Z-Market Cap for Zillow Dropped Over $30 Billion

By Ken DeLeon

According to the Diamond Price Index, in December 2021 the average price for a diamond was $11,212.56 per carat. I found this interesting given that the average price per carat of diamonds has gone up significantly since the time I proposed to my lovely wife, Alex, in 2020. However, it would be a financial mistake for her to value her ring based on this simple calculation. There are many other nuances that go into the true value of a diamond, such as the cut, the quality, clarity, and the groom! I like to think that Alex views her ring as priceless.     

Zestimates are a useful tool for general market trends, and may even be helpful in subdivisions where the individual homes are somewhat fungible. However, a reliance upon Zestimates in Silicon Valley’s very specialized market is not much better than valuing a diamond based solely on weight. Unfortunately, it is looking like Zillow is learning this lesson the hard way and their sliding market capitalization may be a direct result.  

Perhaps Zillow’s recent market value drop from $46B to $13B could have been avoided if Zillow’s executive team had read my article nearly 5 years ago, entitled, “Zestimate or Zestimiss?”¹

In my article, I discussed that experienced agents realize that Zillow’s Zestimate, an attempt to use an algorithm to value each home in vast metropolitan areas, is highly flawed in its reliance on incomplete analysis that ignores the nuances of each property. For example, a Zestimate will miss many intrinsic attributes, such as being on a quiet street with no heritage trees limiting redevelopment versus overvaluing homes on high-traffic, cut-through streets, or properties with lower redevelopment potential arising from flood zone, or single-story overlay impacts. Overall, I found that Zestimates tended to overvalue properties, ironically illustrated when the CEO of Zillow sold his home for merely 60% of the Zestimate’s value.²

In fact, class action lawsuits have been filed against the inaccuracy and resulting implications of Zillow’s Zestimate.³ Yet, even with the flaws in Zestimate’s valuation methodology pointed out in my article and others, Zillow was so confident in its pricing algorithm that it said early last year, “its Zestimates would serve as the initial offer price on eligible homes.” That did not last.⁴ In a related, albeit abrupt and embarrassing, about face, late last year Zillow’s entrance into the practicing of iBuying was dramatically halted.⁵

The “i” in iBuying stands for “instant,” wherein Zillow sends owners instant, all-cash offers at their Zestimate value. These Zestimates were so inflated that even with savings in transaction costs and the nationwide housing market strongly appreciating, Zillow was reselling the majority of their homes at a steep loss.

With thousands of their property resales being below their purchase price, Zillow’s iBuyer division had a staggering loss of $422 million in the 3rd quarter. While a monumental number, this paled in comparison to the company shedding 25% of its workforce, or 2,000 employees, along with the majority of its market cap in 2021 as it ignominiously shuttered its plans to purchase tens of thousands of homes with its iBuyer methodology.⁶

This implosion does not only underscore the value of a local expert for valuation analysis… it also calls into question any reliance upon Zillow’s Zestimate in particular, and in general the sustainability of online valuation models going forward.

Zillow’s loss of two-thirds of its market cap was due not only to the failure of the iBuyer model, but the public relations fiasco that ensued, underscoring how inaccurate the Zestimate often is.  

In light of these great setbacks, many articles and experts further question the accuracy of the Zestimate tool. “It’s really a toy,”⁶ said Mike DelPrete, a real estate analyst who tracks the iBuying sector. “It’s meant to drive people’s interest in property.” However, this clearly does not reflect market value as evidenced by Zillow themselves losing so much money due to their reliance upon this flawed metric. 

While the iBuyer concept has been humbled, it could still succeed if better executed, and when applied to homogenous housing markets with a lot of tract housing. Silicon Valley, with its heterogenous housing, high variability in lot size and configuration, building codes varying per city, and with its high prices, poses significant and potentially insurmountable feasibility barriers for iBuying to become pervasive, unlike Phoenix where iBuyers own 13% of all homes on the market.  

While iBuyer companies like Opendoor have lost about 40% of their market cap in 2021, they generally employ better metrics in making their valuations than Zillow, and accordingly will likely survive. However, unless these models are constructed or adjusted at the local level, they will always struggle to achieve the accuracy of a very good local real estate agent, ideally with a qualified local appraiser on staff. It should also be noted that while Compass has lost over 65% of its value from its peak last year, this is not due to any significant iBuyer exposure. Rather, it’s due more to the market’s general disappointment with the company’s performance, which resulted in its general operating losses of over $100M in
the last quarter. Commentators believe that this weak performance will likely continue into the immediate future.

The loss of faith in Zillow’s Zestimate is a cautionary tale illustrating that local expertise is required to analyze value in a market as sophisticated and distinct as Silicon Valley. To that end, for those considering the sale of their home, the listing team at DeLeon Realty is happy to provide a complimentary and accurate analysis rooted in localized, sound market data of the valuation of their property, a valuation enhanced by our on-staff licensed appraiser. And for those considering the purchase of a new home, the buyer team at DeLeon Realty is dedicated to employing an equally proven, data-driven approach to property valuation critical in today’s highly competitive Silicon Valley market.

¹  https://deleonrealty.com/2017/an-assessment-of-zillows-automated-valuation-algorithm/

² https://www.geekwire.com/2016/zillow-ceo-spencer-rascoff-sold-home-40-less-zestimate-1-75-million/

³ https://www.washingtonpost.com/realestate/zillow-faces-lawsuit-over-zestimate-tool-that-calculates-a-houses-worth/2017/05/09/b22d0318-3410-11e7-b4ee-434b6d506b37_story.html

⁴ https://finance.yahoo.com/news/ever-notice-zillow-house-price-201500446.html

⁵ https://www.bloomberg.com/news/articles/2021-10-26/zillow-s-zeal-to-outbid-for-homes-backfires-in-flipping-fumble

⁶ https://www.marketwatch.com/story/its-really-a-toy-zillow-closes-home-flipping-business-what-does-that-say-about-the-reliability-of-its-zestimate-home-valuation-tool-11635947573