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Making sense of home prices

A "For Sale" sign hangs in front of a house in Miami

Tess Vigeland: And now a little red meat for home owners. We all know that a home's value is whatever a buyer and seller can agree on. But that doesn't stop us from sometimes wondering what it's worth. And over the last few years, for that, we've turned to various online services, like Zillow.com.

Well, this week, Zillow changed the way it calculates value -- and some of us had a hard time believing what we were seeing. So we invited Stan Humphries on the show to explain. He's Zillow's chief economist. Good to talk to you again.

Stan Humphries: Hi Tess. Thanks for having me again.

Vigeland: So Zillow changed the algorithm that it uses to calculate home values this week. What changed?

Humphries: So in terms of what changed, well, before I get into that, just a higher level understanding of what the "zestimate" is. Again, it's a zestimate, so it's an estimate of home values. It's designed to be a starting point for consumers to use to start a conversation about the value of their home.

In terms of what changed, so last week we rolled out a new set of algorithms that produced those zestimates and those algorithms achieved a number of things, a number of important things around better coverage -- we added about 25 million homes to the web site that have values -- and we substantially improved the accuracy of the algorithm. It's now about 33 percent more accurate than it was before.

Vigeland: Well, the reason this caught my attention this week, because I've been monitoring Zillow and my own home value, because we're thinking of doing a re-fi on our house in Pasadena, Calif. So, I just happened to go to Zillow this week and I had to pick my jaw up off the floor after seeing that the home value had changed by six figures, and not in a positive direction, and the last time I checked was less than two months ago. So, can you possibly explain what might have happened there?

Humphries: Yeah, in general we had some zestimates that went up, some zestimates that went down. And in general, the movements were fairly modest. Most were under 10 percent in change, but some did see larger changes. And it's important again to remember that this is an estimate of home value. The true price that attaches to a home can only besettledd when a buyer and seller come to an agreement on the price of a home.

Vigeland: Sure. Or you get an appraisal.

Humphries: That's correct, right, so, the zestimate is designed to be a starting point where, you know, as an input to a conversation, that there'll be other inputs as well.

Vigeland: Ok, with all those caveats, how is it possible to have a property price move by that significant of an amount? And I'll tell you, though, I went on Twitter to ask my followers if anyone else had noticed this. And you know, for example, one of them came back and said that actually there is a change of six figures as well -- on the upside. So they were very pleased about that. But it just seems like such an enormous jump. Is this purely this new algorithm that explains this?

Humphries: Well, a key part of the new algorithm is that we designed it so that it puts more weight on recent transactions so it's better able to track what's happening right now in your local area. And that's -- in some areas that have been rapidly moving, that is a reason why you could potentially see some larger changes. So for example in Pasadena, that's a market that did see considerable stabilization in prices in a lot of 2009, 2010. In fact, saw five quarters in a row of positive appreciation. And then when the federal home buyer tax credits lapsed in the middle part of 2010, started to see significant depreciation again. So this algorithm is able to better track that depreciation that's happening in the market.

Vigeland: So you're looking at a combination of both the new algorithm and really very recent market changes, as well.

Humphries: That's correct, right.

Vigeland: Well, let's talk about the impact of Zillow's zestimates. You know, I know that they're not an appraisal, but I also do know for a fact that buyers and sellers use that number as a bargaining chip. They're kind of like almost like a Kelly Blue Book for property. Maybe they shouldn't be but they are, and that means this kind of change can really take a toll, can't it?

Humphries: You're right that buyers are using the zestimate, but I think they're using it in conjunction with a number of other data points. For example, recently sold data from the website, as well as I think they're obviously working with local real estate agents, and appraisers typically, as well. And I think buyers are smart. I mean, they've done a lot of research. Typically buyers who are in the market, or have been in a lot of homes in the area that they're looking. And ultimately, if they want a home that they're falling in love with, they'll pay what it takes, regardless of what the zestimate is on that home... So while I think that the zestimate is a useful bit of information in their home shopping process and their thinking, I don't believe that home owners are not buying homes for prices above the zestimate.

Vigeland: All right, Stan Humphries is the chief economist for Zillow. Thank you so much for coming in.

Humphries: Thank you, Tess, for having me.

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