuying business. In 2018, the company launched Zillow Offers, making all-cash offers to sellers looking to move quickly and seamlessly. In theory, Zillow could then turn around and offload the home in short order for a modest fee, plus however much the home had appreciated. The company used a combination of internal algorithms and human analysts to value the home and predict what it could sell for in a few months — in some cases, homeowners could get an immediate cash offer based on their Zestimate with just a few clicks. But the company's forecasts turned out to be way off base. Zillow Offers squandered $422 million in the third quarter of 2021 alone — a Business Insider investigation found that almost two-thirds of the homes listed by Zillow in Atlanta, Phoenix, Dallas, Houston, and Minneapolis were being marketed at a loss. Once the losses came to light, the company swiftly shuttered the division and laid off a quarter of its staff.
The key takeaway to remember about the Zestimate. "It's 100% a marketing tool," says Mike DelPrete, a scholar-in-residence at the University of Colorado Boulder who studies the intersection of tech and real estate. "Like, not even 99%. It's a 100% marketing tool."
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