Based in Bellevue, Washington, withinVUE is a blog by Elizabeth Walsh. Her posts explore the housing market of east King County..

Buyer Beware : The Limitation of Pricing Models

Zillow vs Redfin - What is My Home Worth?

Any broker will tell you that your home is worth what someone is willing to pay.  Without question the pricing estimates of sites such as Zillow and Redfin have influenced the decisions of home buyer and sellers.  Sellers incorporate the estimations into their expectation on home value, buyers tether their offers around perceived value of the home purchase.

But these pricing models are far from perfect.  This past week I conducted a comparative market analysis (CMA) for a client looking to sell a home in the Issaquah Highlands.  While I don't rely these types of estimates in my pricing model, I always review these sources to gain an understanding of current market expectations.  Let's take a look at the following chart from Redfin. 

What is wrong with this graph?

 
Redfin Estimate Townhome Issaquah.PNG
 

What is wrong with this chart? For starters, the Redfin estimates do not provide information on margin of error, confidence bands, or standard deviation - measurements which allow us to understand the accuracy of the model.  A good estimate is accompanied by a high level of confidence.  We have no idea how strong this model is, and therefore how much we should trust the estimate.

Notice the historical estimates.  According to Redfin the value of the home in July of 2015 was $298,559 - even through Redfin has a data point that the home sold for $247,734 at that time.  Redfin's estimate is 20% higher than the actual value - a difference of over $50,000.

Of course, no one can predict the future - and we should always expect future estimates to be approximations.  But, Redfin has a historical data point for this house - two of them.  And the Redfin model is not incorporating the historical data point into the estimate. 

If that doesn't give you a reason to increase your skepticism of the Redfin pricing model, then the shape of the graph should.  Anyone who has followed the market in this region understands that the acceleration of home prices is seasonal.  Prices increase more rapidly in the late spring / early summer and begin to cool off in the fall.  The chart below shows the three-week moving average for 3 bedroom homes in the Issaquah Highlands. Notice the peaks and valleys in the actual sales data.

Issaquah Highlands 3 bedroom sales 2013 to 2018.png

Is Zillow any better?

It depends on the home.  The pricing estimates are based on proprietary models - we don't know how these estimates are calculated. But we do know that Redfin and Zillow estimates are not the same. In the example above Zillow estimates that the 1300 square foot, 3 bedroom townhome in Issaquah Highlands would sell for $412,997 while Redfin estimates $383,889 - a difference of nearly $30K.   

Redfin Estimate Feb 19.png
Zestimate 3 bd 1300sf home.png

Redfin or Zillow?  The Zestimate includes a Zestimate Range, and reports the strength of their calculations for each metro market.  As of this writing, the Zestimate reports a median error of 4.5% for the Seattle market and a 20% confidence band for 92% of homes.  Meaning, that 92% of the homes will have a Zestimate that is within 20% of the sale price.  20% is $200,000 on a $1M home - far from accurate.  With Zillow at least you have a range for the sales price.  I prefer to see a range - it allows us to explore our comfort levels with selling or buying a house at within the range.  The lack of this type of detail in the Redfin model places too much expectation on a single number.

So, if you are frequent visitor of pricing estimates be sure to take those numbers as nothing more than a general estimate of the housing market for your area.  The predictability of these estimates is certainly better than a coin toss, but don't count on the home reaching the estimate target.  The models tend to undervalue in times of rapid growth, and overvalue when the market slips. 

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