Either Zillow Is Broken Or We’re In A Massive Housing Bubble

In January 2014 I wrote a post entitled, “Exploit Online Data To Lower Your Property Taxes“. In the post I highlighted a chart of my house’s estimate value by Zillow. The chart looks like a internet stock from 1999-2000. The chart significantly impedes my efforts to lower my property taxes this year because property assessors use online sources such as Zillow to partly make their assessments.

Since the publication of the post, the chart has continued to go up every day (see below). We’re now close to 300 days in a row of price increases according to Zillow. Are you looking at a new billionaire in the making who only hangs out with super models? Or is Zillow completely wrong? There is no way my home price could be up 60% since May 2013. Furthermore, there is no way prices can rise every day in a straight line for 10 months in a row. Just looking at the gap between the bold blue line and the dotted line (average price of my area) shows things are out of whack.

Thank goodness San Francisco is limited to raising property taxes by around 3%. But for someone like me who was able to successfully lower my property valuation for years, I will now be reset back to the original assessed value +3% a year catchup if I fail this year.

Housing Bubble Chart

Zillow is either broken, or San Francisco is in a massive housing bubble. Thanks to the robust growth of tech companies here in the Bay Area (e.g. Facebook at record highs, AirBNB and DropBox going public next, etc), I don’t think San Francisco is in a housing bubble. I don’t even have to mention rent control, land restrictions, good weather, and an international city as other reasons for propping up demand. We’re probably in the sixth inning of a dramatically tight ball game. 

EVERYONE SHOULD QUESTION WHAT’S GOING ON

Let’s forget about San Francisco. Think about the hundreds of other cities in America where Zillow and others are wrongly assessing home values to boost property taxes and perhaps create some type of buying frenzy. You can see this article by Priceonomics which fact checks the following statement by Redfin and The New York Times: “Redfin estimates that, on average, homes in San Francisco are selling for 60 percent to 80 percent over asking price.” You and I know this is absolute horse poop, yet The New York Times went on and published this data by Redfin!

Ever since Redfin, Zillow, Trulia and other online real estate companies were started, I’ve been hopeful they would help lower the oligopolistically priced 5-6% selling commissions. The internet, after all, has successfully lowered costs for consumers in every other industry imaginable.

5-6% selling commissions used to make sense when housing prices cost under $100,000 decades ago. But when completely uninspiring homes are selling for $700,000 here in San Francisco, you’ve got to wonder what’s going on that would warrant a $35,000 to $42,000 commission. The internet has made connecting buyers and sellers easier. The internet has also helped find a more efficient transactional price point. The agent’s job has gotten easier, not harder.

To understand why the pricing model continues to be bullet-proof in the real estate industry, all you have to do is study the business models of online real estate companies. The internet has failed the real estate consumer. Everybody has a right to make as much money as the markets dictate. (See Do Landlords Have The Right To Maximize Profits). But if you fail to help consumers lower their artificially high transaction costs, at least have a working algorithm to properly assess home values so as to not hurt consumers through higher property taxes.

The biggest irony is this: By keeping selling commissions artificially high, the real estate industry is screwing themselves because transaction volumes are artificially suppressed. We call this “friction” in economics land. The real estate industry should look to lower selling commission costs for its own good instead.

WHAT IS A REAL ESTATE CONSUMER TO DO?

First of all, you can start a site to write about the peculiarities that are going on in the real estate industry. You might not make any friends in the real estate industry, but you certainly will gain some respect and appreciation from consumers. It’s worth reaching out to sites who are mis-pricing your property to see if they can make it right.

The second thing you can do is vote through action. I’ve decided to never sell any of my properties until the total selling commission cost is lowered to under 4%. Even 3-4% seems egregious for a property that costs more than $250,000 nowadays. If the industry could institute a flat cost to selling a property, I think everybody but the very top producers will benefit.

