How Accurate is the Zillow Zestimate?
Image provided by Unsplash.
Homeowners often look to Zestimate, Zillow’s proprietary algorithm that estimates a home’s market value, to see the equity accrued in their home. Sellers may use it in pricing the sale of their home, while homebuyers may eye Zillow’s Zestimate when developing their offer. Zestimate is a quick and easy way to find out the value of real estate, but how accurate is it?
Turns out there’s more to Zestimate’s accuracy than meets the eye. Its algorithm, the very feature that makes it so easy to use, is exactly what limits its reliability when it comes to determining the market value of homes in areas of the country like the northeast. Below, I’ll explain why.
In addition to all of the factors that go into determining the value of a home, such as its features, square footage, acreage, etc., in general, two broad variables underlie the accuracy of a home’s Zestimate—namely, whether a home is on or off-market and which area of the country it is located in.
Zestimate is Less Accurate if a Home is Off-Market
The relationship between whether a property is on or off market and the accuracy of its Zestimate is illustrated by Zillow’s self-reported on and off-market listing accuracy rates. According to Zillow, the nationwide Zestimate median error rate for on-market homes is 2.4%, while the Zestimate for off-market homes has a median error rate of 7.49%.
Zestimate’s increased accuracy in estimating the market value of a home currently listed for sale makes sense when one considers that its on-market estimates are based on listing price, property description, comparable homes, and days on the market.
Off-market Zestimates are based on tax assessments, prior sales, and other publicly available data, which may be minimal. Thus, there are more unknowns involved in analyzing off-market properties. Because of this, Zestimate’s inability to compare data other than that readily available to the general public increases its chances of error. For instance, any improvements made to a property that are not reported to the property’s local tax authority will not be taken into account by Zillow’s Zestimate algorithm.
Zestimate’s Accuracy Depends Upon Where You Are in the U.S.
As the saying goes, real estate is all about location, location, location, and that is true also in determining the value of a property’s Zestimate. In addition to whether a property is on or off market, the accuracy of Zestimate depends a lot upon the geographic location of a property.
Zestimate accuracy varies state by state, being most accurate in western states like Arizona (median error rate of 1.99% for active listings and 6.50% for inactive), Colorado (median error rate of 1.63% for active listings and 5.48% for inactive), or Utah (median error rate of 1.85% for active listings and 5.55% for inactive). These states have more residential new construction projects and planned residential communities, whereby homes are generally built according to predetermined model specifications in large, uniform developments. This type of residential building is less common in Connecticut, where population density is higher and large tracts of open land on which to build new developments are less readily available. In fact, Connecticut has the sixth oldest housing of any state, including Washington D.C, and has had zero percent change in new residential building applications between this year and last.
In comparison to the examples of median error rates for Zestimates in states out West, the median Zestimate error rate for on-market homes Connecticut is 2.95% and for off-market homes is 8.25%. This is in line with Zillow’s higher median error rate for other states in the northeast that neighbor Connecticut. For instance, the median error rate for on-market homes in New York is 3.50% (median off-market error rate is 10.31%), New Jersey is 2.81% (median off-market error rate is 7.83%), and Rhode Island is 2.78% (median off-market error rate is 7.50%). These states, like Connecticut, have older homes and communities, whose valuations are presumably harder to measure with algorithm-only based comps.
Additionally, Zillow acknowledges that its “estimating method differs from that of a comparative market analysis completed by a real estate agent” because it “use[s] data from a geographical area that is much larger than your neighborhood—up to the size of a county—to help calculate the Zestimate.” The geographical area used by Zillow in formulating its Zestimate risks being too large to be accurate in a state like Connecticut that, despite being small in size, has large town-by-town variations in such things as population, city/suburban/rural spaces, property taxes, etc.
Zestimate Should Not Outweigh the Advice of a Real Estate Expert
Despite on and off market median error rates for homes in Connecticut hovering around 3% and 8% respectively, there is room for using Zestimate in working with a real estate professional.
Because homes in Connecticut are generally older and therefore unique in architectural style, features, and updates, finding comps using an algorithm may often be less accurate than having the discernment of a real estate professional, who is able to physically look at the property. Real estate agents are the eyes and ears of the market.
A real estate agent is able to visit the property and the surrounding community, weigh the unique features of your property against others in your community, and operate within an awareness of market trends. In conclusion, a Zestimate may serve as a starting point in discussing the valuation of a property, but should not be the sole determinant of how the property is valued.
Article Sources:
What is a Zestimate, Zillow
Housing Stock, CHFA Housing Needs Assessment
New Home Construction Statistics, This Old House