[HN Gopher] Zillow, Prophet, time series, and prices
___________________________________________________________________
Zillow, Prophet, time series, and prices
Author : zorked
Score : 148 points
Date : 2021-11-07 07:06 UTC (1 days ago)
(HTM) web link (ryxcommar.com)
(TXT) w3m dump (ryxcommar.com)
| xrd wrote:
| It's normal to assert that open source generates millions or even
| billions of dollars that isn't captured.
|
| In this case, it seems like an open source project destroyed
| billions of dollars.
|
| That's a new idea for me.
| mcastillon wrote:
| I'm surprised that nothing here has been written about human in
| the loop. All time series models are flawed in some capacity, and
| are going to have difficulties in the current market given how it
| won't necessarily match historical seasonalities. Just having
| more human safeguards to flag wacky outputs seems to be a more
| reasonable explanation than not handling Prophet's shortcomings
| properly. Zillow would have likely faced similar issues with
| other time series packages as well
| mcastillon wrote:
| Reading some more, it does look like Zillow was in fact
| leveraging humans in the loop
| https://venturebeat.com/2019/12/11/why-explainable-ai-is-
| ind.... What seems like a likely explanation is that the proper
| balance between machine and human judgement was not calibrated
| to this current market.
|
| "Part of the challenge of Zillow Offers' human-in-the-loop
| system -- any such system, really -- is finding the balance
| between humans and machines. "In order to optimize this human-
| in-the-loop system, we'd like to figure out when the human is
| best, when an assistive situation is best, and [...] when a
| machine is best," said Fagnan."
| sushsjsuauahab wrote:
| My opinion is that we are not at the top of the housing market.
| People are realizing that it is not fun to live in dense areas.
|
| Local markets may ebb and flow, but desirable houses will rise.
|
| Phoenix is particularly dense and the house prices are cheap,
| which is why I believe Zillow sold them all-- they realized their
| actual profits weren't as good as what they projected.
| IIAOPSW wrote:
| >People are realizing that it is not fun to live in dense
| areas.
|
| Sounds like you're assuming your personal preferences are the
| natural ones which "people" surely have by default.
| alpineidyll3 wrote:
| A good prediction is one which is made BEFORE the outcome. All of
| these armchair data scientists had the opportunity to short
| Zillow BEFORE it was obvious that zoffer was losing money. No one
| did? The best outcome which could flow from this is a sort of
| adverse peer review in data science based on asset trades. To be
| honest, the zillow data team should have sought this themselves,
| the community could have debugged them.
| trhoad wrote:
| Imagine being this angry about a job listing mentioning a Python
| library...
| extr wrote:
| He's not angry. He's responding to people who are angry he
| flippantly made fun of the job posting.
| trhoad wrote:
| > The requirement that people come to your company knowing
| how to use piss easy baby tools is an extremely dumb and lazy
| hiring practice.
|
| Sounds angry to me!
| brodouevencode wrote:
| Nah he's mocking the crap out of them.
| rmah wrote:
| He sounded at least a bit put out to me too
| windsignaling wrote:
| Worse. He sounds "fake angry" and spent what looks like an
| inordinate amount of time writing a crappy article to express
| his fake outrage. His understanding of time series seems OK
| at best.
| tqi wrote:
| This was pretty stupid straw-man. I doubt anyone who has used
| Prophet is under any illusions as to what it is doing under the
| hood (after all, the only input is a single time series
| dataframe...). Companies use it to do quarterly/yearly goal
| setting and anomaly detection, not deploying it to production to
| power product features. This whole thing has the tone and
| substance of a giant "i am very smart" faff.
|
| The author also seems annoyed that people get paid 200k for such
| little "technical" skill, to which I would ask why he cares?
| lainga wrote:
| >to which I would ask why he cares?
|
| Do you think he didn't think enough about the reasons he stated
| in TFA for why he cares? Or they're not good reasons?
|
| He says, from the employer's perspective,
|
| "$200k a year can attract people who actually know what they're
| doing. Maybe a math or econ PhD. Maybe a Microsoft Excel pros
| with 10 years of finance sector experience";
|
| from the prospective employee's,
|
| "The aggregate effect of this practice being widespread is that
| talented people with unusual backgrounds get gatekept out of
| good paying jobs that they'd be exceptional at. ... The job
| post excludes people not based on aptitude, but based on
| whether they have previous experience and familiarity with a
| tool they could be introduced to and then master in under 15
| minutes."
| tqi wrote:
| I think reason he gives about gatekeeping is only weakly
| related to the bulk of the article. The point is that job
| listings shouldn't be arbitrarily specific is an obvious one
| that most already agree with, and was a thin excuse to show
| off his deep knowledge of modeling jargon.
| stopagephobia wrote:
| I don't know, maybe, or only I liked it better when there was so
| much new houses being built that this wouldn't of happened. Some
| of us People of Age remember growing up in houses built in post-
| war baby boom buildings, so there was enough of a housing
| increase that people weren't paying so inflated prices for
| houses. Maybe this is what we get when interest rates are so low
| and so little money is needed for down payments, I know a bunch
| of people who are started getting into real estate in the last
| year because even though it's lots of money banks make it easy if
| you have credit.
| msapaydin wrote:
| Extremely well written article for someone who would like to dig
| deeper into forecasting, actually giving someone ne valuable
| links about the prophet tool that i used and recommended. I agree
| with the author that it is strange that the job posting only
| mentions the prophet tool, which is rather like a very basic and
| one particular library that i usually recommend to undergrads for
| their senior project.
