Why isn't Zillow dead?

How is it that a site about buying and selling houses is growing in this miserable economy? CEO Rich Barton explains.

"Things are very good at Zillow," Rich Barton, CEO of the online real estate company, was telling me. We're in the thick of the worst economic crisis of a generation and a depressed real estate market, so this means that Barton is either a very clever CEO or an audacious liar. I was at first inclined to believe the latter, but left the interview convinced of the former. He's a canny Web entrepreneur.

It hasn't all been smooth sailing for Zillow. In October, Barton laid off about 25 percent of Zillow's staff . He said he did it because he "couldn't forecast" his business and had to assume the worst scenario. However, the trough following the 2008 bust ended up not being as bad as he thought it was going to be for Zillow, and the company is now back up to its October 2008 staffing level of about 130 people.

Zillow is currently growing, but in a different way than it was before. Page views and unique visitors are up. The site had 8.8 million unique visitors in March, which is a 70 percent year-over-year growth. Zillow has the twice the users at this point as Barton's team originally projected. However, the revenue per unique user is down to a third of what he expected it would be.

Rich Barton builds cheap sites that focus on expensive audiences. Rafe Needleman/CNET

There was, of course, a fundamental shift in user behavior after the bust. But it wasn't all bad. Buying activity on Zillow went down, though site traffic went up. As Barton says, "Buyers are on the sidelines, but not passively." They're monitoring the market, he says, looking for the time to jump in, to either buy or sell. Like the Zillow site itself, physical open houses are crowded, he says. The browsing activity doesn't get reflected in home transaction data. Neither sales volumes nor prices are going up, even if people are circling open houses and online real estate sites like buzzards.

Until the market becomes a place where buyers and sellers want to engage again, they continue to gather information. So Barton continues to sell advertising and new data services.

I told Barton I thought Zillow was "real estate porn." Barton accepts this--his business at the moment is based on it--and says simply, "there's a practicality to real estate porn. People are dreaming about their next home. That's positive. They're planning."

Barton is making access to that real estate porn easier. A new iPhone app shows you the Zillow price estimate ("Zestimate") of homes as you walk or drive by them, and Barton says 10 percent to 20 percent of the site's queries are coming from the iPhone app, which was downloaded 234,000 times in its first 12 days of release.

Barton says two-thirds of the site's users are in the market right now, though when he says "in the market" he means waiting for the market to look good enough to buy or sell. He says 21.9 percent of the homeowners on Zillow are underwater on their homes (they owe more on the mortgage than the home is currently worth), and that the overall Zillow home value index "is in freefall, down 14 percent year over year." There are, he says, very few markets where the acceleration of the housing price decline is slowing--but those are mostly the markets that got hit the worst first, such as Los Angeles and Modesto, Calif.

But listing homes in foreclosure on Zillow is a growth business. "They advertise!" Barton says.

So he's selling his advertisements, including new geographically targeted home sale listings on the site's front page as well as featured homes on the maps. He's also got bank ads on the mortgage part of the site. "Those are $4 clicks," he says.

Barton does see people returning to the housing markets starting now. The combination of depressed prices and lowering mortgage rates have combined to make most homes dramatically more affordable (though, arguably, prices are still inflated). "It's like 20 percent more affordable" than before the bust, he says. Zillow is gaining share and revenue in the real estate Web service business. "Advertisers in December and January just shut down," he says. But that's changed in the last 6 to 8 weeks. "Marketers are saying, if this is what bad feels like, we'll be OK."

Zillow pages have geo-targeted home listings and agent ads (highlighted in orange) as well as cost-per-click mortgage ads (green). Screenshot by Rafe Needleman/CNET

The Zillow way

Zillow is just one of Barton's Web properties. He started Expedia at Microsoft, spun it out, left, and then started Zillow, Glassdoor ("Trip Advisor for employment," he calls it), Avvo (a site where users review attorneys), and RealSelf (where users review cosmetic surgeries and related products).

The sites share common operating principles. They're all highly dependent on user-generated content, they all serve people who advertisers pay dearly to reach, and none does any outbound advertising of their own. "It's easy to get traffic from Google," Barton says, "but it makes you lazy on the product." Barton tries to build products that sell themselves, "but you have to be patient," he says, for traffic to build.

He says one reason Zillow keeps growing is that the company doesn't try to over-monetize. For example, Zillow's mortgage service is about transparency, user reviews, and complete data up front. Competing services "try to separate you from your phone number," he says. Zillow, instead, lets users get quotes without putting in personal contact information (they can come back to their own set of quotes using a unique identifier that the site gives them). This respect for the user helps growth, and makes advertising work better.

But you have to focus on high-value communities, Barton says. "Community for community's sake doesn't work."

 

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