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`Pop Goes the Bubble
`http://www.fool.com/investing/small-cap/2006/02/14/pop-goes-the-bubble.aspx
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`Rick Aristotle Munarriz
`February 14, 2006
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`If you own shares in HouseValues (Nasdaq: SOLD ) -- and to a lesser extent, Homestore.com
`(Nasdaq: HOMS ) and Cendant (NYSE: CD ) -- you should do your portfolio a favor and stop
`what you're doing. Take a deep breath. Crack your knuckles. Now go to www.zillow.com.
`
`I'll wait.
`
`This is what I see. It's a site that makes many of the other models obsolete. Type in any
`address into Zillow, and you're one click away from a satellite map of your neighborhood with
`the estimated values of each home. Click on a home, and you'll find more detailed information
`(such as rooms, baths, square feet, resale history, and last year's property taxes).
`
`Getting to this point at HouseValues.com requires a more invasive -- and inconvenient --
`experience. At HouseValues, you must enter personal information and fill in two dozen different
`fields in order to be ultimately emailed a somewhat similar result tagged by a local realtor.
`
`Building mousetraps with moving cheese
`There was nothing wrong with HouseValues. Until Zillow launched in beta form last week, it was
`a great way to get an assessment of what your home was worth and get in contact with a
`licensed professional if you really did want to put your home on the market. That is pretty much
`its sole purpose, though. One of the questions you have to answer is, "When do you want to
`sell your home?" with answers ranging from "right now" to as long as "2 years from now." There
`is no option for "not now" or "just curious." It may be a good way to vet for the quality of the
`lead, but Zillow doesn't care, doesn't pry, and doesn't make you wait up to three business days
`for an answer.
`
`Zillow has disrupted the online real estate services market, probably irreparably. The rest of the
`market just doesn't realize it yet.
`
`I say this with guarded pessimism because I want to be wrong. HouseValues was singled out
`by Tom Gardner to Motley Fool Hidden Gems subscribers three issues ago. Earlier this month,
`Homestore was one of the 10 stocks under $10 that I recommended for 2006.
`
`Unlike the real estate sector, which may be on tenuous ground with rising interest rates and a
`glut of new and existing homes on the market, these sites weren't headed for the same kind of
`fall. If anything, once homes stick around a little longer and buyers can afford to be a little more
`finicky, real estate agent relationship-enabling sites like Homestore and HouseValues are just
`the ticket for a cyclical sector.
`
`The problem is that Zillow hasn't just destroyed the moat; it has also made the castle in the
`middle practically worthless. Don't believe me? Let's put it in terms that we can all relate to.
`What if Google (Nasdaq: GOOG ) required you to take a couple of minutes to fill out some fields
`related to a search result, only to email you its findings after forwarding your request to a local
`search specialist that would get back to you "within three business days"? Would you still
`Google, or would you move on to a search engine where the results were immediate and not as
`nosy?
`
`Kicking tires and shingles
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`

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`I spoke to my fellow Fool Rich Smith about Zillow last week, and he thought the site had
`potential, but he was left unimpressed with the estimate on his home. He figured that Zillow
`overshot the value by $100,000 or so. Was Zillow inflating values for the sake of ego-stroking,
`as Rich suggested to me?
`
`I decided to test his theory. The "zestimate" from Zillow for my home was $716,998. To
`compare, I then filled out the HouseValues form. Nine hours later, a local broker had emailed me
`an estimated value range for my home from $800,000 to $820,000. The Zillow estimate was
`short by $93,000 but certainly within the ballpark of reason -- especially if the HouseValues
`broker was hyping up the value of his range to motivate me to cash out of a home that my wife
`and I had bought for a third of that price less than seven years ago.
`
`How does Zillow do all this for free? It's a paid-search model. The satellite image of your
`neighborhood with corresponding value estimates is offset by relevant ads from the Google
`AdSense program.
`
`Can such a business model make it? Zillow was founded by some of the folks behind Expedia
`(Nasdaq: EXPE ) . For those scoring at home, Expedia and Travelocity obliterated another
`industry a few years earlier by demystifying the conventional travel agency business with their
`attractive travel portals.
`
`Rebuilding the castle, not the moat
`HouseValues does have other legs to stand on. HomePages.com is a slick site for home hunters
`but sorely lacking in the listings department. JustListed.com and The Loan Page clearly have
`sustainable models. The problem is that HouseValues' flagship -- and namesake -- site has been
`rendered practically obsolete. The lead generation model has changed, and now the company
`has to make sure that it rolls with the changes.
`
`What gets me is that most companies fail to realize the magnitude of a startup with a better
`mousetrap. When Motley Fool Stock Advisor recommendation Netflix (Nasdaq: NFLX ) first
`started out, Blockbuster's (NYSE: BBI ) CEO regularly brushed off the threat in the quarterly
`conference calls until it was too late. It wasn't until Netflix had grown too big a lead and nibbled
`away at too large a chunk of the DVD-rental market that Blockbuster got aggressive -- perhaps
`overly aggressive -- in formulating a response.
`
`That's why this may be an awkward position for HouseValues. Unlike many of the small,
`promising upstarts that Tom Gardner unearths for his Hidden Gems subscribers, this isn't an
`undiscovered company that is revolutionizing the industry. Maybe HouseValues was that
`company before Zillow, claiming 16,000 real estate agent accounts paying $500 apiece to be
`part of the HouseValues network. Now it may be left with little hope but to abandon that model
`or hope that Zillow's popularity doesn't spread like the wildfire I expect.
`
`In the end, maybe this will be the best thing that could happen to HouseValues. How many
`potential eyeballs did the company lose in the cumbersome and intrusive registration process?
`The current model had revenues growing nicely, but EBITDA margins were stuck at a four-year
`low. The company knows a lot about real estate, so it can probably relate to the rebuilding
`process.
`
`If I'm wrong about HouseValues, it wouldn't shock me. The average Hidden Gems selection has
`risen by 37%, three times better than the S&P 500's 12% average gain in that time. Tom and
`his team of analysts have proved skeptics -- like me in this particular case -- wrong time and
`time again. Even if you're a penny-pincher like me, you can see what they're up to for the next
`30 days with a free trial subscription.
`
`Will history repeat itself? Will I be the next critic to fall? Perhaps, but don't bet the house on it.
`
`Longtime Fool contributor Rick Munarriz isn't interested in selling his home, even if he recognizes
`that the once-red hot South Florida market is cooling off quickly. He does own shares in Netflix,
`which is aMotley Fool Stock Advisorrecommendation. The Fool has an ironcladdisclosure policy. Rick
`is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth
`stocks a day early.
`
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