K@W: "Why Automation Is Killing the Property Appraisal Business"

From Knowledge@Wharton:

Property assessment has long been a solid industry with steady work for those willing to undertake the education and training required to enter the field. But that stability is changing thanks to automation. The number of appraisers is shrinking as software gets more accurate at valuing property and is increasingly integrated into the sale process. Benjamin Keys, Wharton professor of real estate, and Stan Humphries, chief analytics officer at online real estate marketplace Zillow.com, recently appeared on the Knowledge@Wharton show on SiriusXM channel 111 to discuss the changes and where the industry is headed. (Listen to the podcast at the top of this page.)

Following are key takeaways from their conversation:

The margin of error is decreasing as automation improves.
Zillow offers a tool it calls Zestimate that uses input factors to determine the worth of a property. The Zestimate, which has been around since the website’s inception in 2006, cannot be considered an official, certified appraisal. But it’s a start, said Humphries. It’s also getting better as the company pours more resources into research and development.

“Back when we launched, we put in about 43 million homes and had a median error rate of close to 14%,” he said. “Today, we value about 100 million homes every single night and our error rate is down to 4.3%. So, we’ve made a lot of advances in the accuracy of valuing homes.”

Zillow is pushing for even greater precision. The company is offering a monetary prize for its teams that can get the algorithm’s error rate down to 2% or 3%.

“Computerized models are going to get very accurate, although in the end there’s probably some role for human beings to be involved there,” Humphries said. “The question is, what is that role of that human being? Right now, appraisers are professionals. They have a high degree of discretion, and there’s a bit of an art to what they do. In the future, there is a role to make sure that the facts the computer is using are accurate, but that’s more of a technician type job as opposed to professional.”
Keys credits Zillow for improving virtual assessment methods and said automation is an undeniably growing part of the industry.

“I think it’s only a matter of time until the technology is strong enough and cheap enough, from the standpoint of the lenders and the buyers, to cut out the humans from this process and move to more of an algorithm-based process,” he said.

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