| pjdemers wrote:
| Very likely this was not a real job post, but rather the
| statutory post required for a visa application (H1-B, etc).
| Zillow HR looked at the current employee's background for a set
| of skills that is rarely found in one person, to keep the number
| of qualified outside applicants at zero. "Must be a a senior
| person with recent hands on experience in this novice tool". What
| they didn't say is, their exist employee used Prophet in a class
| unrelated to work.
| rossdavidh wrote:
| This is an excellent point, and whether or not it happened here
| it is often what happens, not only in developer jobs.
| say_it_as_it_is wrote:
| There isn't a company or individual who has models that can
| accurately predict the future of housing prices. There are only
| charlatans who claim they can achieve the impossible. This guy
| can do no better, but he'll do his best to convince capitalists
| that he's got the right stuff.
| evrydayhustling wrote:
| > The main reason why competitive market price movements tend to
| be stochastic and I(1), and tend to exhibit little highly
| profitable predictable seasonality, is because if that wasn't
| true, then people would be able to make free money and markets
| would no longer be weak-form efficient.
|
| Oh no! Someone invoked weak-form efficiency! I guess every market
| maker should shut down now?
|
| OP is trying to criticize the hypothetical Prophet-trader because
| Prophet seems to rely on trivial seasonalities for forecasting.
| But he is ignoring that the bare minimum configuration for
| Prophet requires several injections of domain expertise (or at
| least bias):
|
| - Prophet predicts event frequencies, not prices/events. So
| presumably it must be used in conjunction with another price
| model.
|
| - The Prophet user must acquire and group data for their forecast
| -- which is itself a form of locale-sensitive regularization, and
| is often >50% of the challenge of calibrating a predictive model.
|
| - Prophet users configure market sizes, change points and event
| streams ("holidays" are a special case, not the only example)
| based on external data.
|
| Obviously none of these things saved Zillow, but they are all
| outside the conditions supported by weak-form efficiency, which
| gives you a good idea of how useless that concept is in practical
| trading.
|
| I have zero investment in Prophet and wouldn't use it for a
| trading model, but it's annoying to see Data Twitter's culture of
| assuming others are dumb in order to quote grad school stats
| classes getting rebroadcast elsewhere.
| vmception wrote:
| BTFD.
|
| Zillow issued $4bn corporate bonds that they only have to pay 2%
| on annually while they pay it back over 10 years. This is way
| below their annual revenue which was already $2.7bn annually. The
| bonds were for the expansion of Zillow Offers, but based on their
| prior revenue. And now, they are trying to sell a bundle of homes
| for $2.8bn all at once "at a loss", with no information about the
| percentage of loss. -5%? -25%? Does anyone else see that it
| doesn't matter _even if it was 100% loss_ which it clearly isnt?
|
| People out here acting like this is the great financial crisis
| they've missed 12 years of alpha just waiting for.
|
| This is the least leveraged market participant in real estate
| lol. They flipped a few (thousand) houses maybe at an overall
| profit, made some of their developer and overleveraged home owner
| friends happy, and found an excuse to fire a bunch of their
| workforce!
|
| This game is obvious
| [deleted]
| evergrande wrote:
| Is it possible that Zillow artificially inflated the housing
| market?
|
| They bought up bunch of houses while having the most popular
| pricing tool? That's a strong incentive to predict ever
| increasing prices. Plus it whipped up a frenzy and site traffic.
| Dangerous incentives all around. You can see how this could be
| self reinforcing with systems that all want the numbers to go up.
| modriano wrote:
| Per this US Census and HUD report [0], there have between 600k
| (2018) to 1M (2020) single family home sales per year over the
| years since Zillow started Offers. Per this Barron's article
| [1], Zillow bought 9680 homes in Q3 2021 and less than half of
| that in Q2 2021.
|
| So, yeah, they've probably driven the price up a little bit,
| but their purchases represent maybe 2% of all sales, so I
| assume the impact that has on the market in general would be
| pretty small.
|
| [0] https://www.census.gov/construction/nrs/pdf/newressales.pdf
|
| [1] https://www.barrons.com/articles/zillow-opendoor-stock-
| price...
| nerevarthelame wrote:
| Zillow only bought houses in certain markets (24 different
| metropolitan areas [1]). So their impact on prices within
| those regions would've been bigger than what you'd expect by
| comparing them to all home sales in the US. I admit that I
| have no idea how much bigger, though.
|
| [1] http://zillow.mediaroom.com/2020-08-04-Zillow-Resumes-
| Buying...
| brodouevencode wrote:
| Zillow is just an aggregate typically MLS data. Sure it can
| probably have some influence via it's Zestimate product, but
| that's not what failed. Anecdotally 1/4 of the folks in my
| neighborhood currently have a for sale sign in their yard
| because of the price increases. I'm not sure where this upward
| pressure is coming from, but I fear another 2008.
| gpapilion wrote:
| The economy itself has been good the last 12 months in
| coastal cities. The upward pressure is coming from those who
| have money to spend upgrading the life.
|
| I don't fear another 2008 since the mortgage market hasn't
| gone as crazy. I do think we'll see a correction, but it's
| more likely to be a slow down and increase in time to sell
| homes.
