The trouble with Zestimates (2024)

The aspirational pastime of flicking through Zillow listings with no intention of buying has become such a universal experience that it was parodied on "Saturday Night Live" by the "Schitt's Creek" actor Dan Levy.

"Sex isn't really doing it for me anymore," he said cheekily to the camera. A sultry voice-over offered an alternative: "You need Zillow dot com."

As a laugh track played, Levy growled and scrolled through home listings. "The pleasure you once got from sex now comes from looking at other people's houses," the voice-over continued.

But while the Zestimate has bolstered Zillow's popularity since its founding, it's also a key driver of the real-estate giant's recent troubles.

Here's a history of the beloved and controversial feature, from the psychology behind why it's so irresistible to its role in shuttering the company's home-flipping arm.

The failure of Zillow Offers highlights the potential inaccuracy of a Zestimate

At the beginning of November, Zillow abruptly announced that it would be shuttering its "instant buying," or iBuying, outfit and laying off a quarter of its staff, about 2,000 people.

The unit, called Zillow Offers, was essentially a home-flipping business. Zillow would scoop up properties across the country at the click of a button, guided by its proprietary Zestimates algorithm, with the intention of selling the homes for a profit. But there wasn't much profit. An Insider analysis of almost 1,000 Zillow-owned homes on the market in October found that almost two-thirds of them were on the market for less than what Zillow paid.

"Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in," Rich Barton, Zillow's CEO and cofounder, said in the company's November 2 earnings call, just hours after he'd publicly confirmed Zillow Offers' demise. Barton also disclosedhundreds of millions of dollars in losses for that quarter.

The losses cast doubt on the accuracy of Zestimates and the home-valuation algorithms that Zillow used to buy homes, which are essentially a mystery to company outsiders.

What's in a Zestimate?

Zillow has been plastering a home valuation underneath every address featured on its website since its launch in 2006.

The company maintained that the Zestimate margin of error for homes on the market was about 2%, meaning that half of all on-market homes ultimately sell within 2% of the most recent Zestimate.

Zillow said it used public, MLS, and user-submitted data to craft a precise property value. The algorithm takes into account local home prices, market trends, and factors such as location, number of rooms, and recent renovations.

Over the years, Zillow has poured many resources into developing the tool. In 2019, it even paid out a $1 million prize to the team that improved the accuracy of the Zestimate the most.

But even Barton acknowledged its imprecise nature.

"The Zestimate started out fairly inaccurate, but it didn't matter," he said in an October podcast. "It was provocative."

The Zestimate origin story

In a 2006 email chain among founders, one said Google Maps' recently launched satellite view gave a bird's-eye view of every neighborhood in the US. Another suggested that they could put a price on every featured rooftop, Forbes reported.

Everyone was immediately on board. "It's so cool and innovative to say, 'Oh my god, I can grab my kid's school roster, and I can Zillow everybody at my kid's school and see what everyone's house is worth,'" Spencer Rascoff, Barton's cofounder and predecessor as CEO, previously told Insider.

He explained that they went about assembling data primarily from county-level sources. They acquired data on homes' number of bedrooms and bathrooms, square footage, tax assessment, sale history, and more from local courthouses — and then digitized those documents to act as the backbone of a Zestimate.

After the arduous task of collecting that data, early employees lined up their Dell desktops on Ping-Pong tables in the company's Seattle headquarters, connected them for stronger processing power, and then let the low-budget supercomputer analyze the digitized documents to create the initial estimates for 43 million homes.

The feature was such a hit that it caused a crash on launch day in 2006, Rascoff said. "There was this huge media explosion, and it brought the site down," he explained. "We launched with a bang."

Today, there are Zestimates for over 100 million homes, the majority of the 139 million homes in America.

The psychology behind a Zestimate's hype

The reason for the site's initial popularity is simple: A Zestimate piques curiosity — and not just from homeowners or prospective homebuyers. Anyone can find it interesting.

Jonathan Miller, the president of Miller Samuel, an appraisal and consulting firm in New York, said Zestimates were so attractive for one reason: "It's conveying a truth that doesn't exist."

Zealously keeping up with Zestimates, he said, feels similar to other minor daily engagements: "Why do you read your horoscope?"

For homeowners, specifically, a Zestimate can puff up egos frequently, since it's updated so often.

"My self-worth is defined by my Zestimate," the editor Kris Frieswick wrote in The Wall Street Journal in October. "Today, our Zestimate is $5,000 more than it was 30 days ago. I smile. For the next 24 hours, I am a good person. And smart. Possibly thinner," she continued.

Brad Klontz, a financial psychologist and professor at Creighton University, compared the obsession to an age-old tribal human instinct. "We are wired to pay extremely close attention to how everyone values us," he said. "If you're not paying attention to how the rest of the tribe is viewing you, you might be blindsided by a knife in the back."

The obvious problems brewing behind the numbers

But the tribe might ultimately be evaluating inflated Zestimates, Miller said. Take Rascoff, for example. He sold his own home for 40% below its Zestimate in 2016.

Meanwhile, Frieswick was able to beef up her Zestimate by thousands earlier this year once she reported to Zillow that her house had two and a half bathrooms instead of two, a surprising three bedrooms instead of four, and a finished basem*nt where there wasn't one. Her experiment indicated that the feature could be manipulated to spit out a higher value.

Miller also said Zestimates are so effective in reeling users back in because they affirm what users want to see. "When a homeowner lists a property, they often seek the price they want, not what it's worth," he said, while a broker wants to list it at a price that guarantees a sale.

"If the seller picks a random number that is too high and the Zestimate justifies that, that is problematic," Miller said. "You poison the seller with this aspirational value that isn't real."

And that causes headaches for realtors.

Tal Daniel, an agent with Maxima Realty, told the South Florida Business Journal that it's important to manage Zillow users' expectations when it comes to listing a home. "Every seller I work with sends me a screenshot of what their house is worth on Zillow. If I say no, then they will go with someone else who goes on what Zillow says," Daniel told the outlet.

Sarah Richardson, a broker with Tru Realty, a wholesaler in Phoenix, told Insider that she witnessed Zillow's now defunct homebuying arm snapping up local properties at their Zestimates early this fall — at prices that local Realtors said were too high.

The Zestimate-based deals Zillow made left Richardson and the agents at her firm laughing. She said, "I almost thought it was part of their business plans to lose money for, like, a tax write-off."