Zillow, the real estate listing and brokerage website, provides a wealth of publicly available real estate data. Among these, the Zillow Home Value Index (ZHVI) offers a seasonally adjusted measure of home values and market trends. Its "flagship" ZHVI is based on data for "all homes, middle tier, smoothed and seasonally adjusted cut," aiming to represent the typical home value rather than the median. Introduced in 2006, the ZHVI includes various segmentations by geography and housing type. Here, we focus on the flagship ZHVI, which reflects typical home values.
In February, home values rose for the 23rd consecutive month, reaching a new all-time high, according to the Zillow Home Value Index. However, after adjusting for inflation, real home values declined for the 10th straight month, hitting their lowest level since May 2021. Last month's ZHVI came in at $357,138, up 0.13% from the previous month and up 2.58% from one year ago. However, after adjusting for inflation, the real figures are -0.15% month-over-month and -1.77% year-over-year.
Zillow Home Value Index Methodology
Zillow’s ZHVI is measured using monthly changes in its “Zestimates”, its proprietary home valuation model. The index is meant to be timely, comprehensive, and transparent, published three weeks after the close of a given month. Many other home value indexes are published with a significant time lag - like the S&P at Core Logic Case Shiller Index and the FHFA House Price Index.
ZHVI is calculated with a few assumptions:
- Monthly changes are calculated with a weighted mean
- The average Zestimate within a range determines the index level
- It can be interpreted as the market’s total appreciation for a given geography or cut
In addition, historical appreciation is based on actual historical housing stock versus a fixed basket of homes, and home improvements are considered in appreciation unrelated to market movements.
The first chart below shows the flagship ZHVI series - the “typical home value” since 2000, not adjusted for inflation. The current nominal value is at an all-time high.
Next, we take a look at the same index values but adjust for inflation using the CPI. As you can see, it’s a different picture. According to the ZHVI, today’s home values are below that of the (inflation-adjusted) housing peak in 2006.
Here is an overlay of the nominal and real indexes for a comparative look.
Housing Prices (ZHVI) and Mortgage Rates
The following charts overlay mortgage rates with both nominal and real ZHVI, highlighting their relationship. Typically, rising interest rates reduce buyer affordability, decreasing demand for homes. This can lead to downward pressure on home prices. With that said, today’s housing market is following a different path because we’re seeing elevated mortgage rates in conjunction with elevated home prices.
Zillow Home Value Index vs. S&P CoreLogic Case-Shiller Index
Zillow claims that the ZHVI are “the most accurate and timely measures of residential real estate prices in the United States" and that its index is more representative of housing stock than the S&P CoreLogic Case-Shiller Home Price Index. Zillow claims this due to its extensive database that includes input from real homeowners as well as their sophisticated home valuation model in the Zestimate.
Zillow believes its ZHVI has distinct advantages over the Case-Shiller index. The Case-Shiller (CS) Index uses the repeat-sales methodology, meaning it measures price changes by looking at homes that have resold in a region, while the ZHVI only includes homes that have sold at least twice in recent history and excludes all new construction. Here are a few charts pulled directly from a piece by Zillow comparing the two indexes. We tried to get this data to do our own analysis, but the research group there would not provide it. Here’s a link to that article.
© Zillow.com
Another difference between the CS and ZHVI is that CS includes foreclosure resales. Zillow emphasizes that foreclosure resales are “substantially different from non-distressed sales” and are often considerably discounted from such. Zillow claims that using foreclosure resales represents “two very different market segments”. Eric Stubbs, Ph.D. at RBC WM believes foreclosure sales is a matter of taste and says that foreclosures are actual sales, so they do in fact affect the price of surrounding properties.
In any case, the ZHVI is another tool in the tool belt to determine home values and is useful due to its timeliness and variety of information.
ETFs associated with residential real estate include: iShares Residential and Multisector Real Estate ETF (REZ).
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