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I don’t think it’s just that they had a poor model, but the combination of that and adverse selection. If you pledge to purchase at the Zestimate then people w

I don’t think it’s just that they had a poor model, but the combination of that and adverse selection. If you pledge to purchase at the Zestimate then people who reasonably think they can get more than the Zestimate on the open market don’t have an incentive to sell their house to Zillow (besides convenience). But people who think the Zestimate is an over estimate will of course sell to Zillow. So instead of a normal distribution of actual value:estimated value you end up with a skew towards the end where the estimate is over the actual value. Trading housing is very different from normal market making because houses are not fungible commodities like most securities are. For most entities trading securities at low frequency it does not really matter whether a market maker skims off a few pennies on their trade; it’s worth it for the liquidity. Houses are less liquid (because they are non fungible) so the liquidity is more valuable, but the price improvement routing around a MM can also be many percentage points of a trade because there are not only so many factors affecting their valuation, but also just chance and random noise (bidding war, a particular buyer falling in love with the property, not-price-conscious buyers).

emodendroket 5y ago
Well, that makes sense, but wouldn't it sink Opendoor too then? They are doing fine, as far as I know.
- icelancer 5y ago
  Rabois talks a lot of noise about how well they're doing, but Opendoor is a miniscule fraction of the size of Zillow, and it's hard to know exactly how good Opendoor is doing anyway. We'll see as the years roll on with a lot of economic uncertainty coming up.
perl4ever 5y ago
>adverse selection According to Matt Levine's recent column, while you might think that, it wasn't what sunk them in practice. Bidding low in fact worked; it just was inherently limited in scale, which is why they switched to bidding higher. Unfortunately, being wrong in the other direction is very bad. "I know, I know, the traders are saying: “No, this is stupid, your algorithms will not be 100% precise, some of your ‘lowball’ bids will in fact be too high, and those will be the ones that sellers accept. You’ll get adverse selection and end up losing money.” But that was not Zillow’s actual experience in the first quarter! The actual experience is presumably that some people accidentally got too-high bids, realized they were good and accepted them, but mostly Zillow sent too-low bids to everyone, and some people, for whatever irrational reason — market ignorance or financial necessity or laziness or whatever — accepted the too-low bids. The general point is that there is no reason at all to think that the people on the other side of these trades from Zillow are generally better informed than Zillow is. Sure they know more about their houses than Zillow does, but Zillow knows more about the market, and has more money" "If you systematically bid too low, you will not do many trades, but you will make a lot of money on each trade. If you systematically bid too high, you will lose money on each trade, and also you will do a whole ton of trades. This is much worse!"
- bee_rider 5y ago
  I wonder -- does it really matter if the previous homeowner is more informed than Zillow? For things like "annoying neighbor" or other hard to quantify/quickly detect annoyances, the buyer doesn't know about those things either, so I guess the information asymmetry is almost 100% in Zillow's favor, right?
  - mistrial9 5y ago
    no - because machine data of the deal is not complete, therefore cannot be represented in the models. As any computer-vision researcher knows, the code sometimes does not see what is "obvious" to almost any person.
  - notahacker 5y ago
    The buyer might not realise about the annoying neighbour (unless the most annoying thing about the neighbour is the mess they leave everywhere) but will definitely pick up on things that Zillow's algorithm doesn't.
  - jasonwatkinspdx 5y ago
    This is one of the things that's still useful about agents. They want to keep doing deals with each other, so the selling agent is motivated to pass on information like this.
    - emodendroket 5y ago
      Maybe that's been your experience. Mine has been that they're eager to cover up issues and explain away those they can't. I mean no hate, that's their job.
      - jasonwatkinspdx 5y ago
        It has been my experience. My agent took a particular likening to me for whatever reason, probably because I'm a very low drama client, and took me around on the open houses that are mostly intended for agents to connect. In my town these happen on Wednesday morning. Selling agent usually has some basic amenities out like a coffee station, pastries, occasionally pizza. A large number of agents just cruise through continuously. It's something of a festive atmosphere. I was usually the only client vs agent in these situations, and while all agents have a degree of salesmanship to what they do, I saw first hand very frank discussions of potential problems that would cause a deal to feel sour after it was done. As an agent you make your money on the overall volume, not squeezing the last bit out of any particular deal. Near as I can tell getting a reputation for deception is nearly career suicide unless you're at the very low end of the market. I think you're making a fundamental mistake in thinking about incentives in the context of a single sale vs having a career in a business that is very strongly driven by personal networking. This is a common fallacy in microeconomic thinking.
deleted 5y ago
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emodendroket 5y ago

