Do Zillow.com's Web Property Estimates Violate Federal Consumer Laws?
Why the Site Is Wise To Add Disclaimers to Its Home Valuations

Zillow.com offers free, instant online home valuations ("Zestimates") for more than 67 million houses and condominiums. Launched in February of this year, the site already boasts more than 3 million daily visitors.

On Zillow, visitors can zoom in on a house, check its value, check out the values of other properties on the same street and neighborhood, and see satellite photos of them all. "Zestimates'' can be found not only on Zillow itself, but also on Yahoo.com and real estate brokerage sites.

While many home buyers consider Zillow a boon, sellers - and mortgage seekers - may be very disgruntled if their Zestimate is lower than they think it ought to be. Zillow does provide one remedy, however: Users can update the property record information listed on the site, which affects the Zestimate.

Nevertheless, in late October, the National Community Reinvestment Coalition (NCRC), a nonprofit group that represents housing rights and economic justice groups, filed a complaint with the Federal Trade Commission (FTC) alleging that Zillow is illegally and intentionally engaging in "unfair or deceptive" trade practices by misrepresenting the accuracy of its home valuations. NCRC also claims that these alleged misrepresentations are especially pernicious because they have a discriminatory effect on low-income neighborhoods and minority homeowners.

In this column, I'll consider whether NCRC's FTC complaint has merit - and conclude that even if it does, which is not yet clear, the right remedy is not shutting down Zillow (as NCRC asks) but requiring the company to provide better disclaimers regarding the limits of its data.

Zillow's Disclaimers: An Important Defense to the FTC Complaint

One strong defense Zillow has against NCRC's FTC complaint is based on the breadth of its disclaimers.

The site encourages users to use the Zestimate merely as a starting point - "just one piece of information for buyers, sellers, and owners" - and to refine it by using "My Estimator," which allows the user to create his or her own estimate based on additional information about a particular home.

The site also cautions consumers that a Zestimate is Zillow's estimated market value for a home, computed using a proprietary formula from some (but not all) existing data, and that it's a free research tool, and not an appraisal. It urges users to consult not only My Estimator, but other "supplemental information." And it reminds users that "your real estate agent or appraiser physically inspects the home and takes special features, location, and market conditions into account. Variations in price also occur because of negotiating factors, closing costs, and timing of closing."

Finally, it's important to remember that Zillow is not itself in the real estate business - and thus is not luring anyone to buy a home from the site, based on its own Zestimates.

The Theory of the Complaint to the FTC: Problems with Zillow's Valuation Model

Despite these disclaimers, the complaint to the FTC takes issue with Zillow's proprietary automated valuation model (AVM).

The use of such models is common: Many lenders use commercial AVMs for home valuations and to uncover inaccurate appraisals. Real estate appraisals typically cost upwards of $300 whereas AVMs can cost major lenders $20 or less.

For its own AVM, Zillow reportedly gathers data from public records. . Zillow gathers its data from property tax records as well as reports on recent home sales. The company notes that it does not use demographic information in valuing properties. It has not publicly revealed the computer algorithm that it uses to generate valuations.

NCRC says that the valuations are far from accurate. Zillow's website states that "Our data shows us that the vast majority of Zestimates are within 10 percent of the selling price of the home." (Emphasis added.) (Zillow also allows users to check the purported reliability of its estimates for different areas within the U.S. where the margin or accuracy may vary greatly.)

But NCRC says that, in fact, Zillow's valuations are within 10 percent of actual market value "less than one-third of the time." (Emphasis added.) To support this claim, NCRC cites two other valuation studies, which it says demonstrate that Zillow's accuracy varies much more than 10 percent even in the five markets it lists as its most reliable.

In addition, NCRC says that the valuations have a discriminatory effect, charging in its complaint that "While overvaluations were prevalent in predominantly white areas, undervaluations were more frequent in communities that were predominantly African-American or Latino by census tract."

If the Complaint Does Have Merit, What is The Right Remedy?

The NCRC urged the FTC to enjoin Zillow from providing home value estimates. But even if there are problems with Zillow's estimates, the right remedy certainly isn't a permanent injunction. The right remedy is more prominent disclaimers.

NCRC also alleges that Zillow's estimates have opened the door to a variety of deceptive and predatory real estate practices in low-income neighborhoods - practices that may themselves violate the Fair Housing Act (FHA).

But if so, it's the violators - the persons and companies engaging in such practices - who should face FHA or FTC enforcement. Presumably, they are offering or using Zestimates without the disclaimers Zillow offers. But since Zillow itself does offer these disclaimers, it should not be tagged with deception that others may perpetrate.

Many websites' activities may have highly undesirable side effects (I wrote earlier about the use of MySpace and similar sites by sexual predators), but in a world where the First Amendment protects free speech, and rightfully so, we don't just shut them down. Granted, Zillow's speech is in the somewhat less-protected category of "commercial speech" but it still falls within the First Amendment.

It would be a good thing, surely, if Zillow were to voluntarily decide to take a look at whether its own AVM is as accurate as it could ideally be. It would also be great if Zillow would strive to ensure that its valuations were as fair and accurate for low-income, as for high-income communities, and as fair and accurate for predominantly-minority communities, as for predominantly-white ones. Even when First Amendment and free trade concerns counsel against government regulation, self-regulation can still be a very good thing.