| mattwest wrote:
| The question should be, 'To what degree did Zillow influence
| the housing market?'
|
| Interest rates are low so people have cash. New housing
| development was lacking even before Covid disrupted supply
| chains. Now we are facing a labor shortage that could play out
| in a number of ways, not limited to proletariat uprising or in
| contrast, a new age of entrepreneurialism.
| gpapilion wrote:
| I think this is an extremely likely probability in the markets
| it operated offers in. Even if they were buying 5-10% of those
| homes.
|
| I also think realtors were slow to sue Zillow homes to clients,
| but have no hard evidence to support this. I do see a Redfin
| listed home in my neighborhood gets 1/4 the traffic of anything
| else, and I have to believe that influence from realtors. This
| is something that happens with for sale by owner homes too.
| asdff wrote:
| Do people actually use zillow for buying or just for perusing?
| Most of the listings on my zillow are these stale 60 day old
| listings where there is obviously something wrong with the
| listing, it doesn't look like the actual market that realtors
| are using considering homes here sell so fast. My understanding
| is real estate moves too quickly and you are going to be
| putting offers on homes your realtor shows you before they even
| hit market let alone aggregated on zillow.
| TheGuyWhoCodes wrote:
| I think it's true for any platform for housing markets. Once
| you have easy access to pricing of houses sold or being sold
| around you, as a seller you will try to be at the same ballpark
| and higher. So everyone ups the price by 5-10% so it becomes
| the new normal and repeat.
| chiph wrote:
| I think there is a feedback loop involved. Someone wanting to
| sell their home will likely look at the Zestimate to help them
| set an asking price. And then tack on a few thousand for
| negotiating room.
|
| Zillow monitors the offer amounts by potential buyers, and if
| any are above the current Zestimate, that signals the algorithm
| to raise the home's value, even if the sale hasn't closed yet.
| This then becomes a "comp" for the neighborhood (since other
| realtors will check their site) and influences nearby sales.
| microprediction wrote:
| Hi I'm the author of the Prophet article
| https://www.microprediction.com/blog/prophet which for better or
| worse is why many people have recently questioned Prophet as a
| time-series method. (There are better, and certainly more formal
| critiques before and after - I referenced several).
|
| I just hope those who push back on your article read all the way
| to the last paragraph. I'll repeat it below. Very well put.
|
| I'm happy to answer technical questions about Prophet from anyone
| here but again, this is somewhat beside the point, which is...
|
| The requirement that people come to your company knowing how to
| use piss easy baby tools is an extremely dumb and lazy hiring
| practice. It is also, unfortunately, a common practice in data
| science job postings. The aggregate effect of this practice being
| widespread is that talented people with unusual backgrounds get
| gatekept out of good paying jobs that they'd be exceptional at.
| Making fun of the job posting and using Prophet has been compared
| to gatekeeping. To be clear, the Prophet prerequisite is an
| actual form of gatekeeping being undertaken by a major company
| that has actual material impacts on people's careers. The job
| post excludes people not based on aptitude, but based on whether
| they have previous experience and familiarity with a tool they
| could be introduced to and then master in under 15 minutes. A
| tweet making fun of the job posting is not gatekeeping. Get over
| it, LinkedIn clout chasers
|
| I would add that since posting my own less-well worded version of
| this astonishment I have received numerous DM's from people at
| large companies who are aghast at the way Prophet is a favorite
| of management. So whether or not this was a problem at Zillow
| beyond, say, 2015, it might well be the case elsewhere.
| teitoklien wrote:
| Your blogs are awesome !
|
| I check on them every few weeks to see, What you wrote next :D
| rossdavidh wrote:
| While there are some decent points in this post, it ignores
| another possibility for why Zillow Offers got shut down.
|
| The first explanation, when it was just being paused, was that
| there was a shortage of labor and materials to do the renovating.
| Probably true, but not the real reason. It is entirely possible
| that the second explanation, that it was too hard to model
| accurately the price 6 months out, is also true but not the real
| reason.
|
| The real reason might be something the Zillow CEO doesn't want to
| say out loud. Like, we are near a top in house prices, and it
| looks like it might fall a lot, or for a long time, or both,
| before we get back to reasonable house prices that have a chance
| of going up again. Zillow does not want to say "real estate is
| about to bust, as an investment strategy", because they are still
| tied to the real estate market. But, flawed as their analysis
| might have been, they might have been able to see enough to know
| that no matter how good their algorithm could be made, they're
| not going to be able to buy low and sell high if the prices keep
| falling.
|
| Now, maybe Zillow is wrong again, and housing is not in for a
| rough ride in the very near future. But maybe they're not wrong,
| and shutting down Zillow Offers (rather than fixing it) will look
| like a quite prudent move in a year's time.
| jrochkind1 wrote:
| I don't think they lost $420 million on it because they knew
| what they were doing and were good at forecasting home prices
| and know things others don't about them. I mean, it's an
| interesting story you tell, but doesn't seem like the most
| obvious explanation to fit the data -- which would be,
| actually, they were bad at forecasting home prices, is why they
| lost $420 million trying to predict home prices.
| yxwvut wrote:
| As someone who's been on the buyer side of the market for the
| past few months, I think it's even worse for their objective:
| they might be good at forecasting home prices on average
| conditional on their statistics, but bad at forecasting home
| prices of the subset that would be willing to sell to Zillow.
