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Technology has become an inescapable part of our society. Whether that is a good or bad thing is arguable, but when it comes to real estate especially, technology can be an extremely helpful tool. A computer’s ability to identify trends within massive amounts of data is invaluable.

And although the predictive capabilities of a computer are impressive, it is important to remember that they are still far from perfect. If a prediction model doesn’t provide a confidence interval, take it with a grain of salt. ‘People love the Mayor,’ is far less reliable than ‘the Mayor’s approval rating is 45% with a 2% sampling error.’ The confidence interval tells us how dependable a set of data is and therefore how much we should rely on it.

When it comes to Zillow and Trulia, these statistics can be troubling.

Before I really get into things, I just want to clarify that I am not anti-Zillow/Trulia. I use them more often than not, and I believe they have tons of knowledge to offer. A user can access information on just about any property in the world with only a few clicks. And on top of that, these sites are sleek, concise, and easy-to-use.

When it comes to the predictive capabilities of Trulia and Zillow, however, the numbers are not quite so practical. To summarize, Zillow makes the following claims:

• 46.1% of the time, the Zestimate was ± 5% of the actual sales price
• 69.1% of the time, the Zestimate was ± 10% of the actual sales price
• 85.4% of the time, the Zestimate was ± 20% of the actual sales price
• 5.6% is the median error rate

(These are national statistics. Most submarkets like the Bay region are broken down and may be more or less accurate. The statistics for Middlesex County and Lancaster County have both been left blank if that tells you anything.)

Basically, Zillow is stating that their estimates for a home sold for $400,000 would have been between $320k and $480k over half of the time.

The majority of buyers and sellers place a great deal of faith in the value estimates provided by these sites without questioning how the data was derived. Although neither Trulia or Zillow have ever claimed 100% accuracy, they are committed to defending their algorithms and perpetuating the notion that their estimates are correct.

What throws off their estimates is a continued use of incorrect information that is plugged into their algorithm. You would think that as time goes on and more homes are added to the database the accuracy of these estimates would improve.

At the moment, that has yet to happen.

What it comes down to is this…

Trulia and Zillow are computer algorithms created by people (albeit statistic geniuses) and are therefore subjective and imperfect. If you ask several Realtors for an estimate, they will give you varying answers as well.

Every Agent gets frustrated when they hear a client say, ‘Well, Trulia said…’ and watch as they make a decision based on an unfounded claim made by one of these sites. It is so important to remember that Trulia and Zillow are just one of many tools that can be used when valuing a property. Hiring an appraiser, Realtor Market Analysis (CMA), and your own experience are all tools as well – even trial and error.

When you have a home in a region like the Chesapeake Bay where the properties are diverse and the sales are sporadic, the ability for a computer (or anyone, really) to accurately project values decreases dramatically. Recently, values in this region have dropped to the lowest anyone has seen in years, providing buyers with a tremendous opportunity to purchase a waterfront property.

So, the takeaway of this article is this… Trulia and Zillow can be wonderfully helpful, but are only one of many different tools available. Do not rely solely on any one source alone as your reference – this is not the recipe for success. Use all of the tools available to you, and understand how they get their information. Values in the Bay region are extremely low, so you do not want to miss out.

When you hear someone say ‘evolution,’ typically the first words that come to mind are ‘growth’ and ‘improvement.’ Everything in the natural world evolves, as do more abstract or artificial things. Essentially, we are surrounded by evolution.

In real estate, we most often see these stages of growth within our buyers as they go through the journey of purchasing a home.

How Do Buyers Evolve?

To begin, let’s talk about the market that exists today. We know that markets fluctuate year-to-year, and it is fair to say that the home buying experience from 2003-2012 has essentially zero resemblance to what we are seeing today. So the sooner you can let go of what you remember about buying a home a decade ago, the better off you will be on your home-buying journey today. Even a home buying experience from just two years ago can vary drastically from that of today. The current market has inventory conditions tighter than any period in modern history and the Dodd-Frank Act has permanently altered the mortgage markets in ways we are still discovering.

Stage 1: All of the Good Cheap Houses Sold in 2009 and 2010

When the market flipped, production continued well after the demand for housing stopped. This lag between when everyone realized what was happening and when construction actually stopped meant that home production continued at a staggering pace for up to 9 months. Stated simply, 2 million new homes were built in the US in 2007 while less than 500,000 were built in 2009.

