Zillow recently announced accuracy improvements for off-market Zestimates, which will now utilize neural networks to generate valuations. We believe historically the majority of the Zestimate used algorithms that were designed by data scientists. These algorithms are static in nature and therefore, have difficulty keeping pace with a hot housing market. Neural networks are essentially algorithms that have the ability to dynamically create new algorithms on their own, hence the phrase machine learning. The bottom line is the new Zestimate should be more accurate because it will be more agile.

Initially, Zillow has reported modest improvements in accuracy from switching to neural network-based outcomes. What’s more important than the initial accuracy gains is that Zillow has just put AI on the clock, given we can now timestamp the Zestimate’s accuracy pre and post addition of the neural network. If history repeats itself, we should see measurable improvements in the Zestimate’s accuracy over the next two years.

Zestimate accuracy inches forward

As a reminder, there are two flavors of the Zestimate: on and off-market. Off-market Zestimates are the most important Zestimate for the success of Zillow 2.0 because the majority of live Zestimate cash offers will go to homeowners whose homes are not on the market. While sellers who have already listed their home could pivot and sell to Zillow Offers, they would likely have to navigate a listing agent contract, which we view as unlikely.

The off-market Zestimate median error rate is now 6.9%, compared to 7.8% previously. In plain English, this means 50% of the 104m off-market Zestimates are accurate within +/- 6.9% of a home’s eventual sale price. The other 50% fall outside of this +/- 6.9% range. In short, the off-market Zestimate is still unpredictable and has a long way to go. That said, the important thing is that it’s getting better, which we believe is important for three reasons:

1. Expands live Zestimate buybox. The tangible result of the Zestimate improvement is that the pool of eligible homes for a live Zestimate offer will “likely increase by 30%” from 900k to roughly 1.2m (a fraction of the ~105m off-market homes in the US). Increasing the box of addressable homes is key for acquiring inventory, something Zillow struggled to do in the March quarter, which led them to guide Homes revenue for the June quarter about 10% lower than expectations. The more homeowners that see a live Zestimate and the more accurate it is should increase seller leads and conversion, leading to more inventory.
2. Builds trust with consumers. The reason a more accurate Zestimate builds trust is because pricing transparency is core to the iBuying experience, given homeowners initially anchor their decision to sell based on price. If the live Zestimate undershoots, Zillow won’t build inventory. Regardless of whether it’s a machine or a human, if you bid too low, you’re not going to get the house. If the initial live Zestimate overshoots and the company must materially lower its final cash offer after an in-person inspection, consumer trust will erode.
3. Maintaining its lead in search. The Zestimate helps Zillow control of the top of the real estate search and discovery funnel because the Zillow surfing phenomenon is rooted in people’s curiosity to know the value of their dream home or their neighbor’s. The more accurate the Zestimate, the more valuable it is to users. Maintaining control of the top of the search funnel is important for Zillow 2.0 because it provides a huge organic audience (220m monthly visitors) to which the company can advertise its iBuyer offerings at no added cost. Over time, this marketing cost advantage should translate into better margins for Zillow and better offers to home sellers, leading to more inventory and selection for home buyers, driving the flywheel.
   

Gene is joined by Academia founder, Richard Price, to discuss a less known, yet fast growing content category: the world’s academic research.

A number of companies are going after the opportunity to disrupt residential real estate – Zillow, Opendoor, Redfin, Offerpad, Compass, Homeward, and Porch, to name a few. The reason is that residential real estate is 1) a massive, fragmented market with around 5.5m home transactions annually, triggering an exchange of around $2T in value, and 2) full of friction because digital offerings today are nascent. For perspective, iBuying accounts for less than 1% of all home transactions today, and tech-powered brokerages such as Redfin and Compass have less than 5% share of transaction volumes.

The unifying thread among new entrants is an attempt to bring liquidity and reduce friction in the home transaction and ultimately, the moving process. That said, the opportunity is being approached through a spectrum of strategies. In our opinion, iBuying platforms have the potential to be the most transformative. That’s because they’re solving the most difficult problem – using machines to price and purchase homes directly from consumers – along with building a platform to streamline all activities around moving to provide a one-stop digital shop to buy and sell. Given the size of the TAM, other tech-powered approaches from brokerages like Redfin and Compass and alternative home financing companies such as Homeward will continue to grow as they help improve home transaction efficiency.

Below we outline the landscape of companies addressing the residential real estate opportunity. We’ve segmented them into three categories: iBuyers, tech-powered brokerages, and alternative home financing companies.