| Every zillow-owned home I've seen, bar none, has had either a
| bad micro-location (eg: next to a railroad in an otherwise
| good location), or a bad interior (eg: a smoker home). The
| same was true for Opendoor, who are in the same business. IE
| conditional on Sq Footage, location, acreage, etc. they might
| be incredibly accurate, but they're only able to buy the 50%
| below that average (and the gap is large because the
| missing/intangible variables matter a lot).
| jrochkind1 wrote:
| That's a really good point. The people most likely to sell
| to zillow, after all, are going to be the people who think
| zillow's price is way more than it should be!
|
| En masse buying of buildings based on algorithmic pricing
| may be doomed because of this. Even if you're on the mark
| 80% of the time, under-estimate 10% and over-estimate 10%
| -- the 10% where you over-estimated will be the people most
| eager to sell to you!
|
| Which is true for anyone in the property business, but if
| they didn't have local people who understood the market
| actually looking at the individual property and being like
| "uh, that one is next to a railroad track which the
| algorithm doesn't seem to be accounting for..." those
| people realized they hit the jackpot when zillow offered
| them a price as if they were NOT next to a railroad track!
| wil421 wrote:
| I agree that OpenDoor and Zillow bought really weird
| houses. My neighborhood is completely brick houses except
| for one that has some plastic looking siding and was in
| slight disrepair, guess which one Zillow bought and it sat
| for 6 months? There was another house OpenDoor bought down
| the street and at one point the roof was caving in, I dove
| by it for a decade wondering who lived there. A house
| flipper came along and repaired the cosmetics then sold it
| to OpenDoor for a premium. It sat for a year. There were
| also other weird houses like a fake barn and one's, as you
| said, with bad micro-locations. Every single one within 5
| miles of my house was a house with something weird.
| travoc wrote:
| The brilliant Zillow AI got fooled by old fashioned
| American DIY home improvement catastrophes.
| natdempk wrote:
| I think you should also consider first and foremost the CEO's
| primary stated reason, which is introducing too much volatility
| for the company. He's said that Zillow aimed to be a market
| maker with +/- 200 basis points, but that Zillow Offers ended
| up swinging +/- 700 basis points. This volatility makes Zillow
| less like a reliable publicly traded company with regular
| growth and earnings, and more like a housing hedge fund where
| they need to hold onto a huge pool of capital to cover
| liquidity swings.
|
| > We have been unable to accurately forecast future home prices
| at different times in both directions by much more than we
| modeled as possible, with Zillow Offers unit economics on a
| quarterly basis swinging from plus 576 basis points in Q2 to an
| expected minus 500 to minus 700 basis points in Q4.
|
| > Put simply, our observed error rate has been far more
| volatile than we ever expected possible and makes us look far
| more like a leveraged housing trader than the market maker we
| set out to be.
|
| > We've got these new assumptions that we'd be naive not to
| assume will happen again in the future, we pump them into the
| model and the model cranks out a business that has a high
| likelihood, at some point, of putting the whole company at
| risk, not just the business, but in the more normal case, just
| causes a ton of volatility in earnings, which is not a great
| look for a public company. That's basically what it boils down
| to.
|
| He also acknowledged the operational issues, but in reality it
| seems like the volatility + scale of the capital needed is too
| much for Zillow to risk on top of their existing business and
| status as a public company.
|
| Stratechery had a good article on this which is where I pulled
| those quotes from, but it is behind a paywall.
| sokoloff wrote:
| Rising interest rates will be a drag on the market. It's clear
| those will eventually come, but maybe not for five years.
|
| Pundits have called 23 (or more) of the last 2 housing market
| drops.
| nostrademons wrote:
| Eh, I think we'll see the nationwide housing market basically
| do what the Bay Area market did in 2018. Buyers dried up
| because prices outran incomes, the overbid vanished, and houses
| basically sold at list, leading to a ~10% decline from what
| they were selling for at the beginning of the year. Then it
| stagnated for a couple years until the COVID reopening, and has
| since shot up ~30-40%. The increase appears to be durable;
| unlike in many other regions, Bay Area techworker total comp
| has gone up like 50% since COVID, so houses are actually more
| affordable.
| throwawayapples wrote:
| > Bay Area techworker total comp has gone up like 50% since
| COVID [, so houses are actually more affordable.]
|
| That's a pretty shocking claim, even if you're exaggerating
| to make a point; do you happen to know if anyone is tracking
| any data for this?
|
| The only data that I can find (non-tech worker) seems to
| indicate that things are still _significantly_ worse in
| California and the Bay Area specifically, versus the country
| as a whole. This is dated Nov 2021, but it 's not tech-
| focused, and, well, things don't look great: https://www.bls.
| gov/regions/west/summary/blssummary_sanfranc...
| nostrademons wrote:
| It's based on stock prices and levels.fyi (which itself has
| pretty shocking numbers, eg. new grad comp at any of the
| FANGs is pushing $200K/year). Stock prices of most of these
| companies have doubled in the last year; some recent IPOs
| (eg. Coinbase, Roblox) have gone up 10x. Someone who gets
| paid 50% in stock at a FANG, which is pretty typical from
| the levels.fyi data, has seen their comp go up 50%. Someone
| at one of the recent IPOs with a pre-IPO grant is getting
| paid in the multi-millions _per year_.
