A short while ago Zillow revised the algorithms that power the home value estimates (cleverly called “Zestimates”) on their Web site. According to a recent Wall Street Journal story “the overall margin of error for Zestimates dropped from 12% to 8.5%, not far off the typical 5% margin of error that most home appraisers claim.”
Well, in reading this story I was surprised to learn that a) people really take these Zestimates seriously (OK. I guess that really didn’t surprise me.) and b) people apparently check the value of their home on a regular basis, much like you might regularly check the value of your stock portfolio.
So when Zillow revised their algorithms, as you might imagine, some of these people saw their Zestimates drop – by a lot. And these people, being of types (a) and (b) above, now believe that as a result of this algorithm change their net worth has declined – by a lot. So these people are outraged and some have even gone so far as to write angry letters to Zillow. The Wall Street Journal article tells the story of a Mr. Trumbo of Phoenix:
his personal “net worth” statement, which incorporates the value of his house based on Zillow’s estimates, showed that he was $40,000 poorer than he had been a week before. He dashed off letters to Zillow’s CEO, as well as to the CEO of his bank, Wells Fargo, explaining that Zillow’s change had caused him to lose $40,000 in paper net worth.
“These changes have already affected pending financial decisions, but it’s really hard to predict the effect of adjusting the net worth of millions of Americans, by billions of dollars!” he wrote in one letter. “Consider the family that used Zillow when deciding on a home purchase two years ago. After paying their mortgage for two years, thinking they were ahead of the game, today they discover that they paid $50,000 too much for the home and were underwater on day one.”
Wow! This mentality is wrong on so many levels:
- Regularly revaluing your portfolio is one thing – you might want to make some adjustments based upon the values. However, if you’re not planning on selling your home any time soon why does its value matter?
- Why would you trust Zillow to provide you with a valuation of your home? As I’ve pointed out numerous times in the past, these Zestimates are pretty crude. They can’t possibly account for the level of finishes inside the home, any major work done, or block by block valuation differences.
- Related to my last point, who in their right mind is going to use Zillow for making a home purchase decision, as suggested in Mr. Trumbo’s letter?
- Changing an algorithm on some program 1000 miles away does not change your net worth. It merely changes your perception of your net worth – right or wrong. Mr. Trumbo seems to think that Zillow actually controls the value of his property.
I guess a lot of people believe that if it comes out of a computer it’s almost as good as coming from God. I wouldn’t let any computer have that much power.