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Isn't is also true that the original pricing algorithm was built for a very different purpose? It was useful for getting a ball park estimate of value, but it w
by pge 5y ago
Isn't is also true that the original pricing algorithm was built for a very different purpose? It was useful for getting a ball park estimate of value, but it was hardly accurate in the underwriting sense (for the reasons you point out). The hubris of assuming that those prices were so accurate that Zillow was willing to buy at them sight unseen is mind blowing, particularly when one takes into account the adverse selection (if Zillow's estimate is above what I can get from in-person bidders, I am more likely to take it than if the error is in the other direction).
- lordnacho 5y agoYes, you might discover that your average price is accurate, which is just fine for a reporting site. But beneath that there could be some structure, for instance there might be blobs of houses that your model makes too cheap vs reality, and blobs that are too expensive. If those are identifiable, eg via some sort of local knowledge, you might find that people will sell you houses that you've marked too high, but you can't buy the ones that you've marked too low.
- spoonjim 5y agoTotally. There’s a surly creep who lives on our street and the houses next to his are worth less because of that. But Zillow would never know that.
- hamburglar 5y agoThis “annoying neighbor” problem keeps getting cited as an example of something that affects housing prices that the automatic algorithms don’t know about, but does it really exist? What is the mechanism by which the potential buyers find out about the annoying neighbor? I’m highly skeptical. I’ve had annoying neighbors before and there is zero chance that any potential buyers knew about them when I sold. Are people interviewing all the neighbors before making a house purchase? Are those neighbors not incentivized to withhold any negative information about the neighborhood because it affects their own property values?
- spoonjim 5y agoTwo covered cars in the driveway, bushes growing out halfway into the sidewalk, house in disrepair, taller than allowed fencing with Beware of Dog signs, it’s sometimes not hard to spot someone you don’t want to live next to.
- hamburglar 5y agoHuh. Some variation of this house exists on any given block in my city except maybe the neighborhoods where the prices are well over $2 million. No HOAs. I guess my threshold for “annoying neighbor” is a bit different from yours.
- spoonjim 5y agoSure, these houses exist everywhere, but most people avoid buying houses next to them. If Zillow bought such a house they’d take a loss to unload it unless they baked it into their model.
- hamburglar 5y agoI think I’m just used to a housing market (seattle) where that is such a tiny blip it couldn’t possibly affect the price. Maybe untrue elsewhere. Edit: it also seems like a small thing to worry about at a point in time since neighbors change. Annoying neighbors move away, or a new annoying neighbor can buy the house next door at any time. I’m not paying extra for something that is completely out of my control and could change tomorrow. The potential for annoying neighbors is not a feature of a given house so much as a feature of all houses, in my mind. But this attitude is probably more prevalent in people who don’t live in neighborhoods governed by HOAs where certain “annoying” behaviors are regulated away.
- spoonjim 5y agoI can't speak for everyone. But I definitely think that a lot of people are put off by buying a house next to a Beware of Dog guy even though they know that one could move in tomorrow. Also, in California, a lot of people are in neighborhoods who could never afford to move in but own the home and don't have to worry about increasing taxes.
- ahepp 5y agoWhere I am all the houses sell for above asking, often before an open house. It seems hard to imagine a buyer would even have a chance to get scared off by the neighbors.
- spoonjim 5y agoThis neighbor has external signals of the kind of person he is.
- dsizzle 5y agoEven if their ML model provided excellent predictions, another potential problem they may not have accounted for is adverse selection: the only takers may have been on houses whose bids were too high.
- aetherson 5y agoIt seems very difficult for me to imagine that they didn't anticipate adverse selection and try to account for it. I mean, clearly something went wrong somewhere, but I feel like people are acting like they had never heard of adverse selection until now.
- neltnerb 5y agoMakes me wonder if Zillow wasn't planning to "tune" the models, surely they wouldn't want to publicly publish what they think things are worth and then offer 5% less. I wonder whether accurate estimates or making money from flipping would have dictated their decision-making...