|
| Things are significantly worse if you are not in tech, but
| then you are not buying houses. Things are significantly
| worse if you are not in tech largely _because_ you are not
| buying houses - everybody who is not in tech is largely
| getting squeezed out of homeownership here. This too is
| part of my prediction for the rest of the country.
| asdff wrote:
| What markets was zillow operating in? If it was in a
| particularly constrained market, there is no top over say a
| decade of ownership. Zillow could hold and rent properties and
| in 10 years, even if we had 2008.2 tomorrow, they'd be worth
| more than they are today. Then again that sort of longterm
| investment thinking doesn't click with modern shareholder
| controlled companies.
| modriano wrote:
| Median housing prices have been consistently rising [0] since
| Zillow started their property buying program in 2018. In their
| most recent earnings report, Zillow announced $422M in Q3
| losses from their home buying program and expects $240M to
| $265M in losses for homes they plan to buy in Q4 [1]. Rising
| sale prices coupled with big losses implies Zillow has been
| systematically paying above-market rates for homes, and there's
| a lot of evidence corroborating that hypothesis [2]. Maybe
| we're near a peak in home prices, but prices haven't started
| falling yet, and if Zillow was paying market rates, they
| wouldn't be losing money yet.
|
| [0] https://fred.stlouisfed.org/series/MSPUS
|
| [1] https://investors.zillowgroup.com/investors/news-and-
| events/...
|
| [2] https://fortune.com/2021/11/03/zillow-house-flipping-
| overpai...
| x3sphere wrote:
| yeah where I live in AZ, Zillow overpaid massively for every
| home it purchased that I've seen. Like 15-20% over usual
| price.
|
| And they've priced the homes they are selling quite a bit
| below what they bought them for already. Many aren't moving
| too.
|
| I'm not too sure why they just don't hold onto the homes
| though. Even with the carrying costs, holding on would be
| profitable if market is to rise another 10%+ as some are
| predicting. The only reasonable explanation to me is that
| they are expecting a significant drop in 2022-2023, but maybe
| I'm wrong.
| thehappypm wrote:
| Carrying costs aren't $0 though and it would be horrible PR
| to sit on empty houses when people are struggling to find
| affordable housing.
| nostrademons wrote:
| They can't do it without getting creamed by the market
| (which is exactly what's happening now). They're a public
| company, which means they need to report earnings
| quarterly. All of those carrying costs come straight out of
| earnings. Worse, they're a public _tech_ company, which are
| usually valued on having consistently increasing revenues
| and high margins (Zillow had something like 80% margins
| before Zillow Offers). If they have a year of massive
| losses investors are going to lose confidence in their
| business model, tank the stock, and oust the CEO.
|
| I suspect that Blackrock or whoever buys the portfolio is
| going to make massive amounts of money off of it, though.
| Financial firms _are_ setup to hold assets for long periods
| of time and even out gains and losses, and their investors
| expect this.
| jrochkind1 wrote:
| Especially because whoever buys their portfolio is going
| to get Zillow selling it at a loss, they're going to pay
| less than zillow did!
| ishjoh wrote:
| Thanks for this well cited information. Here in the US we
| also have a strange habit of describing housing as national
| instead of local. Even during the housing bubble pop in
| 08/09, there were some markets that were hit extremely hard
| like Las Vegas, and others that were barely impacted like
| Dallas.
|
| I'm in a market that had insane growth over the last few
| years, and I am now seeing price cuts on lots of houses
| listed for sale.
| nradov wrote:
| Price cuts don't necessarily mean anything. Better to look
| at the Case-Shiller index if you're in one of the covered
| metropolitan areas.
|
| https://realestatedecoded.com/case-shiller/
| rgbrgb wrote:
| One thing to note is that seasonally there are always less
| listings and less home shoppers at the end of the year. So
| seeing more price cuts and less new listings is actually
| pretty normal in October, November, and December.
| Personally I'd bet on continued growth in January.
| tqi wrote:
| How does the accounting work for those losses? ie is $422M =
| (Total $ from homes sold in Q3) - (Total cost of
| buying/renovating those homes), or is it (Total $ from homes
| sold in Q3) - (Total $ from homes purchased in Q3)?
| rossdavidh wrote:
| Absolutely Zillow overpaid, at least a lot of the time.
| However, part of that is because they apparently had a hard
| time getting people to accept their offer often enough, and
| so tweaked the algorithm to pay higher. This suggests that,
| if you pay the amount you can actually make money on in six
| months, you don't get very many people accepting your offer,
| because people don't know as much as Zillow knows about
| what's about to happen in the housing market.
|
| Or, maybe, Zillow is just no good at predicting housing
| prices. But it's at least worth considering that, if they
| were actually reasonably good at it, they might have come to
| the conclusion that the only way to make money right now is
| to convince house sellers that their home is about to be
| worth less than it seems to be now, which isn't likely to be
| something they wanted to try to do. Maybe they're just
| incompetent, but they might be competent and have nonetheless
| come to the same conclusion that Zillow Offers needed to be
| shut down.
|
| p.s. thanks for the great links, but I would like to point
| out that the St Louis Fed link goes up to July 1, which
| leaves open the possibility that Zillow saw something in the
| last 1-2 months different from what came before.
| jrochkind1 wrote:
| > if you pay the amount you can actually make money on in
| six months, you don't get very many people accepting your
| offer, because people don't know as much as Zillow knows
| about what's about to happen in the housing market.
