arket in the most passive-aggressive way
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A transparent market

The real estate industry is based on what economists call information
asymmetry, which simply means that one party (typically the seller) knows
more about a product than the other (the buyer). It's an opaque market that
encourages obfuscation and leads to flawed pricing.

The big idea behind Zillow is to make real estate more like a stock exchange
, a transparent market where all information about every property is readily
available, and as a result pricing is perfect. The problem with building
such a system, Barton explains, is that "the best information about the real
estate market is locked up in people's heads. It's happening in
conversations in backyard barbecues."

For a buyer, the best way to root out the true value of a property is to tap
into that communal knowledge, interviewing neighbors about how well the
home has been cared for, barking dogs, loud buses, crime, buzzing power
lines. For a seller looking to price a home properly, the key is knowing how
many people showed up at every nearby open house for the past six months,
analyzing overbids and price reductions, knowing the average time on the
market and walking through every comparable home that has sold recently.

Doing all that legwork is unrealistic, of course, which is why we use agents
. If Zillow does what Barton and Frink say it will, however, all that
information will be as readily available as the number on the mailbox.

Needless to say, Zillow has a tendency to put real estate people on edge. "
There is something really quite scary," reads a post from last summer on
0DotZero, a real estate blog, "about the fact that Joe and Jill Consumer [
are] perfectly willing to give their frikkin' cell phone numbers to Zillow.
com, when they wouldn't even be willing to accept a cookie from my Web site."

The blogger, who claims to oversee interactive technology and marketing for
a large unnamed commercial real estate agency, sees trouble ahead for his
business. "He who holds the primary customer relationship controls the
customer," he says. "From that perspective, Zillow is well poised to control
the customer."

Both founders have heard this type of angst endlessly, and they swear they'
re not trying to obliterate the middleman. (They're much more intent on
stealing one of the last great cash cows of newspaper advertising - like
Craigslist with a profit motive.)

"At Expedia we were the agent," says Barton, whose mother was a real estate
broker. "With Zillow we're not. There's speculation that we're going to
charge commissions and sell houses. That is not what we're doing." He goes
on to say that a broker is less like a travel agent than an attorney. You
have access to every bit of legal information that a lawyer does, but none
of the training - would you really choose to represent yourself?

It's clearly in the company's short-term interest to maintain the current
power structure. Brokers, agents and developers spend upwards of $8 billion
in advertising a year. By 2010 a greater percentage of that money will go to
the Internet than to newspapers, according to the media consultancy Borrell
Associates.

So Frink spends his time convincing the professionals that their ads on
Zillow will attract new clients. "If you have a good agent, they'll say, 'I
know about the barking dogs,'" says Frink. "If we can get the agents to
share that kind of information with the public and they get a benefit from
it, they'll get more clients and gain more trust."
Agent outreach

For the most part, Frink's outreach seems to be working. The site is getting
more ads from agents every day, and the National Association of Realtors is
sold on the concept. "Zillow is lighting up the imagination of consumers,
getting them engaged in the real estate process. If you're marketing
anything, it's good to have an interested user base," says Mark Lesswing, a
senior vice president at NAR. "Many realtors don't fear Zillow anymore. They
use it as a way to show how their services are more valuable than something
you can get for free on the Web."

If Christopher Guest ever films a mockumentary about real estate agents, he
could do worse than to make the trip to Phoenix and get a load of Brett
Barry. With a George Michael beard, bleach-white teeth, perma-tan and a
smattering of gold jewelry, Barry darts around his office in a strip mall,
his face lighting up whenever another human comes within shouting distance.
Home challenge: Make me move!

Specializing in a planned community near Scottsdale, Barry lords over his
territory in a canary-yellow Porsche Boxster whose vanity plate reads
SAYSOLD. "It's a realtor thing," he says, half apologizing for, half drawing
attention to his chariot. Locals tell me today is the coldest day of the
year in Phoenix, but that doesn't dampen Barry's enthusiasm. "Let's put the
top down!" he calls out as we get in the sports car for a tour of his domain.

