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Typical Zillow Listing
January 2025
Overreliance on Mega Data Has Already Landed Zillow in Serious Financial Trouble
In 2021, Zillow shuttered its online home-flipping enterprise, known as Zillow Offers, after losing more than half a billion dollars, watching its stock drop 25% in one day, and shedding 25% of its workforce. While on the surface, there’s no obvious connection between that failed enterprise and Zillow’s current push into climate-related risk assessment services, there are underlying patterns that should raise a red flag for the wary.
Essentially, Zillow’s former house-flipping business and current climate risk assessment offerings were—and are—mega data-driven concepts, intended to rake in revenue by collecting fees on related sales and servicing transactions. Success depends on whether the model works everywhere and anywhere—on a colossal scale. The arrogant naïveté lies in forgetting that real estate is hyper-local with infinite variables.
To quote Richard Barton, then-President of Zillow Offers, when he explained that group’s demise on a 2021 earnings call: “We have been unable to accurately forecast future home prices at different times in both directions (i.e. up or down) by much more than we modeled is possible…Put simply, our observed error rate has been far more volatile than we ever expected possible.”
In other words, Zillow fell victim to inaccuracies in its own algorithms and was stuck with more than 10,000 houses it had bought nationwide, paying prices that were too high in many cases, and consequently, having to sell the properties at a loss.
And as Wall Street Journal Podcasts summarized at the time: “As far as housing is concerned there’s always been skeptics when it comes to data and technology, because it’s an extremely local thing. And it’s dependent on a lot of factors sometimes that aren’t really capturable by data, especially if that data is old, things about the particular nature of neighborhoods or how neighborhoods might be different in the north end than in the south end, and some things that have happened in that area recently…there has always been people who’ve said, “They’re never going to be able to capture that as well as what people on the ground can.”
Count MasterWerks among those skeptics.
However, count Zillow among the eternal optimists. Having been burned on acquiring and flipping properties themselves, they are back to hoping they’ll make money through referral and service fees. Their latest gambit is to encourage sellers "in select markets,” who prefer to avoid the hassle of listing their homes, to sell to their “trusted partner” Opendoor, a company that will make “a cash offer within minutes to sell your house faster.” Flipping by proxy, in other words. Whereas sellers who prefer a more conventional sales approach can sell with a Zillow partner agent, essentially a referral network with a fee participation agreement.
We’ll see how all this goes.
Thoughtful Analysis & Measured Advice
January 2025
ZILLOW'S MEGA DATA-DRIVEN CLIMATE-RELATED RISK ASSESSMENT:
Just Whose Interests Are Being Served?
While the emerging field of mega data-driven climate risk modeling may be advancing, MasterWerks is alarmed by the speed at which the real estate sector is beginning to rely on these long-term assessments that are inherently untested, and frankly, have proven to be speculative, and in many cases, flat-out wrong.
However, here’s what we can forecast with 100% certainty: Insurance companies, lending groups, and their partner organizations will seize the opportunity to use these unproven tools and tactics to price environmental factors into their models and adjust rates upward, with homeowners ultimately feeling the financial effects.
Zillow is one of the first corporations to jump on this bandwagon, recently forming a partnership with the risk-assessment firm First Street. Now when potential homebuyers check any for-sale listing on Zillow, they see a risk score for flood, fire, wind, air, and heat, along with interactive maps, and insurance recommendations.
These scores claim to encompass the next 15 to 30 years—corresponding to the average lengths of fixed-rate mortgages.
Each data set is accompanied by a recommendation about the owner’s need for flood insurance, a clearly stated priority, and a link to the First Street site, which will helpfully estimate insurance costs. (One wonders whose products they’re trying to sell and what referral revenue they’re potentially earning.)
To quote Skylar Olsen, chief economist at Zillow: “We’re providing buyers and sellers with clear, property-specific climate data so they can make informed decisions. As concerns about flooding, extreme temperatures, and wildfires grow, this tool also helps agents inform their clients in discussing climate risk, insurance, and long-term affordability.”
As for First Street, founder and CEO Matthew Eby says, “We are on a mission to connect climate change to financial risk. Partnering with Zillow helps us achieve that mission by providing the millions of everyday users on the Zillow platforms with the same property-specific climate risk data that is used by top banks, agencies and investors.”
While these rationales sound high-minded, the bias is implicit: Long-term climate modeling primarily serves financial institutions by generating forecasts used to create increased revenue by identifying and offloading potential risk.
The content on First Street’s web site makes it clear whose side they are actually on:
“We exist to make the connection between climate change and financial risk at scale for financial institutions, companies, and governments.”
And:
“Go beyond compliance and leverage the most comprehensive physical climate risk data to transform regulation into opportunity.”
As for Zillow, here’s a quote from one of their recent Group Email Alerts: “First Street’s models, developed by leading scientists and vetted through a peer-review process, are used across multiple industries, including real estate, banking, government, and insurance, ensuring that the climate insights given on Zillow are both credible and actionable.” (In passing, this peer review vetting process is not spelled out. The logical question remains: Just who are these peer reviewers and are they paid for their services and endorsements?)
As a homeowner and “everyday user,” you’re at a disadvantage in this high-stakes game. You have no power to dispute or refute the omnipotent forecast, which is presented as fact-based and unassailable, despite the reality that models of this kind have a notoriously faulty track record. Nor are you permitted—or given tools or an avenue—to dispute or make quick, simple edits, for instance, if another home’s rating is misapplied to your home. These ratings are, in fact, fait accompli, and you can only reckon with their impact on your home’s desirability and/or affordability.
One bright spot in this scenario is that new home listings in many major Midwest markets, including Minneapolis—and by extension Edina and adjacent suburbs—hold the lowest climate risk. According to Zillow’s analysis, fewer than 10% of local new listings in August 2024 were at major risk of flood, wildfire, wind, heat, and air quality issues.
So, while homeowners here are not as vulnerable as residents in states like Florida and California—where major insurers are dropping coverage altogether in vulnerable geographic areas—the situation does bear watching. As climate risk assessment becomes more accepted, adopted, and systematized, it’s not hard to envision its increasing commercial use, impacting appraisals, underwriting standards, mortgage rates, and insurance requirements, not to mention regulators tightening codes, building standards, and other matters.
MasterWerks will provide you with an update when we have additional insights.