|
| I mean... wouldn't that be because people _do_ know as much
| as Zillow knows about what 's going to happen in the
| housing market, so they're happy to wait the six months to
| make more money too, instead of letting zillow make a
| profit by doing nothing more than sitting on it for six
| months?
| travoc wrote:
| > maybe Zillow is just no good at predicting housing
| prices.
|
| You can spot check the historical "Zestimate" for a few
| homes over a few years and notice the drastic spikes and
| troughs where the inaccurate Zillow price was instantly
| corrected after a real market event. Overall their modeling
| is wrong, but still useful.
| Damogran6 wrote:
| I'm looking at the current RedFin value of my house, the
| statement that "A lot of these properties are purchased by
| companies" and "Zillow is getting out of the flipping business"
| and thinking it was a problem of their own making. They've
| overheated the market to the point that they can't make any
| money, and a lot of people were having to spend more cash than
| necessary on a house that wasn't worth what they paid for it.
|
| I don't have to move, I expect a 30% drop in value...it
| probably won't be as bad as 2008.
| distantsounds wrote:
| I feel like labor and materials would be included somewhere in
| the forecasting model for pricing. Fairly hard to ignore either
| in, well, any business.
| unclebucknasty wrote:
| If their Zestimate is any indication of their algorithm's
| proficiency, then that might point to the problem. The range of
| values they give for a home are frequently ~30% wide. Then they
| just pick a midpoint. So, it's "we think it's worth $700K, give
| or take $100K. Not exactly rocket data science.
|
| I previously just chalked that up to the whole estimate being a
| marketing thing anyway. And figured that if they did have some
| brilliant data science accurately predicting home prices, why
| would they give it away?
|
| Now that I see they were consistently overpaying for houses in
| a rising market--even with a presumed premium baked in for the
| convenience of an easy sale process--it's looking like their
| algorithms are indeed suspect.
| Imnimo wrote:
| But if we are "near the top", that doesn't really explain why
| Zillow Offers lost so much money. If we're still on the
| upslope, and the problem is just that Zillow expects a bust
| soon, wouldn't they have just been able to sell their houses
| for a profit? Like I don't think Zillow's model was to buy
| houses and sit on them for five years with the expectation that
| they continue to rise in value, so should an approaching
| downturn really cause them to lose hundreds of millions?
| dsizzle wrote:
| The post seems more like an explanation for how Zillow they
| lost a bunch of money going long housing in a real estate boom
| than why Zillow is shutting down Zillow Offers.
| anonAndOn wrote:
| The _only_ time I 've seen house flipping work at scale is
| 2010-2012 when those with huge piles of cash could buy
| foreclosures in a few heavily affected metros, do nothing for
| 3-6 months then put them back on the market for a tidy profit.
|
| After that brief window closed, you either had to become a
| landlord for a couple years or employ a crew of handymen on
| staff to fix all the surprises that come with being a
| homeowner. You're either a landlord or a builder if you want to
| actually make money outside of a recession.
| mertd wrote:
| The idea was not house flipping at scale. They wanted to
| "market make" for housing. Housing market is illiquid. People
| would leave decent money on the table if they could just sell
| their houses within hours without having to deal with
| realtors, open houses, listing and closing process. Of course
| Zillow would have made some repairs and improvements but I
| don't believe that they thought this was their upside.
| vannevar wrote:
| I think you're probably right. And in order to bootstrap
| the necessary volume (and starve their competitors), they
| were willing to actually pay _more_ than market (similar to
| Uber 's investor-subsidized rides in their early years). So
| the problem isn't so much that they lost money (which they
| probably expected for the first phase of the program), but
| that they lost more money than expected (and could
| tolerate). The additional cost and carrying time associated
| with labor and supply shortages in the construction
| industry may have contributed in that case, though I agree
| with the article that the adversarial market aspect was
| probably the biggest factor: in a competitive market,
| particularly bad offers were particularly likely to be
| accepted.
| lotsofpulp wrote:
| >The additional cost and carrying time associated with
| labor and supply shortages in the construction industry
| may have contributed in that case
|
| And property taxes. And security. I do not know who ran
| the numbers on this program, but anyone with even a
| little bit of real estate experience was wondering what
| the hell they were doing. Blackstone has been around and
| killing it in real estate for 20+ years, and you would
| figure something obvious like what Zillow was planning to
| do would be on their radar if it made sense.
| sokoloff wrote:
| Exactly. People sell cars to CarMax for less than they
| could otherwise get _because it 's easy, fast, and
| certain_. People buy cars from Carvana over the lowest
| price they could pay elsewhere _because it 's easy, fast,
| and certain_.
|
| I think there's a lot of money to be earned by turning a
| slow, tense process into a fast, lower stress process.
| toomuchtodo wrote:
| What market making opportunities do you see that aren't
| currently aggressively competed for?
| gnopgnip wrote:
| Some would say the real estate brokerage market isn't
| that competitve. The national realtors association keeps
| prices artificially high, there is room for ibuyers or
| market makers to offer a better service, and charge less
| than 6%
| sokoloff wrote:
| I'm no expert, but as a homeowner and someone who as a
| result has to employ contractors to fix things, I'd love
| to see someone make home repairs easier, more certain,
| and lower aggravation.
|
| I think there are probably thousands of other
| industries/segments where an aggregate hundreds of
| millions or billions of dollars are spent annually and
| where people would spend 1 to 2.5% extra if friction were
| noticeably reduced. That used to be flights, hotels, and
| cabs that have been made easier in the last 2 decades.
