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Zillow’s Cestation home values have become a benchmark for U.S. homeowners. But when Zillow tried to use her algorithm to buy and sell homes, he misread the market.
The company’s iBuyer (or “immediate buyer”) arm, where the first technology companies use algorithms to quickly value, buy and sell homes, was launched in 2018 in Phoenix. Arizona has entered a bustling market in the city: Opendoor, Redfin and Offerpad have been buying and demolishing homes there since 2014.
The principle behind iBuying is simple: by harnessing the power of big data, tech companies estimate the price they think they can sell a home for, and then inform them of purchase offers. They tend to offer lower prices than regular buyers, but they attract sellers, ordering faster cash offers.
When an IBuyer owns a home, he or she quickly works to renovate the property and resell it, theoretically making a profit. A study of the sale of millions of homes In the U.S. between 2013 and 2018, academics at Stanford, Northwestern and Columbia Business School found that iBuyers made a 5 percent profit by flipping houses.
Zillow believed that there was a secret to the iBuying world: Zestimate. Launched in 2006, the highly acclaimed algorithm was trained in millions of home valuations across the U.S. before Zillow set to work calculating the possible price of the goods he bought. In theory, it was a natural confluence of two things: a new method of buying properties based on Zillow’s experience in housing prices and accurate estimates.
He worked for three years, according to John Wake, who has been a real estate agent and analyst around Phoenix since 2003. During this time, he has seen the market fall several times, including during the 2008-09 financial crisis. problems with subprime loans. But he has never seen anything like it in the last 18 months.
“I don’t know if he announced that he would do what the market did in the spring of 2020,” he says. “No one expected it to take off and become so strong.” In March 2020, almost all activity in the Phoenix housing market came to a halt when the world closed and economic uncertainty prevailed. In October 2021, sales accelerated tremendously, including among iBuyers.
Technology companies chose the Phoenix area because of the dominance of cookie-cutter homes. Unlike Boston or New York, identikit streets make pricing properties easier. iBuyers ’market share in Phoenix rose from about 1 percent in 2015 — when tech companies entered the market — to 6 percent in 2018, says Tomasz Piskorski of Columbia Business School, who is also a member of the National Bureau of Economic Research. According to Piskorski, iBuyers – including Zillow – have grown their share since then, but they still account for less than 10 percent of all transactions in the city.
Real estate people feared the arrival of iBuyers, Wake says. In early October 2021, Zillow recorded his own the most active week Buying homes in Phoenix is part of his goal Buy 5,000 a month by 2024. Then he suddenly stopped buying. Wake had a question: “What the hell happened?”
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