Finally, I’d like to ask other readers to share your experience with egregious online valuations. It might feel good to see your property rise in value, but unless you are planning on selling, a rising assessed value hurts your net worth due to rising property taxes. Your goal as a property owner who doesn’t plan to sell is to have everyone value your home as close to $0 as possible.

If there is anybody from Zillow reading this post, please contact me through my About page. I’d like to get my Zestimate cut in half. I understand that estimates can be off, but in my case, they are egregiously way off. I do believe companies like Zillow are terrific for gathering historical sales information and helping one assess the direction of the local market. Just be very wary of the price estimates.

Recommendations For Homebuyers Or Homeowners:

* Check Your Credit Score: Take a moment to check your free TransUnion credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance! The average credit score for rejected mortgage borrowers has risen to 729 due to more stringent lending requirements. Do you know what your score is?

Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

* Check Your Property Comps: You can check your property comparables on Zillow. Just realize that the estimates can be off by 20% either direction. Use Zillow to see when the seller last purchased the home and for how much as well.

Thanks,

Sam

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Retire Before Dad says

    Sam,
    It’s refreshing to read someone challenging the real estate industry. It is getting easier for agents because buyers have so many resources now. Our buy side agent did very little when we bought our house and was still paid 3%. I have never sold a property, and the fees are most discouraging. Redfin has challenged the sacred 3% and the market will ultimately determine how long that number holds.

    As for zillow, I think it’s accurate in some areas but not in others. The Bay Area is probably the most challenging for their algorithms. If municipalities actually use zillow, we may be in trouble with taxes. From what I can tell, Zillow makes money from agent and lender referrals, so their destiny is tied to volume and commissions, and thus does have an interest in rising prices.
    -RBD

  2. Adam says

    A friend of mine did not get a buyer’s agent and the negotiated with the seller’s agent to credit him back the 2.5-3% that would have been paid to a buyer’s agent. Obviously that only works in a market that isn’t hyper-inflating and having 10x offers on everything.

  3. Grayson @ Debt Roundup says

    Zillow is actually pretty accurate in my area, but it depends on the house. My house is pretty close to what it should be. others are far off. My city doesn’t use these values to evaluate homes, but in my case I wish they would. The city has pushed up the value of my home to a level that it was never at. Zillow and the others have it much lower.

  4. nbsdmp says

    I think specialty areas are impossible for these types of sites to accurately depict costs. San Fran is an anomaly, just as resort areas, waterfront,…basically what I call position “A” properties.

    My home on Zillow (one of those position A properties) is about 20% under what I know I could sell if for based on sales I’ve seen in the last 6 months (and been told about by a pesky realtor trying to get me to list my home). If local governments are using this to raise people’s property taxes that is just ridiculous!

    I think we are in a little bit of a bubble though because the herd is moving so fast back into real estate it is a little crazy…but now I’m really glad I went all in back in 2010…

  5. Zee says

    I have always thought that zillow was horribly off. They evaluate my property value at approximately 85% higher than the actual selling prices, and it has been this way for at least 2 years (I never really looked it up before then). I also live in San Francisco if you’re curious about what city I’m in.

    I also think that realtor fees just don’t make sense. I know that my realtor didn’t even do anything but get the paperwork in order when I bought my house. It makes me think that I should consider doing a for sale by owner type of thing when I sell my house. It would be like paying myself that money, I’m sure that due to the rise of, ‘everything is on the internet’ I could find people who have gone through the process themselves to figure out how to do it myself. As far as advertising that’s easy, put it online. Open houses… just a few weekends. Doing the paperwork, well that’s the only tricky part I see. I see that as the easiest way to make tens of thousands of dollars just by sacrificing my weekends for 3 or so months. And it’s also like making money tax free since I’m not actually paying myself, I’m just not paying someone else.

