For nearly a decade Lee Kennedy commandeered nuclear submarines for the U.S. Navy and when the Cold War ended, he sought a different path to apply his education in nuclear engineering. Kennedy landed a job at American Savings Bank, later acquired by Washington Mutual, and he helmed the company’s fledging Alternative Valuation Business Unit.
By the late 1990s, Kennedy said, data storage and computing power was growing cheaper. Washington Mutual felt increasingly comfortable using data points about a single-family home – when the property was built, its location, available purchase price history – as fuel powering a valuation model to extend someone a home equity line of credit.
Fast forward to today, and alternative valuation models – redubbed automated valuation models or AVMs – are deployed to extend credit, appraise a home, and – in the case of iBuyers – even guide when to purchase a home for cash that might be profitable to resell.
When Zillow waved the white flag on its iBuying operation earlier this month, CEO Rich Barton couched the company’s price forecasting model as something of a Frankenstein’s monster, an audacious curiosity that proved too dangerous. “Our observed error rate has been far more volatile than we ever expected possible,” Barton said.
To some housing executives who routinely use AVMs, Barton’s explanation rang false. “This is not a problem with valuation models,” said Matt Woods, CEO of real estate consulting service Sold.com. “This is a Zillow problem.”
But to Kennedy, who for the last 16 years has run AVMetrics in Simi Valley, California, an evaluator of AVMs for client companies, what happened at Zillow is not surprising.
What’s different about Zillow? “Most of my clients are large lending institutions and shy away from publicly admitting a mistake,” Kennedy said.
With Zillow out, there are two publicly traded companies, Opendoor and Offerpad, whose predominant business model is iBuying.
Both are scaling up rapidly. Opendoor posted a 91% revenue increase to $2.3 billion in its quarter three earnings report released Wednesday. Offerpad revenue grew 30% to $540 million in the third quarter.
But neither has found a profitable path even amid a booming housing market. Opendoor lost $56.8 million in the quarter. Offerpad posted a $15.3 million loss, though it was profitable in the second quarter.
Kennedy is skeptical that a pricing model can ever work for Opendoor, Offerpad or future iBuyers. Such a model, the engineer pointed out, must assess current value while baking in near-term price fluctuations.
“Inflection points in the market are hard to predict,” Kennedy said. …Article continued on HousingWire.com.
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