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Zillow (and similar systems) gives the illusion of providing "valuations" for properties (Zestimate) for comparisons and trends. There are so many problems with the underlying datasets supporting their computer "models" and with those models themselves that the results are far worse than useless -- they contribute to misinformation, misleading media articles, frenzied panic decisions by buyers and sellers, counter productive or wasteful public policies, and much more.
I think Zillow is trying to compile and report reasonably accurate and valid data in an accessible format with enough perceived value to maintain traffic to their site so they call sell advertising. Their business model is much the same as online companies like Google or traditional advertising-supported information and entertainment providers -- newspapers, magazines, or commercial television.
The issues with Zillow are much the sames as those with similar sites, whether consumer oriented like Zillow or supposedly more professional tools used by appraisors, lendors, Realtors, taxing authorities, etc. The underlying data compiled from public records (deeds, tax records) varies from county to county, city to city, state to state. The online records are riddled with errors introduced at each step in the process, and almost noone seems to have done even simple common sense data validation on the online records, except for items critical to collecting taxes, etc.
Even when dealing places with detailed, high quality property and tax records such as those in Chapel Hill (Orange County) where I live, Zillow is wildly inaccurate, inconsistent, unstable, erratic, and likely to harm all parties involved with the real estate market. First, there are important items that Zillow mishandles. It connects a property to the nearest schools, public or private. In my case, it uses a fairly good private school rather than the nationally recognized public high school for my district and sees no problem comparing with houses in adjoining counties with the same ZIP.
Zillow seems to value all square footage the same, whether main level or below grade (basement) which is usually given a much lower value per sq.ft.
The Zillow algorithm fails to properly identify comparable properties seems grossly inadequate. While my house is EnergyStar, "green", etc. in a walkable dense neighborhood, none of the comps selected for it by Zillow are in my neighborhood and all are much older, somewhat smaller, but with much higher energy costs, and often with hazardous building materials. One of these comps was torn down and a new house is being built on its nice lot.
But Zillow has even bigger problems establish valuations/Zestimate. This problem is widely discussed, typically questioning why several nearly identical houses by the same builder within a block or two of each other are assigned very different Zestimates, and their individual values often move quickly in different directions by large amounts without any apparent reason. In my case, while the tax appraisal for all the similar houses differ by less than 5%, the Zillow estimates are often much more different and move up and down independent of each other over just a week or two.
After puzzling over this for too long, not understanding why they did not find and fix this problem, I think I might now understand. It is not a bug, it is a feature -- designed to increase dramatically the number of repeat visitors to the Zillow site. If Zestimates were relatively stable and slowly changed in response to sales and other infrequent events, most people would take longer before revisiting the site.
While that random-walk component of the Zestimate might be good for building traffic at Zillow, think about how a typical homeowner reacts. With everyone already very nervous about the housing market, having constant reminders that the value of your house (or another of interest) is fluctuating wildly for no obvious reason increases your perception of risk. Homeowners might panic and try to sell into the falling market, while potential buyers delay taking any actions.
In previous downturns in the housing market, most home owners held onto their properties and worked with the lenders who still owned the note. They road out the crisis and tried not to think too much about doing anything except continue to make their monthly payments.
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