Zestimates currently use a variety of data, including a home’s square footage, location, tax assessments and comparable recent sales of homes in the area. Banks and insurance companies have used software to value real estate for years through what are called automated valuation models. Zillow was simply the first to get mainstream awareness for its estimates by making them available to the public online.
At first, the Zestimates were pretty dubious. When Zillow started out in 2006 with 43 million homes listed, it calculated the median error rate across the site at about 14 percent, said Stan Humphries, the chief economist of Zillow. That means half were within 14 percent of final sale prices for homes, while those for the other half of homes were off by more than 14 percent — a big discrepancy for the real estate business.
Through refinement of its algorithms and better data about homes, Zillow, now with 110 million homes accessible on the site, has a median error rate of around 5 percent, Mr. Humphries said.
Even that still adds up. In a place like San Francisco, with a median home price of $1.1 million, being off on a home estimate by more than 5 percent means missing the final price by more than $55,000.
While Zestimates can be amusing for curious homeowners, they are infuriating for others. Barbara Andersen bought a home in Glenview, Ill., in 2009 with a view of a golf course for about $630,000. She wants to sell the home for about that amount, but the Zestimate on it is now about $536,000, which she believes is too low and has deterred buyers.
Ms. Andersen, a real estate lawyer, filed a lawsuit against Zillow this year, accusing the company of conducting stealth home appraisals without a state license. In recent days, she has represented several plaintiffs in a similar lawsuit filed in Cook County Circuit Court.
“If it’s not reliable, you shouldn’t put it out there,” she said in a phone interview, referring to Zestimates.
Zillow said that the lawsuits are without merit and that Illinois law doesn’t count computer-generated estimating tools as appraisals.
Most real estate agents grumble about online home estimates, too. Redfin, an internet real estate firm in Seattle, introduced its own home value estimator less than two years ago, commissioning an independent study that showed its figures were more accurate than Zillow’s (Zillow disputes its conclusions).
Unlike Zillow, Redfin is a real estate brokerage, employing agents to buy and sell homes for clients, which means that its chief executive, Glenn Kelman, regularly hears from Redfin agents who either love its estimating tool or despise it. The latter would rather have a conversation about home values without the Redfin estimator having colored clients’ expectations.
“I’ve almost never talked to our field organization without having to address the estimate,” Mr. Kelman said. “It’s a very personal and emotional thing.”
There’s little chance that home value estimation tools will ever eliminate their error rates entirely.
Susan Athey, an economist who is a professor at Stanford University, said she’s impressed with Zillow’s 5 percent median error rate for something as variable as homes. She said information like Zestimates are valuable for making a market like real estate function more smoothly.
“If individuals do not understand the market value of their property, they may pass over offers, making both buyers and sellers worse off,” Ms. Athey said.
Even as they improve, it makes more sense to look at internet home estimates the way we look at Yelp reviews of a restaurant — helpful, but hardly the final word.