| nradov wrote:
| Except for really basic stuff like snaking a toilet, home
| repairs and remodeling are all different. It's not a
| standardized commodity service like flights, hotels, and
| cabs where the majority of customers all want pretty much
| the same thing.
| gruez wrote:
| > I'm no expert, but as a homeowner and someone who as a
| result has to employ contractors to fix things, I'd love
| to see someone make home repairs easier, more certain,
| and lower aggravation.
|
| While it's definitely possible to improve the experience
| around that, I don't think it really qualifies as market
| making. Specifially, look at wikipedia's definition:
|
| >A market maker or liquidity provider is a company or an
| individual that quotes both a buy and a sell price in a
| tradable asset held in inventory, hoping to make a profit
| on the bid-ask spread, or turn.
|
| You can't really hold "renovations to be done" as an
| "asset in inventory". It'll be something like uber, ie. a
| marketplace, not a market maker.
| sokoloff wrote:
| That's fair and I agree that it's friction-reducing but
| not market-making.
| JAlexoid wrote:
| All home repairs - it's a damn nightmare. Home building -
| complex, slow and expensive RE agencies, seem to
| compete... but it's an oligopoly market. (just to stay in
| the RE segment)
|
| And all three have severe government monopoly powers and
| competition killing regulations.
| anonAndOn wrote:
| Except, it never works that way for houses. Banks are
| reluctant to give mortgages when the roof is EOL, or the
| siding has dry rot or there is some black mold basically
| anywhere, etc. Giant Corp may be able to buy quickly and
| efficiently but Joe Homeowner can't get his loan approved
| until A, B, and C are fixed. Good luck getting 3
| different contractors lined up quickly and under budget
| while in escrow.
| cortesoft wrote:
| I wonder if this is location dependent, because my bank
| barely cared about those things when they approved my
| refinance last year. The appraisal consisted of just
| driving by the house. They didn't check for any condition
| of the house.
|
| It probably helps that the entire house could just
| disappear and the price for the lot would only change 10%
| or so.
| anonAndOn wrote:
| That's probably due to a favorable LTV. If they have to
| foreclose, not only would the bank not lose money it
| might actually be profitable!
| gruez wrote:
| > Banks are reluctant to give mortgages when the roof is
| EOL, or the siding has dry rot or there is some black
| mold basically anywhere, etc.
|
| but used cars seem to do fine, even though they can be
| similarly damaged?
| amerkhalid wrote:
| Used cars loans tend to have higher interest rates
| though.
| pille wrote:
| Maybe because used cars cost/risk about 1% as much as
| houses?
| bena wrote:
| Also, every car has scrap value. Houses don't have that.
| gruez wrote:
| The equivalent for houses is the land they sit on. In
| metros that could easily be worth more than the house,
| and in most cases it's worth more (in % terms) than the
| scrap value of a car.
| gruez wrote:
| Why? because the unit price is lower? Can't zillow
| just... buy less houses? I don't see anything different
| between zillow buying a $500k house and one hundred used
| cars worth $5000 each.
| djbusby wrote:
| Easier to sell 50 cars than 1/2 of a house tho.
| gruez wrote:
| While I don't doubt this effect exists, I seriously doubt
| it's a significant factor when you're dealing with 7000
| houses.
|
| 7000 figure from:
| https://news.ycombinator.com/item?id=29081118
| sokoloff wrote:
| Do _banks_ even look at these things; I mean, beyond the
| appraisal?
|
| I don't think my mortgage lender has ever inquired about
| the age of the roof on the purchase or during any
| refinances. For my first house, I bought it with a roof
| that needed work, had some small leaks, and was well
| beyond its design life. I got a mortgage without the bank
| bringing that issue up (albeit in 1996).
|
| _Home inspectors_ look at these things and buyers might
| choose to walk away based on the inspection report (which
| the bank never saw on either of my purchases).
| anonAndOn wrote:
| In my experience, the level of underwriting is a function
| of how levered the purchase is. The LTV and your Debt to
| Income are both major factors in how thoroughly the
| underwriter is going to review your mortgage and how much
| they will require to prevent a loss.
| sokoloff wrote:
| That makes sense. Both times I was near the 25% front-end
| ratio that I considered to be a sensible limit, but was
| putting 20% down on a conventional conforming loan the
| first time and a conventional jumbo the second time.
| DSMan195276 wrote:
| From what I've seen it depends a lot on the kind of loan.
| I bought a house with a conventional loan earlier this
| year and I don't think the appraisal even looked at any
| of the potential issues (Despite at least a few thousand
| in repairs identified by the inspection). But I also know
| someone who used an FHA loan to buy a house and they
| couldn't get the loan unless the house passed a pretty
| detailed inspection.
| cmckn wrote:
| Like seemingly everything in the modern world, it depends
| on your credit worthiness. Some mortgages also come
| partnered with homeowners insurance, and those policies
| are what often lead to sales being blocked by even minor
| issues.
| kmonsen wrote:
| In the bay area there seems to be some companies that do
| this. Every time I turn on the radio there is an ad for
| "John buys bay area houses".
|
| I think they do exactly what you say, give a quick cheap
| offer, then do some fixing and sell the normal way for a
| profit.
|
| Basically, if you can convince someone to sell for x% less
| than the real price today, you can make x% - some costs. Of
| course this has huge variability, but the company I noticed
| do it in one market they probably know extremely well so
| they can make good bets.
