re: Zillow Zestimates

AFAIK they haven't released their exact method but have either said or it's generally inferred that they're basing it off of comps, sales history for the property and sales history of the comps, and tracking the percentage change in sale prices over time to come up with the zestimate.

I'm not in the business but just as a random schmuck using the site I look at the zestimate as being a plus or minus 10% ballpark figure. It's going to be fairly accurate for established neighborhoods with alot of comps and sales histories, but fairly inaccurate in other situations (like in your example of an area where houses are being bulldozed and rebuilt on a higher end).