Well, that makes sense, but wouldn't it sink Opendoor too then? They are doing fine, as far as I know.

icelancer 5y ago
Rabois talks a lot of noise about how well they're doing, but Opendoor is a miniscule fraction of the size of Zillow, and it's hard to know exactly how good Opendoor is doing anyway. We'll see as the years roll on with a lot of economic uncertainty coming up.

perl4ever 5y ago

>adverse selection According to Matt Levine's recent column, while you might think that, it wasn't what sunk them in practice. Bidding low in fact worked; it just was inherently limited in scale, which is why they switched to bidding higher. Unfortunately, being wrong in the other direction is very bad. "I know, I know, the traders are saying: “No, this is stupid, your algorithms will not be 100% precise, some of your ‘lowball’ bids will in fact be too high, and those will be the ones that sellers accept. You’ll get adverse selection and end up losing money.” But that was not Zillow’s actual experience in the first quarter! The actual experience is presumably that some people accidentally got too-high bids, realized they were good and accepted them, but mostly Zillow sent too-low bids to everyone, and some people, for whatever irrational reason — market ignorance or financial necessity or laziness or whatever — accepted the too-low bids. The general point is that there is no reason at all to think that the people on the other side of these trades from Zillow are generally better informed than Zillow is. Sure they know more about their houses than Zillow does, but Zillow knows more about the market, and has more money" "If you systematically bid too low, you will not do many trades, but you will make a lot of money on each trade. If you systematically bid too high, you will lose money on each trade, and also you will do a whole ton of trades. This is much worse!"

bee_rider 5y ago
I wonder -- does it really matter if the previous homeowner is more informed than Zillow? For things like "annoying neighbor" or other hard to quantify/quickly detect annoyances, the buyer doesn't know about those things either, so I guess the information asymmetry is almost 100% in Zillow's favor, right?
- mistrial9 5y ago
  no - because machine data of the deal is not complete, therefore cannot be represented in the models. As any computer-vision researcher knows, the code sometimes does not see what is "obvious" to almost any person.
- notahacker 5y ago
  The buyer might not realise about the annoying neighbour (unless the most annoying thing about the neighbour is the mess they leave everywhere) but will definitely pick up on things that Zillow's algorithm doesn't.
- jasonwatkinspdx 5y ago
  This is one of the things that's still useful about agents. They want to keep doing deals with each other, so the selling agent is motivated to pass on information like this.
  - emodendroket 5y ago
    Maybe that's been your experience. Mine has been that they're eager to cover up issues and explain away those they can't. I mean no hate, that's their job.
    - jasonwatkinspdx 5y ago
      It has been my experience. My agent took a particular likening to me for whatever reason, probably because I'm a very low drama client, and took me around on the open houses that are mostly intended for agents to connect. In my town these happen on Wednesday morning. Selling agent usually has some basic amenities out like a coffee station, pastries, occasionally pizza. A large number of agents just cruise through continuously. It's something of a festive atmosphere. I was usually the only client vs agent in these situations, and while all agents have a degree of salesmanship to what they do, I saw first hand very frank discussions of potential problems that would cause a deal to feel sour after it was done. As an agent you make your money on the overall volume, not squeezing the last bit out of any particular deal. Near as I can tell getting a reputation for deception is nearly career suicide unless you're at the very low end of the market. I think you're making a fundamental mistake in thinking about incentives in the context of a single sale vs having a career in a business that is very strongly driven by personal networking. This is a common fallacy in microeconomic thinking.

deleted 5y ago

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