    I know that when I was a buyer, the real estate agents only really helped fill in minor details like HOA fees and utilities for my little community I was moving into. They get paid too much to provide such little service to their clients. Maybe I have had a poor experience in real estate, maybe there are agents out there that work really hard in your favor, that REALLY help negotiate better prices on your behalf. But they just seem like middle men messengers to me and they shouldn’t get paid so much for what they do.

  6. Mark Ferguson says

    I wrote an article on my blog about Zillow prices a few months ago. I compared what my rentals are worth compared to Zillow estimates. Some were within 5% and others were 40% off. Zillow is not accurate, because they use data from many different sources including foreclosure sales which may be very inaccurate. Not foreclosure sales that the public buy, but sale prices at the auction which may be what the bank is owed and not indicative to value at all. I won’t link my article due to comment edicatte unless you are okay with it Sam.

  7. B says

    Zillow undervalues real estate in my area. I had to have several appraised in connection with a break up and zillow was off by about 20%. I think the appraisals were closer to accurate because I’ve got an offer at appraised value to consider. Some people like Chase Home Value Estimator better than zillow – maybe they have better data. Also, regarding property taxes, always challenge them. I have a guy I use in my state who challenges them on a 33% contingency fee, so I’m never out of pocket for his work.

  8. ynikon says

    Hi,

    I think zillow is close in estimating in my area, chicago burbs. The value of the house is very good estimate of what we can get right now. I think real estate fees are ridiculous but what can we do to improve the situation. I think if someone will push a law where transactions can we all automated (at least some parts of it), we would see a huge reductions in fees. Think of times when there was no ameritrade, etrade, scottrade, the broker fees where mile high, now its like $5-10 per transaction with extras for options. I think the same principle can be applied to housing market. Redfin is sort of a beginer model but i am sure they can get it much better (involve law side of things and exclude any human factor).

  9. The First Million is the Hardest says

    I agree Zillow is usually pretty high with their property value estimates, but I just checked mine and it’s actually a little below what some recent sales in my neighborhood have been, so who knows. Your graph is pretty nuts though, maybe oil has been discovered underneath your house and you just don’t know about it :)

    Realtor commissions are insane. When I bought my house my Realtor didn’t do much other than sign me up for an MLS email blast based on my criteria, unlock a few doors & hand me the paperwork to sign. Hardly worth 3%. I have to think that except in very rare cases, selling agents aren’t really going out of their way to market and find buyers for your property to justify their commission either.

    • Financial Samurai says

      Haha, that would be sweet if I had gold or oil under my house! Perhaps Zillow is playing catch up after so many years of undervaluing my house after I successfully lowered my assessed value.

      What many folks don’t realize is that half the 5-6% selling commission is used to pay the agent who brings the buyer. This in itself seems like a little bit of a conflict as I know that many agents WON’T BRING their buyers to listings if they see a lower selling commission!

      Everybody is in cahoots I tell ya. Fight the power.

  10. SD says

    I can’t forget about San Francisco because I’m typing this to you while sitting in a cubicle in the Financial District and listening to KEXP with my $300 Bose Headphones (a much better investment than $160 to dine for two at a Brazilian restaurant, but I digress).

    I live in San Carlos. We purchased our house 10.5 years ago. We are in a moderately sized bubble for sure, and in our world, Zillow consistently underestimates real selling prices. It’s great to be Tom Stanley-ing in our neighborhood as a growing number of mini mcmansions (2800 sq foot homes on 5500 sq foot lots) are replacing 65 year old ranchers.

    • Financial Samurai says

      I have to admit, I had to look up where San Carlos is, but now I know! Close to Redwood City, where I commute to once a week or so.

      How much is your house from 10.5 years ago according to Zillow and according to what you really think you can get?

      • SD says

        Oh lord Sam, you had to look up San Carlos, the “City of Good Living,” a mere 28 miles south of San Francisco? Well….you’re not alone!

