Many have pointed to the failure of Zillow Offers as proof that the Zestimate is inaccurate, but the company’s struggles actually reinforce the critical role that quality automated valuation technology plays in the iBuying process.
Zillow’s abrupt retreat from iBuying, which is the practice of using advanced technology to rapidly purchase and sell homes, has rocked the real estate world.
But beneath the drama is a critical question that has tangible implications for Main Street, Wall Street and everyone in between: Is Zillow the canary in the coal mine for the multibillion dollar iBuying market and the nation’s red hot housing economy?
The reality is that Zillow’s stumble does not signal a crisis for iBuying or the residential property market. Everyone can take a deep breath. Instead, this is simply an isolated story about one prominent company’s stumble in a high-flying market with little room for error.
Zillow’s struggles actually reinforce the critical role that quality automated valuation technology plays in the iBuying process.
When paired with proper human oversight, artificial intelligence and data-driven investing provide distinct advantages for institutional players and larger buyers in the residential property market. These technologies also bring stability to the market by typically discouraging iBuyers from overpaying and contributing to an overheating of the market.
As the Zillow story continues to unfold, here are the three key takeaways for homeowners, homebuyers and policymakers to keep in mind.
Zillow’s flop was of its own making – not a harbinger of the next crisis
We know now that Zillow’s iBuying business grew so fast that the company couldn’t keep up with its own strategy. In the third quarter of 2021, it aggressively doubled down on iBuying by purchasing more properties than it had over the previous 18 months combined.
It appears the company failed to make strategic structural adjustments in preparation for market shifts and supply chain constraints. On the other hand, competitors such as Opendoor and Offerpad seem to have adapted accordingly and are still thriving.
On a fundamental level, Zillow was unable to accurately understand and play the market. The company was overly aggressive with its expectations, estimating that home prices would grow approximately 8 percent during the back half of 2021. According to data from HouseCanary, home prices instead began decreasing in the third quarter following their mid-summer peak.
As the housing market began to cool in July, Zillow continued to pay top dollar for homes that did not deserve such elevated valuations, which begs the following question: If Zillow kept buying up homes at a premium because it was unable to see that price appreciation was cooling off, why didn’t the likes of Opendoor and Offerpad suffer the same fate?
One possible difference is that Zillow evidently does not leverage the same institutional-grade modeling and forecasting as its competitors, meaning its ability to value properties and estimate where prices were headed at a hyperlocal level is potentially limited.
Keep in mind that the Zestimate, which is Zillow’s consumer-facing home price calculator, has been called into question repeatedly over the years. Zillow itself has even acknowledged that its consumer-facing pricing model is at best a broad guideline with a potentially costly error rate.
Automated valuation models and algorithmic-based forecasts have helped many iBuyers navigate pandemic volatility
In a statement, Zillow said it was unable to “accurately forecast the future price of inventory three to six months out, in a market where there were larger and more rapid changes in home values than ever before.”
However, institutional-grade automated valuation models have been highly accurate in calling the market despite rapidly changing conditions during the pandemic.
Many algorithmic-based market forecasts are conservative by design, even when prices are increasing and hovering near record highs.
Our own average national forecast for June through September price growth was 1.51 percent, while actual change came in at 2.15 percent over the same time horizon. Many other data-driven forecasts utilized by institutional investors and mass buyers were similarly conservative.
This is why there were no other meltdowns in the housing market as price growth slowed across the country during the summer.
The vast majority of iBuyers have experienced unprecedented success with automated valuation models
With today’s advanced technology, iBuyers have incredible amounts of market data at their fingertips, allowing them to plan acquisitions and inventory months in advance and the ability to pivot their business strategy in real time.
The reality is that most other players in the iBuying industry have been able to profit in this market because they have implemented advanced valuation technology and adhered to the movements of highly accurate pricing algorithms.
A week after Zillow announced its departure from the homebuying market, rival Opendoor reported better-than-expected third quarter results, with the number of homes it sold and purchased up 72 percent and 79 percent, respectively, from the second quarter. Meanwhile, Pretium Partners has reportedly agreed to scoop up 2,000 Zillow homes across 20 U.S. markets.
Significant progress has been made to further develop and hone these models after they first broke onto the scene before the advent of the dot-com era.
As the demand for highly accurate, real-time and localized property data continues to grow, we will see artificial intelligence and machine learning play an increasingly important role in all aspects of the homebuying process, from mortgage underwriting to refinancing to iBuying.
This is something that all market participants should welcome.