Zillow: Ahead of its Time or Falling Behind?

Zillow uses big data and machine learning to address pain points in the real estate industry, but is it thinking too small?

Buying a home can be considered one of the most important investment decisions a person will make in their lifetime. Unfortunately, it is extremely difficult for buyers to make an informed choice. Buyers have historically had very limited access to real estate data (available listings, market prices, trends) and have been forced to rely on intermediaries like real estate brokers to communicate information. The scant information that is made publicly available is difficult to gather and interpret. In this environment, buyers are forced to pay brokers high fees for their expertise (often 6% of sale price) and may miss out on better deals. Despite the obvious pain points, the industry has been slow to adopt technological solutions.

Zillow saw an opportunity to use data aggregation and machine learning to address this information asymmetry. Zillow developed a web- and mobile- based marketplace that helps people find information on homes and connect with professionals. Zillow aggregates data from multiple listing services, brokerages, the U.S. Census Bureau (including the Housing Vacancy Survey and the Survey of Construction), the Bureau of Labor and Statistics Employment Cost Index and homeowners themselves. The consumer-friendly website digests the data and delivers accessible and helpful metrics to potential buyers and sellers. One democratizing metric Zillow offers is Zestimates, which uses sophisticated data aggregation and analytics to predict the value of a home. Another helpful tool is the Breakeven Horizon, that “gives users a snapshot of how long they would need to own a home in a given area for the accrued cost of buying to be less than renting.” Zillow maintains a living database of over 100 million homes, offering property facts, transactional history, and listing information.

Increasingly, consumers are turning to Internet and mobile solutions for real estate information – in 2016, over 65% of Zillow’s traffic came from mobile. Zillow has positioned itself well to take advantage of this shift in consumer habits and increased demand for information. It may seem like Zillow is the real estate company of the future, however, its model relies on many old-world real estate realities. For example, Zillow’s business model relies on the participation of real estate agents and brokerages. Zillow generates revenue from the sale of advertising services and tools to professionals in the real estate, rental and mortgage industries. Zillow’s operating model similarly relies on data from multiple listing services, brokerages, and real estate agents. For these stakeholders, Zillow provides lead generation that drives their businesses.

Part of what Zillow has done for the real estate industry is highlight the inefficiency of the existing model of home buying. The real estate tech world has responded by developing a myriad of ideas to solve the problems of home buying, with focus on the 6% fee paid to brokers. The market is trending towards technologies that will replace the agent in real estate transactions, increasing efficiency and reducing or eliminating commissions. Companies like auction.com, Allre, and VivaReal are just some examples of online marketplaces that disintermediate the broker. As people move towards a completely digital model, tech-enabled brokerages that reduce transaction costs may have a role to play. Here, companies like SmarterAgent, Zumper and Movoto compete. In addition to this threat to the real estate industry composition as whole, companies like S’moretgage, Real Matters and FindTheBest fiercely compete on the research and analytics front, challenging Zillow’s leadership in this area.

All together, these companies represent a revolutionary change to the traditional model of real estate, which Zillow, though advanced, still relies on in great part. Zillow needs to recognize this seismic shift and focus not on how to create value for the customer in the existing market, but how to compete in the new world of real estate. Zillow needs to reduce its reliance on traditional data providers like real estate agents, brokerages, and MLS. If customers have viable options to list, find, and purchase homes without using these intermediaries, the quality of Zillow’s data will be greatly damaged. Zillow might consider acquisition of online marketplaces that offer valuable data on homes that are bought and sold through that medium. More radically, Zillow might move towards a tech-enabled brokerage or marketplace model that actually hosts these transactions itself. Such a move would not only guarantee high quality data, but would also allow Zillow to compete with newer models of real estate.

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Zillow 10-K, SEC Filing


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Student comments on Zillow: Ahead of its Time or Falling Behind?

  1. Real estate is indeed considered one of the next industries to be disrupted by tech startups. I saw that Zillow has at least four direct competitors (e.g. move.com), which is excellent to the consumer as it pushes more towards information symmetry in real estate transactions.

  2. And we used the same cover image for our posts 🙂

  3. This is a very well informed article; however, I tend to disagree that Zillow is at potential risk from companies that are trying to phase out realtors. I know it is easy to think about realtors in parallel with the old travel agent model that has essentially been wiped out, but I would push on the fact that purchasing a home is a much more complicated process as compared to booking a trip. I view this scenario as closer to the auto industry. There are a litany of services that are aimed at helping the customer make a more informed purchasing decision, but this doesn’t eliminate the need for a car dealership or for someone to walk you through financing, etc.

  4. I’m with John on this – purchasing a home is a high cost of failure, and usually the highest ticket purchase that people will experience in a lifetime. I’m skeptical that they’d forego a human realtor in doing this.

    On your point on refining Zillow’s database, I think the biggest risk here is that Google or any other high powered data company swoops in suddenly and tries to take on real estate data aggregation. Google did this with Google Flights and completely disrupted the online flight search industry, which just prior to Google’s entry attributed 10 – 20% of their traffic to Google searches [1]. Zillow does not disclose how much traffic they receive from Google, but independent research has shown they show up first for “general, home-buying keywords (e.g. “Atlanta real estate”)” about 53% of the time [2].

    [1] Sean, Ludwig, “Orbitz, Kayak think Google is abusing its power with travel search,” December 27, 2011, http://venturebeat.com/2011/12/27/google-travel-search-abusing-power/, accessed November 2016.
    [2] “The SEO Dominance of Zillow,” https://priceonomics.com/the-seo-dominance-of-zillow/, accessed November 2016.

  5. John and Alpha, I see both your points. For the most part I agree and think that is why the real estate industry has been slow to change. Buying a home is a complicated process and people have been somewhat unwilling to make such a big decision without professional guidance. However, the rise of these real estate tech companies do challenge Zillow. In the U.S., we pay 6% commissions on purchases and with such a big ticket price, that is significant. In other countries, people pay around 1%. The entire process of buying a home is much more complicated than it needs to be. Companies are finding ways to take some of the things that real estate agents used to do and automate them,. For example, companies like Dotloop (recently acquired by Zillow) manage the home buying process online, providing online document review and signing. Other companies have attacked the problem by focusing on the real estate search function. Still others have focused on the process of showing a home and are using technology (in some cases VR) to make it easier to see homes. The real estate agent function is being attacked from many different angles. As users expect more and more from their home buying experience, I think there will be a definite shift towards, at least, tech-enabled brokerages. While it may be awhile before the real estate agent role is completely eliminated, it will be systematically reduced.

  6. To follow – the danger to a company like Zillow is that as the real estate agent function decreases, they will have access to less and less data. Unless they partner with some of the companies that are using these new models, their value proposition will decrease because of the requisite decrease in the quality and amount of their data.

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