        Paid $789,000 in mid 2003. Zillow says we’re at $1,237,000 now. This is for a 68 year old 1600 square foot house with 30 year old bathrooms on a 6000 square foot lot. Oh, and I can hear my neighbors like they’re in my bed. But I’m not complaining. Because I’m extremely confident we could actually get $1.4 to $1.5 million based on the abundant buying froth.

        It’s a head shaker for sure. I think in 20 years we’ll split town and live in Washington State. Because “I’m only happy when it rains.” The property tax stuff is tough, but nothing one can do…

  11. Ace says

    Sam,

    It helps to get outside your normal social group. The idea is to avoid groupthink.

    As an outsider, with no particular interest in San Francisco (outside of the very occasional day trip), I would say: Yes…. You are experiencing a property bubble.

    Your first clue is that real estate sales volume has been dropping drastically.

    Your second clue is that the median household income is $73,802 (US Census 2012).

    Your third clue is that the home ownership rate in San Francisco proper, is only 37%.

    So you have a city with a population of about 800,000 and 500,000 of them are renters. Also, only 13.5% of the population is younger than the age of 18. Not very many families there.

    So…… Here is where you need to do some detective work. It is unrealistic to think that some computer guy getting paid $100,000/year for writing App code is buying an $800,000 house. And sure, I know, there is alway’s the anecdote; the lucky geek whose stock options paid off in an IPO. But that’s not the norm.

    I would look further. You need to find out who is buying and how they are paying for it.

    • Financial Samurai says

      Any thoughts on why the home ownership rate has been so low for decades and prices have kept going up?

      I’m impressed you think the Zillow chart of my house is realistic.

      Income levels are much higher than the US Census for people who are buying homes. Heck, Oakland dock workers are making $120,000 a year and work 35 years a week. BART (train) workers regularly make $80,000+ as individuals.

      http://www.financialsamurai.com/most-people-make-a-lot-more-money-than-you-think/

      • Ravi says

        I think places like SF and NYC are tough to compare based on traditional measures of affordability because they are just “A” list locations. Sort of like valuing a growth stock on a dividend discount model. You’ll still get a number, but it doesn’t mean much.

        It’s less about affordability since I would be willing to be that there is a constant inflow/outflow of people. Tons of people leave NYC every year just as a lot of people come in every year. Perhaps if you could find the median length of residency, that may shed some more light on the phenomena.

        I assume, based on my brilliant estimation skills, that people who move to SF/NYC are on average less likely to live in the same zip code in 5-10 years than some other places. This almost forces more people to rent when property is already valuable, which pushes it up even more since like you said, how many software engineers making $100 are willing to put $800 into a condo that they don’t plan on staying in for the long term?

      • Ace says

        Well, in regards to San Francisco; I neither agree or disagree with Zillow. I simply don’t have enough information. And not really interested.

        Back in 1983, dock workers (long shore men) were making $47,000/year and computer people $35,000.
        They were always well paid.

        Boom and bust cycles have a long history in the Bay Area. It looks like you have a Web 2.0 bubble.

        None of these new web companies interest me. I’m more a fan of Tesla and Elon Musk down in Fremont.
        But….. Not to get off topic, since many Web 2.0 companies (as you personally observed) have moved into the SOMA area, driving up rent and bringing in real estate investors. I wonder how many transactions are in cash? I’d say: Follow the money.

        Again: Who is doing the buying and how is the purchase paid for.

      • Ace says

        Sam,

        Another thought…… How thin are recent sales (volume)? What’s distorting these numbers. What neighborhoods are these sales in? Etc.

        This might be a temporary spike causing distortion in this data.

        In any case…… Yes, I believe that you are currently living through a bubble. This may not matter to you. You may enjoy collecting the high rents and live happy!

        So good for you!

  12. JT says

    Zillow has every incentive to keep transaction costs high. They’re rent seekers (no pun intended), that would prefer to sap a portion of the high transaction costs than reduce transaction costs.

