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Either Zillow Is Broken Or We’re In A Massive Housing Bubble

Housing Bubble Chart
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In January 2014 I wrote a post entitled, “Exploit Online Data To Lower Your Property Taxes“. In the post I highlighted a chart of my house’s estimate value by Zillow. The chart looks like a internet stock from 1999-2000. The chart significantly impedes my efforts to lower my property taxes this year because property assessors use online sources such as Zillow to partly make their assessments.

Since the publication of the post, the chart has continued to go up every day (see below). We’re now close to 300 days in a row of price increases according to Zillow. Are you looking at a new billionaire in the making who only hangs out with super models? Or is Zillow completely wrong? There is no way my home price could be up 60% since May 2013. Furthermore, there is no way prices can rise every day in a straight line for 10 months in a row. Just looking at the gap between the bold blue line and the dotted line (average price of my area) shows things are out of whack.



Thank goodness San Francisco is limited to raising property taxes by around 3%. But for someone like me who was able to successfully lower my property valuation for years, I will now be reset back to the original assessed value +3% a year catchup if I fail this year.

Zillow is either broken, or San Francisco is in a massive housing bubble. Thanks to the robust growth of tech companies here in the Bay Area (e.g. Facebook at record highs, AirBNB and DropBox going public next, etc), I don’t think San Francisco is in a housing bubble. I don’t even have to mention rent control, land restrictions, good weather, and an international city as other reasons for propping up demand. We’re probably in the sixth inning of a dramatically tight ball game. 

EVERYONE SHOULD QUESTION WHAT’S GOING ON

Let’s forget about San Francisco. Think about the hundreds of other cities in America where Zillow and others are wrongly assessing home values to boost property taxes and perhaps create some type of buying frenzy. You can see this article by Priceonomics which fact checks the following statement by Redfin and The New York Times: “Redfin estimates that, on average, homes in San Francisco are selling for 60 percent to 80 percent over asking price.” You and I know this is absolute horse poop, yet The New York Times went on and published this data by Redfin!



Ever since Redfin, Zillow, Trulia and other online real estate companies were started, I’ve been hopeful they would help lower the oligopolistically priced 5-6% selling commissions. The internet, after all, has successfully lowered costs for consumers in every other industry imaginable.

5-6% selling commissions used to make sense when housing prices cost under $100,000 decades ago. But when completely uninspiring homes are selling for $700,000 here in San Francisco, you’ve got to wonder what’s going on that would warrant a $35,000 to $42,000 commission. The internet has made connecting buyers and sellers easier. The internet has also helped find a more efficient transactional price point. The agent’s job has gotten easier, not harder.

To understand why the pricing model continues to be bullet-proof in the real estate industry, all you have to do is study the business models of online real estate companies. The internet has failed the real estate consumer. Everybody has a right to make as much money as the markets dictate. (See Do Landlords Have The Right To Maximize Profits). But if you fail to help consumers lower their artificially high transaction costs, at least have a working algorithm to properly assess home values so as to not hurt consumers through higher property taxes.

The biggest irony is this: By keeping selling commissions artificially high, the real estate industry is screwing themselves because transaction volumes are artificially suppressed. We call this “friction” in economics land. The real estate industry should look to lower selling commission costs for its own good instead.

WHAT IS A REAL ESTATE CONSUMER TO DO?



First of all, you can start a site to write about the peculiarities that are going on in the real estate industry. You might not make any friends in the real estate industry, but you certainly will gain some respect and appreciation from consumers. It’s worth reaching out to sites who are mis-pricing your property to see if they can make it right.

The second thing you can do is vote through action. I’ve decided to never sell any of my properties until the total selling commission cost is lowered to under 4%. Even 3-4% seems egregious for a property that costs more than $250,000 nowadays. If the industry could institute a flat cost to selling a property, I think everybody but the very top producers will benefit.

Finally, I’d like to ask other readers to share your experience with egregious online valuations. It might feel good to see your property rise in value, but unless you are planning on selling, a rising assessed value hurts your net worth due to rising property taxes. Your goal as a property owner who doesn’t plan to sell is to have everyone value your home as close to $0 as possible.

If there is anybody from Zillow reading this post, please contact me through my About page. I’d like to get my Zestimate cut in half. I understand that estimates can be off, but in my case, they are egregiously way off. I do believe companies like Zillow are terrific for gathering historical sales information and helping one assess the direction of the local market. Just be very wary of the price estimates.

Recommendations



Explore real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.

Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.

Fundrise Due Diligence Funnel

Less than 5% of the real estate deals shown gets through the Fundrise funnel

Shop around for a mortgage: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.

Updated for 2021 and beyond.



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