| brendoelfrendo wrote:
| Market makers also typically make money on their spread,
| paying slightly under market rate for an asset and selling
| for slightly over. They can do this in, say, stock trading
| because people want to make trades right now to capitalize
| on moment-to-moment conditions, so that's the price of
| convenience and liquidity.
|
| Zillow SAID they wanted to be a market-maker, but they
| ACTED more like a flipper or investor, expecting to make a
| profit on the houses themselves, not just on the spread.
| When they started making above-market offers on homes they
| pretty much left any pretense of market-making behind: at
| that point, you need to either sell at a loss or hold
| inventory and go (a little) long on your investment. Zillow
| realized they didn't want to hold inventory.
|
| It doesn't help that houses aren't nearly as liquid or
| fungible as stocks: buying a house, prepping it for sale,
| accepting and offer, and closing takes months, and all that
| time can eat into your spread. Zillow would probably always
| have ended up in a situation where they were more concerned
| with the sale price 2-4 months down the line rather than
| their spread.
| SV_BubbleTime wrote:
| Agree, but there is a tiny bit little more in depth to it.
|
| * If you got a lucky market you could've made a lot of money.
| But I had far less to do with the renovation part and just
| the I happen to buy low and sell high part.
|
| * A LOT of flippers lied about it being their primary
| residence. That helps with loans, although there are more
| serious paperwork and requirements since 2012 or so. FBI
| paperwork iirc.
|
| * The math changed if you were your own crew. If you have the
| time, and the skills, it definitely change the equation.
| However, you basically had to make this your full time job,
| and there aren't a lot of competent non-professional "full
| stack" contractors flipping for fun. It's a lot less stress
| to just be hired for jobs.
| nemo44x wrote:
| I doubt it. It would mean Zillow had some type of insider
| knowledge regarding interest rates or the macro economy. We
| aren't in a 2008 scenario either regarding subprime. Perhaps
| they have an insight that no one else sees?
| sharadov wrote:
| Housing is a local game, even at the peak of the housing crisis
| some places did not fall by more than 10%.
| thehappypm wrote:
| I think the issue is around labor.
|
| When a contractor g team has the skills necessary to do a house
| renovation sufficient to flip, then Zillow is really just
| financing it. Financing is not really an issue for house
| renovations because homeowners provide the financing, or small-
| scale flippers self-finance. In any case a loan is really all
| that's needed. I can't imagine a contractor ever doing
| contracting-for-hire by a mega corp when there's so much demand
| from homeowners flush with cash as-is, to the point where
| skilled contractors can basically name their price.
| dboreham wrote:
| Yes. I had been thinking the same thing through the various
| zillow threads here recently: none of the construction
| contractors I know would ever work for a corporation. Unless
| they were starving, which they are not.
| jquery wrote:
| I believe we are approaching a top. A lot of otherwise-
| undesirable places to live have doubled and tripled in price
| recently (while homes in desirable cities haven't moved much at
| all), fueled by COVID-19 and remote work spiking demand
| temporarily. Basically, city-dwellers paying city prices for
| rural real estate. I don't think this is a sustainable state of
| affairs and I believe this has created a giant bubble in home
| prices outside of cities. Something has to give. Either the
| price of homes in cities doubles, or the price of
| rural/suburban homes falls back down to earth.
| kristjansson wrote:
| It's instructive to recall that the original use case for Prophet
| at FB was 'good enough' forecasts for a large number of time
| series. Both the modeling choices and interface are optimized for
| that point in design space.
| lordnacho wrote:
| I see some decent points in the post, but they are mostly about
| modelling.
|
| What I'd like to say is even though you have a good model, that
| doesn't tell you what to do.
|
| If you know it's going to rain next week, should you go corner
| the umbrella market?
|
| If you are going down that route, there are a bunch of non-
| weather things that you'll need to know. Perhaps where to find a
| cheap source of umbrellas, likely places where people will be the
| most susceptible to buying, and so on. Basically domain
| expertise.
|
| The major issue you will have is whether your own presence causes
| your model to be inapplicable. If a guy sees you at the umbrella
| factory, maybe he will decide that's a signal that the weather
| will rain next week? Maybe people will just stay home in that
| case?
|
| The main thing I see with Zillow is a lack of due diligence.
| There seems to have been an idea that you can just have some data
| people, pour in data, and out comes money. In reality there's a
| lot of legwork in any business, and you pay for experience with
| money. In this case also your job.
| Guest42 wrote:
| Another ignored issue I see is that people choose the modeling
| methodology they use, the scoring methodology, and the data
| that goes into the model.
|
| The reactions act as though the model has a life of its own and
| that some unlikely error led to these results.
|
| Purchased data/models can frequently be wrong or unhelpful to
| one's modeling objective.
|
| Finance also has a number of risks vs rewards with every
| decision.
| haroldbolls wrote:
| Like with most market making operations, your main risk is
| adverse selection. I strongly suspect that this was what killed
| the zillow operation. Suppose zillow is on average right with
| their house price prediction, but in 50% of cases they offer 10%
| too much and in 50% of cases they offer 10% too little. In their
| backtest this will show as a fair price prediction. However in
| reality, they will mostly end up buying the houses where they
| overpay 10%. Only their bad quotes are being hit so they keep
| consistently overpaying for properties.
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