    The more revenue agents take per sale, the more revenue Zillow can skim as a “necessary” part of the home buying process.

    FWIW, Zillow is pretty accurate in my neck of the woods, at least for the neighborhoods I know well. Recent sales have probably helped their algos. Their rent Zestimates, however, are off quite a bit. They don’t do a very good job of adjusting that for local market variables, apparently. I could never rent my parents’ house for their Zestimate — it’s probably 30% under what it should be.

  13. Addison @ Cashville Skyline says

    I’ve had mixed results with Zillow for Nashville. There’s low inventory in my neighborhood and I’ve spoken to several real estate agents who have said homes are selling for more than they are worth. My Zestimate appears to be under valued at the moment, so I’m not sure what’s going on. I suspect is has to do with the high amount of foreclosures. And I’m in agreement with you about real estate agent fees – 6% is outrageous just to have your home listed on the MLS.

  14. krantcents says

    I have no idea what Zillow uses as their basis for the information, but I found them to be inaccurate. I would take information like this with a grain of salt thought. The trend is up because of the uniqueness of San Francisco. Building new units are very expensive because you have to take down existing buildings and ther eis many other limitations.

  15. Mrs. PoP says

    I don’t know if it’ll help, but claiming our house on Zillow and updating the features of the home helped give us more accurate results.

    I’d be surprised if your county appraisers are using Zillow to do their job for them. Zillow uses county sales databases to drive their own algorithms, so it’d be fairly circuitous for them to go ahead and use Zillow. Our county property appraisers have to provide a full comps valuation for your property appraisal if you request it.

    • Financial Samurai says

      When I was battling them in 2013, the appraiser said she looked on Zillow for their estimate and asked why I took down my listing. They use Zillow along with their traditional methods here. Zillow does have a sales database.

      • Kristy says

        As an appraiser, I am sincerely disappointed that your assessment appraiser used Zillow for their estimates. We all know that Zillow is NOT accurate. Zillow may have a sales database, but they do not take into consideration the necessary factors to appraise residential homes. If you really think your assessment is out of line, I would hire my own appraiser and fight the assessment office.

  16. Marvin says

    I have never relied on real estate websites. I use their prices as a point of reference but that is about it. I would definitely use them if the situation was different and I could lower my real estate taxes though ;-)

  17. Cee Dub says

    Sam, realtor fees are disclosed. What are fees from your former line of work that affect everyone’s retirement accounts? I may be able to make a $10 trade online, but the underlying fees there are not negotiable and are not very transparent to the average consumer. Our retirement accounts are huge parts of net worth, yes? i think you either do need to sell homes fsbo, and hope it all goes well, or back off the real estate agent hatred. I love this blog, but will likely quit it for this.

    Furthermore, you are making a tremendous case for the value if a knowledgeable Realtor since you are not going to get accurate values from online data providers.

    • Financial Samurai says

      There’s no hatred for real estate agents. Not sure where you got that.

      This article suggests people beeare of zillow’s estimates. It also makes a claim that real estate Internet companies have failed the consumer in lowering transaction costs.

      The cost for trading a Hong Kong security was like 8 basis points of the transaction value. Compare this with 500-600 basis points and I don’t see a comparison.

      Do you really think 5-6% commission is fair to sell a $2 million dollar home?

  18. Paul says

    Zillow is indeed broken. I own two houses in two very different markets. The house I own in the Omaha, NE area has an estimated value by Zillow of $242k. Last year, a local real estate agent valued the house at about $215k. The house I own in the Syracuse, NY area is estimated at $191k by Zillow. That house is currently on the market, listed at $185,900, and has had little interest. It looks to me like I probably will have to settle for a price less than $180k. My guess is that a more realistic valuation of this house is somewhere around $175k. When/if the NY house sells, it will probably end up being a short sale, and that’s after I put several thousand dollars into fixing it up. I don’t know where Zillow gets its numbers, but they obviously have little knowledge of the local market.

