Zillow, the third-most-visited real estate website in America, last month decided to spruce up one of its most popular features: its “Zestimates,” or valuations of what properties on its site are worth.
Historically, these Zestimates — which are now given for nearly 100 million homes — have borne only a sideways relationship to reality. (In my book I believe I called them “as reliable as horoscopes.”) Part of the problem is that the valuations are done by computer, so that the input that you just raised your home’s value by renovating your kitchen might be missing.
Another part of the problem — a more typical problem with appraisals — is that it’s always tough to weigh recent sales data. The day you go into contract on a property, the property is probably worth that amount — at least the market says so. But how about the day you close; is the property still worth the contract amount? What about a week after? A month after?
In order to try to gain greater accuracy, Zillow last month released a new algorithm for its estimates (its third since the site launched five years ago). The goal was to try to better incorporate user-provided data.
Now of course in the current economy, web sites that aggregate user-provided data are worth a ton o’money (it’s estimated that Zillow’s upcoming IPO will bring in $350 million) so the move made sense from Zillow’s point of view.
The company claims gains in accuracy that should help users, too. “For the three-month period ending March 31, 2011, our national median error was 8.5 percent,” wrote Stan Humphries, Zillow’s chief economist, in an essay explaining the changes. “The median error of our previous algorithm over the same time period was 12.7 percent, meaning that the new Zestimates are 33 percent more accurate than the older ones.”
Well, 33 percent is certainly something, and that hasn’t gone unnoticed in the real estate press, including a Wall Street Journal blog piece claiming that homeowners were upset because the Zestimates of their homes had shifted, sometimes radically.
But in my mind, the change prompts a bigger question: Do you really need to know what the value of your home is?
Certainly, if you’re contemplating a transaction, you do. If you’re thinking of trading up or downsizing, for instance, you need to know what your current home will likely sell for, as well as what your target home will probably cost, before you make a decision.
But for most others, the obsession with marking an illiquid asset to market is probably financially destructive. For one thing, it feeds the impulse to treat this long-term asset as a short-term holding. We certainly saw during the bubble that owners counted on their growing equity to the point of withdrawing it as home equity loans. When prices collapsed and the equity disappeared, of course, the debts remained.
What about during a bust? I think looking at one’s lowered home value creates a negative psychology — a desire to get out when, in fact, holding may be the wisest course. Brad Tuttle has written well about the idea of “strategic default” and he notes that even Brad White, the college professor who evangelizes walking away from one’s mortgage, says that it’s a bad idea to default if you’re less than 10% underwater. But what if the fall market reports say you’re 12% underwater but there might be a spring bounce? Remember we’re dealing with an illiquid asset where the transaction costs are fairly high, so attempts to time the market have higher frictional costs than, say, dumping an underperforming stock does.