So now that Zillow is officially in the listing business it’s the topic of the hour .  Some have compared Zillow.com with WebMD, a once promising startup with a now discredited business model.  In my opinion this isn't a good comparison - a doctor spends somewhere between 10 and 15 years in college, medical school, and residency before she can operate on you.  And the internet, no matter how good it gets, will never be able to remove your appendix. 

A much better comparison is with a stockbroker - a skilled profession that offers a more similar service.  The stockbroker profession hasn't been eliminated, but it has changed radically, and margins have plummeted.  I use a realtor, but I don't use a stockbroker.  I go online, log onto vanguard.com or etrade.com, check my stocks, read the research, buy, sell, and manage my own portfolio.  Ten years ago they told us this would be financial suicide - but now it's commonplace.

Remember E.F Hutton - the stock brokerage firm?  "My broker is E.F. Hutton...and E.F. Hutton says"...then everyone turns around and listens w/ rapt attention.  Hutton and their ilk sneered at the internet startups.  Financial suicide for foolish investors, they said.  Cheapskate clients...we don't want 'em.

Well, E.F. Hutton is gone.  Bankrupt.  People stopped listening, and they stopped paying those fat commissions.  Meanwhile, E*Trade, Ameritrade, Fidelity, Schwab, and the rest of the online guys survived the dot.com collapse and are churning and burning.  The point being that all competitive landscapes change...and market participants who don't go with the flow - those that stick to their guns with a religious fervor - are doomed to the dustbins of history. 

Has real estate gone that far?  No.  Not yet.  But it will if the response from the National Association of Realtors is simply to point out Zillow's flaws, insist that the public will always pay 6% commission to sell their house, and that technology isn't a threat. 

Six percent has been a rule of thumb that the National Association of Realtors has done everything in its power to protect (just as any industry - auto, energy, consumer products, whatever - will always try to protect its margins).   

Problem is: in the long run this strategy simply won’t work.  The New York Times  ran a great article on this. A quote from the article:  Traditional agents still firmly control the M.L.S., which allows all participating brokers, including Redfin, to view almost every home for sale in a particular area, even those being offered through competitors' agencies. But the typical 6 percent commission, paid out of the seller's proceeds and split between the seller's and buyer's agents, is under attack because, as economists note, it does not serve consumers well.

Disruptive technologies are notoriously hard to predict.  Zillow may be a flash in the pan.  But eventually – soon – something will come along that isn’t.  There are some stockbrokers and travel agents who survived the onslaught of e*trade, Ameritrade, Orbit and Travelocety, et al – but many didn’t.  The ones that made it adapted found a niche where they added a special kind of value.  But the bread-and-butter business will soon go away. 

The new 300 pound gorilla, Zillow.com, has taken the logical next step.  Now you can go and post your home for free and get exposure to Zillow.com's massive customer base.  Interesting tag line:  It's FREE and anyone can do it.  Translation: you don't have to be a licensed real estate agent. 

Clearly, Zillow still has its problems, and the accuracy of its valuation algorithm has attracted lots of critics.  But one thing can't be denied: these guys have a lot of momentum and they know how to keep the public's ear. 

I saw a New Yorker cartoon the other day.  It showed a couple of dinosaurs chatting.  One was emphatically stating the time to develop the technology to destroy an earth-bound asteroid is now!  but the other dinosaur clearly wasn't interested.  And in that vein I'm looking forward to seeing the reaction from the National Association of Realtors.  To date their stock response has been to point out Zillow's flaws and insist that technology isn't a threat.  If they continue with this approach than this will herald the beginning of the end of the standard 6% commission. 

Stay tuned...

The National Community Reinvestment Coalition (NCRC) has issued a complaint to the Federal Trade Commission (FTC) against Zillow.com.   NCRC alleges that zillow’s valuation methodology is flawed and places consumers at risk, particularly in low-income minority communities.

The NCRC complaint sites statistics on the accuracy of the valuation tool, quoting an MSN Money study that reported that zillow is accurate to ten percent only 29% of the time.  A more damaging accusation is that inaccuracies specifically target African American and Latino consumers – but notably no evidence is included to support this claim.    

A company like Zillow that is seeking innovative ways to provide data and information to the consumer is always going to be at risk for these types of claims.  Information is like any tool and it can be used or misused (a fact that we’re aware of here at equityscout.com.)  On their corporate blog Zillow.com’s president Lloyd Frink expresses disappointment that the NCRC sent their letter directly to the FTC without first opening a dialogue with Zillow.com. That, combined with the fact that the compalint does not offer any evidence for the damaging discrimination accusations, makes the whole issue feel a bit like opportunism. 

The Zestimate tool (Zillow.com’s evaluation model) is not an appraisal, and therefore is not accurate enough to be the sole factor in making any financial decision.  By their own estimate, the median margin of error is 7.2 percent, and 38 percent of estimates fall outside of 10% of the actual sale price.  But having access to a national database of price comparisons, tax records, and other sales data is unambiguously useful for consumers wishing to inform themselves before making a purchase.

Zillow.com got around 3.5 million hits last month according to the New York Times – and being popular makes you a target.  It will be interesting to see how the company handles this issue.