    • Moshennik says

      Wow! Syracuse :). We bought a place in syracuse in 2005 for 155k.. Sold is 2010 for 163k, and I thought we got a good deal. Housing in syracuse has been flat for decades now.

  19. Stan Humphries says

    Hi Sam. Stan Humphries from Zillow here.

    Yeah, that’s broken. We are concerned about emerging housing bubbles in some parts of the country, but that’s not what’s going on with you home given a chart like that. I’ve sent you a direct email to get the property address so we can investigate.

    If helpful to others on this thread, Zillow regularly publishes its accuracy (for both Zestimates and Rent Zestimates) here: http://www.zillow.com/zestimate/#acc.

    Also, the Zestimate models are designed such that any given Zestimate is generally just as likely to be above the actual sale price as below it.

    Thanks.

    Stan Humphries
    Chief Economist, Zillow

    • Financial Samurai says

      Howdy Stan,

      Thanks for acknowledging and shooting me an e-mail to try and fix the situation.

      What I think is happening is that a neighbor who did a complete remodel and sold for top dollar revised the valuation of my house to catch up with its price. The problem is, my neighbor is not a single family house but two condos. When I used condos to try and LOWER my property taxes with the city, they said that wasn’t allowed b/c it is not like for like. But if Zillow is using an expensive, remodeled condo to value my SFH, then that is a HEADS the government wins, TAILS I lose.

      Sam

    • Debt free Dan says

      Stan, I have a severely undervalued property in San Antonio, tx. (33% lower than market according to my calculations). How can I get this corrected?

      • Stan Humphries says

        Hi Dan. Give us a zip code and we can take a look at our accuracy there. Over the past three months nationally, 85% of sales have been within 20% of their Zestimate, 64% within 10%, and 38% within 5%. So, your house with a 33% difference between Zestimate and underlying value is not terribly common but can happen. Of course, you’re in TX which is a non-disclosure state (sales aren’t a matter of public record) which makes estimation harder. By knowing the zip code we can tell if something systematic (and undesirable) is happening in your area or whether your house is simply harder to estimate than others around it.

        Info on Zestimates and accuracy here: http://www.zillow.com/zestimate/

        Anybody interested in understanding how Zestimate accuracy compares to other opinions of value might find this research brief interesting: http://www.zillow.com/research/putting-accuracy-in-context-3255/

        Thanks.

        • Debt free Dan says

          Hi Stan,

          It’s 78247. I bought it distressed with hard money, fixed it up, and refinanced into a conventional loan all in the last 6 months. The appraisal for the conventional lender is was $152K. Zillow’s price is trending towards the distressed sale price, not the market price, IMO.

          Thanks for looking into it.

          Dan

  20. Cindy @ GrowingHerWorth says

    Zillow and the Chase home estimator both seem to value my house around the same amount, which to me seems too high. The houses right near me that have been up for sale recently were listed at or above their Zillow estimates. None of them sold, and several have been taken off the market.

    Looking at the values given in my neighborhood, it’s obvious the estimates are off. For example, my 1 bedroom house is valued only $10,000 less on Zillow than the 3 bedroom house to the West. Chase values my house at $10,000 more than the 3 bedroom house, which is obviously wrong. Their house is in similar condition to mine, with 2 extra bedrooms, and double the square footage. Plus a basement. And yet, the 1 bedroom house to my East is valued ~$40,000 more than mine. True, it has a detached garage that has a small apartment above it, but the house and the apartment are in terrible shape. As in, really need to be torn down kind of shape. I don’t think they could sell that property for half the Zillow estimate.

  21. Rob says

    It disappoints me that some real estate agents depend on Zillow estimates of valuation. It values my rental at roughly 61% of what the market is paying in my area and the data is outdated. Last time I checked, they still didn’t have on record when we purchased the house, which was 8 years ago. May as well ask my 12 year old niece what to price it at before using Zillow.

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