It goes without saying, the continued production led to an unimaginable overhang that the market was forced to absorb before hitting the ‘reset’ button. This surplus of recently-built homes provided a plethora of steeply discounted housing all the way into 2011.

Eventually prices began to stabilize, and those looking to buy were disappointed to learn that the 20% discount on these quality homes was no longer available.

Stage 2: Every House I am Interested in Sells Before I Can Get to It

By 2010, market values were as far below trend as they had been above trend in 2007. And by 2015, the same conditions that had driven up the market to its heights (more demand than supply) were beginning to materialize again, although for another reason. The spring markets of the last several years brought bidding wars, multiple contracts and escalation clauses (all hallmarks of 2006-07) in many sub-markets of Richmond. The conditions are unlikely to change as building has still not caught up with demand and ‘quality’ don’t sit around long, especially in mature neighborhoods. In fact, the 2018 market has seen historical inventory lows.

Expecting to be able to take your time and sit on your decision for several days will result in lost opportunity.

Stage 3: Every Contract Price Seems to Be Higher than I Expect!

Comparable sales are what make the world go ‘round — sort of. Appraisals, assessments and Trulia/Zillow estimates are all calculated using comparable sales. Comparable sales occurred in the past and represent where the market was and not where it is. If you choose to exclusively use past sales to drive current decisions, your valuations will feel low compared to the actual market values. Although it may sound unsettling, the same can be said of the market’s free fall in 2009 (albeit the exact opposite) meaning everyone thought they were making killer below-market deals, only to realize the market was plummeting faster than they thought.

Past events are a great tool to measure progress… use them for that purpose.

Stage 4: Every Seller (and/or listing agent) is Becoming Unrealistic Again

Denial of reasonable repair requests, refusal to renegotiate when appraisals miss, ‘shopping’ contracts, missed deadlines for response, pocket listings … they are all starting to occur again. When response times are not valued, contract agreements disregarded or other behaviors designed to extract value after the fact, buyers become frustrated and decision making becomes poor. Just remember, when the market rolled over, 2009-2010 buyer behaviors were identical. If one side of the market has a huge advantage, they will act accordingly.

When you are buying into a tight market, expect these behaviors. Being surprised or frustrated by questionable seller behaviors is a recipe to miss the bigger picture.

Stage 5: Trulia and Zillow are Total Crapshoots and Cannot be Trusted, Despite Some Really Great Commercials

In their best markets, Zillow can only estimate the FMV of a $300,000 home within $30k about half the time…

Back in 2009, Trulia and Zillow were just websites with funny names… Not anymore.

Unfortunately, Trulia/Zillow have now become the gold standard for many people and thus have a (negative) impact on buyer and seller decisions. It has been one of the most detrimental additions to our industry in the recent decades. Essentially, Trulia and Zillow use inaccurate data and therefore give inaccurate valuations… And the inventory they depict as ‘available’ is pretty questionable, as well.

Many have this technology-driven fantasy that some computer in Silicon Valley has more market knowledge than the locals who actually live in the Bay region — and it’s not their fault. Trulia and Zillow are both incredible technological feats that offer some really useful tools; however, it is the feature that gets the most recognition and application that unfortunately needs the most work.

Stage 6: Appraisers and Underwriting Departments are Petrified of Mistakes Thanks to Dodd-Frank

The Dodd-Frank Consumer Protection Act is another classic example where government intervention hurt the market it was designed to protect. Regulation was increased, compensation to lenders was capped, product choices were decreased, and additional bureaucracy was created. To top if off, Dodd Frank was enacted well after the financial crisis had occurred and largely repaired itself.

In the short run, the act has created an atmosphere where decision makers are waiting for legal precedent to guide their actions (think ‘lawsuits’.) Even several years after passing the law, only half of the over 400 new rules created under the act have been finalized. The level of uncertainty created by Dodd-Frank is staggering. Currently, those in the mortgage business have little guidance and therefore, decision making is stiflingly slow and conservative. Any loan which does not fit nicely into the proscribed box (think ‘most every loan’) represents an unnecessary challenge.

Evolutionary Summary

When it comes down to it, the evolution of a buyer is mostly consumed by understanding market conditions. The past decade has brought unparalleled shifts in market fundamentals in the Chesapeake Bay region, and failing to understand the differences in the process, as well as the impact of those differences, can lead to mistakes.

At Bay Properties, we want our clients to succeed which is why we make it a priority to help buyers understand and navigate market conditions.