Barry is skeptical of Zillow's valuations, especially in a market like
Phoenix, where so many properties are languishing. If the Zestimates are
based on sales, then Zillow is missing a whole lot of data. He points at a
stack of pages from the MLS (for Multiple Listing Service, the nationwide
database of properties for sale). "Look, 213 days, 353 days, 529 days," he
says, referring to how long each house has been available. "There's a lot of
fat in the market. Prices are still too high."

For any homeowner looking to sell, it's a gloomy message: These are the
worst of times. Not long ago, Phoenix was the nation's fastest-growing
market. The median price rose 55 percent in 2005. Agents were closing deals
on the hoods of cars; investors flipped homes without ever moving in.

Fast-forward to early 2007: Throw a rock in any direction, and it'll bounce
off a FOR SALE sign. "There are 45,000 listings in the Phoenix MLS, and that
number hasn't changed in six months," Barry says as we cruise among
lookalike stucco homes. With every passing week, the number of houses on the
market rises, increasing the downward pricing pressure. "It's like a
freeway pileup."

But Barry's not glum. The way he sees it, his services are even more
valuable in a down market. (He says he made $100,000 more last year than in
2005, the height of the boom.) And he's taking me along on his rounds to
show me why that's true. At each place he quickly identifies shortcomings,
punching numbers into his cell phone calculator and revealing that a house
is overpriced by $25,000, $40,000, $90,000.

Scouting trips like this one give Barry valuable knowledge. Same for the
kibitzing he does with fellow agents, telling stories, listening to what
types of properties are moving. Add such anecdotal data to his access to
professional valuation services, his intuition on how much to discount a
house that backs up to a road instead of a golf course, and his presence in
the community, and you get an agent who has repeatedly ranked in the top 1
percent nationwide.

And yet even Barry has problems persuading clients to follow his advice.
Homeowners too often become emotionally attached to the price they could
have fetched at the top of the market - especially if they've taken home-
equity loans.

"You look out on the street and see five to ten houses for sale, but many
people still don't believe things have changed," he says, shaking his head
at a dirty carpet. "The average seller says, 'I need to get this much out of
our house to move up.' But the market doesn't care."

By giving consumers real-time updates on the value of their homes, Zillow
intends to improve the dynamic between homeowners and agents like Barry. "We
're going to change the nature of the communication," says Frink. "When real
estate agents are talking to clients, it's going to be more of a two-way
conversation."

Improving accuracy

The first step on that road is improving the accuracy of the Zestimates.
Overall, Zillow has Zestimated the value of 57 percent of U.S. housing stock
, but only 65 percent of that could be considered "accurate" - by its
definition, within 10 percent of the actual selling price. And even that
accuracy isn't equally distributed.

For example, 85 percent of homes in Los Angeles have Zestimates, and two-
thirds have been accurate. But only 53 percent of homes in metropolitan New
York have Zestimates, and only half of those are accurate. In Louisiana,
where one in 50 homes is listed on Zillow, the site is just about worthless.
(In at least one case, questions about Zillow's accuracy have taken on a
political charge: A community activist group, the National Community
Reinvestment Coalition, accused the site of discriminatory valuations in
minority neighborhoods. "A lot of people have thrown rocks at us," Barton
says. "Have we been sued yet? No, but I'm sure we will be.")

Squirreled away five floors below Barton's office, the company's VP of data
and advanced analytics, Stan Humphries, is trying to improve those
percentages. Each night his formulas churn through two terabytes of data,
comparing every home with similar nearby properties and factoring in newly
reported sales.
Zillow home 'values' rile consumer group

"When you want to see comparable homes - when you ask, 'What homes are like
this house?'' - realtors do that with intuition," Humphries says. "We do it
with machine learning. You can infer information. If one house always sells
for more than everything around it, we might be able to infer that it has a
view. This is a really hard problem to solve, but at some point in the next
year we are going to produce valuations that people are going to be
completely stunned by."

Barry remains dubious. Zillow has Zestimates for 99 percent of all Phoenix
homes and claims that 72 percent are accurate to within 10 percent. But
Barry tells of a family who recently came to him believing their home was
worth a lot more than it was. Zillow told them it would sell for $505