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September 25, 2022

Zillow execs follow housing data to surprising conclusions

  • PUBLISHED :January 29, 2015 - 20:53
  • UPDATED :January 29, 2015 - 20:53
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In less than a decade, Seattle-based Zillow has become the nation’s leading brand for homebuyer real-estate information. It’s become synonymous with looking up your home’s value ― or someone else’s.

In a forthcoming book, “Zillow Talk: The New Rules of Real Estate,” Zillow CEO Spencer Rascoff and chief economist Stan Humphries offer some surprising answers ― backed by data ― to a range of housing questions. Among them:

- Should Congress eliminate the current mortgage-interest tax deduction? (Yes)

- Should the government subsidize homeownership for low-income families? (No)

- To boost your home’s value, is it better to remodel your bathroom or your kitchen? (Bathroom)

Along the way, Rascoff and Humphries share tips and personal stories, such as why they financed their homes with adjustable-rate mortgages instead of conventional fixed-rate ones.

As you might expect from Zillow, each chapter in the 253-page book highlights key points with charts and tables. But the authors intentionally kept each chapter short (nine pages, on average). The writing is fun, accessible and human. Plus, for you real-estate addicts, there are photos of famous homes from real life and television.

“What we tried to capture in the book was the spirit of real estate,” Rascoff said in an interview.

Just as the firm’s name is an amalgam of the quantitative “zillions” (as in lots of data points) and qualitative “pillows” (where you rest your head), the book approaches questions about buying, selling and renting with both data and storytelling.

But they wrote the book with a sense of purpose, too.

“The goal of the book is to replace folklore with fact and debunk myths,” Rascoff said.

“Buying a home is a gamble,” the authors write.

Zillow CEO Spencer Rascoff (left) and chief economist Stan Humphries pose in their downtown Seattle office. (Ellen M. Banner/Seattle Times/TNS)

Don’t get them wrong. By their analysis, from 1975 to 2014, the S&P 500 returned an average 10.4 percent annually, while residential real estate returned 11.6 percent. Homes beat stocks, they write, because they come with less volatility, and thus, less investment risk.

But that doesn’t mean everyone, everywhere should be a homebuyer. “Encouraging low-income families to invest in underperforming communities doesn’t free these families from the cycle of poverty -― it further traps them in it,” they say.

To bolster their argument, they offer a study of home values over more than 15 years in Los Angeles and Chicago. The areas where values went up the most were affluent, while areas where values fell the most were generally poorer.

Across the nation, values in rich neighborhoods appreciate faster, averaging 60 percent higher returns than poorer ones.

“In essence, buyers in poorer neighborhoods are making investments with both lower rates of return and higher volatility ― a dangerous combination that we see virtually nowhere else in the economy,” they write.

“Zillow Talk: The New Rules of Real Estate” by Spencer Rascoff and Stan Humphries. (Grand Central Publishing)

In a chapter called “The Third Rail of Real Estate,” the pair suggest the government could eliminate the mortgage-interest deduction ― which costs the government $100 billion in tax revenue annually ―and replace it with, perhaps, a refundable tax credit or cash grant that helps first-time homebuyers with their down payment.

Zillow’s surveys have found that almost two-thirds of real-estate professionals believe the deduction is vital to the housing market’s health, while 70 percent of economists believe it should be eliminated or scaled back.

Canada, for one, doesn’t have this subsidy, but its homeownership rate is nearly 70 percent.

Only about 1 in 6 Americans is even eligible for the deduction: That’s because to take advantage of it, one must pay federal income taxes and itemize deductions. Subtract those who rent or own their homes free and clear, and the pool shrinks to about 13 percent of Americans who take the deduction annually.

The bulk of the book offers prospective buyers, sellers and their real-estate agents ideas on how to make better decisions backed by, you guessed it, Zillow’s information.

For example, they explain how the law of diminishing returns applies to home remodels: A $3,000 bathroom remodel ― replacing the toilet and light fixtures, adding a double sink and installing some wallpaper ― would produce a $1.71 increase in home value for every $1 spent on the project, they write.

By contrast, any type of kitchen remodel ― granite countertops be damned―boosts a home’s value by only 50 cents for every dollar spent.

Kitchen renovations provided the lowest return on investment among the home improvements that Zillow studied.

In their conclusion, Rascoff and Humphries urge readers to be guided by data, not emotion: “Numbers don’t lie. And they won’t lead you astray. Indeed, they’ll help you find your way home.”

It’s an ironic closing for a company that’s been roundly criticized by some real-estate agents and homeowners for the inaccuracy of its “Zestimate,” a computer-generated value for a home based on a proprietary algorithm, and for outdated or inaccurate for-sale listings.

(Full disclosure: As of Jan. 15, Zillow’s site didn’t show that my home sold last summer; it showed the property last sold almost three years ago. Humphries said home sales in the Seattle metro area should be reflected on the site within a week or two.)

When Zillow was launched in 2006, the site had Zestimates for 40 million homes and a 14 percent margin of error.

With more than 100 million homes in its database today, Zillow’s data scientists have brought the median error down to 8 percent ― not bad, Humphries said, compared with a 6 percent error for real-estate agents.

Now on the verge of its $1.9 billion acquisition of rival Trulia, which could close next month if it receives final antitrust clearance, Zillow is generating lots of cash, but for three straight quarters, no profits for shareholders.

“We’re investing to maximize for revenue growth rather than for profit,” with a focus on growing mobile traffic, which now represents about two-thirds of Zillow’s usage, Rascoff said.

A significant chunk of investors are betting against Zillow: In a recent Wall Street Journal roundup, Zillow was one of the top shorted stocks, with more than 40 percent of its 26.6 million publicly available shares in a short position.

Rascoff said there’s room to enrich how consumers use Zillow to find what they need.

For example, “we now have over a million reviews of real-estate agents,” he said, where before consumers relied heavily on word-of-mouth and yard signs. “It’s been a sea change in the way consumers shop for an agent.”

The company holds “hack weeks” about once a quarter, Humphries said, which produce “a surplus of insanely great ideas ― makes you really bullish about what’s to come.”

By Sanjay Bhatt

(The Seattle Times)

(Tribune Content Agency)

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