August's ZHVI came in at $349,770, up 0.47% from July and up 0.40% from August 2022. However after adjusting for inflation, the real figures are 0.09% month-over-month and -6.45% year-over-year. Nominal home values have increased for 5 straight months while "real" home values have only increased for 3 straight months.
Zillow.com, the real estate listing and brokerage website, makes a wealth of real estate data publicly available. Of these, the Zillow Home Value Index (ZHVI) attempts to provide a seasonally adjusted measure of home values as well as market changes. Specifically, its “flagship” ZHVI uses data for “all homes, middle tier, smoothed and seasonally adjusted cut”. It is supposed to represent the middle of the market for all homes - the “typical home value” - and not the median home value. The index debuted in 2006.
The Zillow Home Value Index (ZHVI) now incorporates the more accurate neural Zestimate.
Starting with Zillow’s January 2023 data release, and for all subsequent releases, the full ZHVI time series has been upgraded to harness the power of the neural Zestimate, which is the Zestimate displayed on home detail pages nationwide. The neural Zestimate employs a neural network that leverages a deeper history of property data — such as sales transactions, tax assessments and public records, in addition to home details such as square footage and location — to react more quickly to current market trends.
Importantly, the way the Zillow Home Value Index is calculated has not changed, just the Zestimates used to construct it. Because the Zestimates that make up ZHVI are now more accurate, the new ZHVI will better reflect market changes at the national and local levels.
Within the ZHVI, there are a number of “cuts” to look at - for instance by geographical region or housing type. Here, we will focus on the flagship ZHVI, the typical home values.
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. These are nominal values, not adjusted for inflation.
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 still above that of the (inflation-adjusted) housing peak in 2006, despite peaking in July 2022.
Here is an overlay of the nominal and real indexes for a comparative look.
Zillow Home Value Index vs. S&P 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 Case-Shiller 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.
Resources: ZHVI User Guide, Zillow's ZHVI/CS Index Comparison, ZHVI Methodology, S&P CoreLogic Case-Shiller Home Price Indices
ETFs associated with residential real estate include: iShares Residential and Multisector Real Estate ETF (REZ).
This article was originally written by Jill Mislinski. Starting in January 2023, AP Charts pages will be maintained by Jennifer Nash at VettaFi | Advisor Perspectives
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