Zillow's Zestimate home values is a popular reference for US homeowners. Zillow's algorithm for buying and selling homes was badly misinterpreted by the company.
In 2018, the company launched its iBuyer arm (or "instant buyer") in Phoenix. This is where tech-first companies use algorithms to quickly value and buy homes. It was part of a bustling Arizona market: Opendoor and Redfin have been flipping and buying homes there since 2014.
The idea behind iBuying works by using big data to estimate the value of a property they believe they can sell. This then informs buyers about their offers to purchase. They offer lower prices than traditional buyers but are more attractive to sellers because they promise all-cash deals and faster turnarounds.
Once an iBuyer has purchased a property, it quickly renovates it and relists it for profit. A study by Columbia Business School, Northwestern University, Stanford Business School, and Northwestern found that iBuyers earned around 5 percent by flipping houses.
Zillow believed that it knew the secret to iBuying: the Zestimate. The algorithm was developed in 2006 and used millions of US home valuations before it was used to estimate the price of Zillow's property. It was, in theory, a natural confluence between two things: Zillow’s expertise in pricing houses and a new method for buying properties that relies on accurate estimates.
John Wake, a Phoenix realtor and analyst since 2003, says it worked for three years. He's witnessed the market crash several times during that time, including during the 2008-09 financial crises caused by subprime loans. He hasn't seen anything similar in the last 18 months.
He says, "I don’t know anyone who predicted that the market would do the things it did in spring 2020." "No one predicted it would take off, and become so powerful." Phoenix's housing market was virtually dead in March 2020 as economic uncertainty reigned and the world crashed. Sales had accelerated dramatically by October 2021, even among iBuyers.
Because of the abundance of cookie-cutter houses, tech companies chose Phoenix. The identikit streets allow for easier pricing than New York or Boston. According to Tomasz Piskorski, a member of The National Bureau of Economic Research and a Columbia Business School graduate, iBuyers' market share has increased from about 1 percent in 2015 when tech companies entered Phoenix. To 6 percent in 2018, iBuyers market share in Phoenix grew to 6. Piskorski believes that iBuyers, including Zillow, have increased their market share in Phoenix but still account for less than 10% of all transactions in the area.
Wake says that the iBuyers were a threat to real estate. Zillow's most active week in Phoenix was October 2021. This is part of its goal to purchase 5,000 homes per month by 2024. It stopped buying suddenly. Wake asked one question: "What's the matter?"
