Market Trends

Tax Reform and Housing: All Your Questions Answered

A number of longstanding federal tax benefits of homeownership — including the ability to deduct all local property taxes paid in a given year and a lofty $1 million cap on the size of loans eligible for mortgage interest deduction — were changed as part of the recently passed tax legislation. While all of the nuances and consequences of the law’s sweeping reforms have yet to be fully explored or realized, some of the more immediate questions on its effects on the housing market, homeowners and homeownership in general can be answered.

We’ve collected some of the most pressing questions and provided general answers — with the caveat that local laws and individual circumstances will change the impact of these laws to varying degrees. We will update this list as more questions emerge, and strive to answer them whenever possible with objective, data-backed conclusions.

Overall, does this tax reform increase or decrease homeownership incentives?

How will the doubling of the standard deduction impact the mortgage interest rate deduction?

What does the survival of the capital gains exclusion mean for homeowners?

How will the new $10,000 limit on state and local income and property tax (SALT) deductions affect homeowners?

What impact will the new mortgage interest deduction cap have on current homeowners?

Will the removal of deductible interest on home equity loans impact homeownership rates?

How does the new legislation impact second/vacation homeowners?

Why are homeowners/taxpayers in expensive, highly taxed areas more likely to feel a pinch from this new bill?

What about other, more corporate-focused tax policies like the Low-Income Housing Tax Credit (LIHTC)? Will changes to the code impact these programs?

 

Overall, does this tax reform increase or decrease homeownership incentives?

This reform definitely removes some the federal government's preferential treatment towards homeowners. Ultimately, more households will be more likely to maximize their tax breaks with a standard deduction rather than with individual, itemized deductions. And using the standard deduction means it doesn't matter if a potential home buyer spends an extra $5,000 on a house, a boat, or a vacation – all that spending is now treated the same. This could remove the incentive to spend a little more on a home in hopes of recouping some of that spend come tax season.

But at the end of the day, people choose to buy – or not buy – a home for a whole host of reasons, not just what their tax bill looks like in April. Most future changes in the housing market as a result of tax reform, if any, won't come because of the few housing-specific provisions the legislation includes. Rather, the health of the housing market is and will continue to be dependent upon the after-tax incomes of households on the margin between renting and buying. If the tax bill puts more money in their pockets, they may lean more toward buying. If it takes some money away, they may choose to rent. Along those lines, it will be interesting to see how the temporary nature of some of these tax cuts shakes out. Will those households on the edge of homeownership make decisions based on what their new take-home income is next year, or will there be some apprehension if they think their taxes will rise down the road?

How will the doubling of the standard deduction impact the mortgage interest rate deduction?

A doubled standard deduction will have a big impact on how many homeowners ultimately decide to take advantage of the mortgage interest deduction. When you combine a much larger standard deduction, with the fact some itemized deductions have been capped or pared back, many filers may no longer find it financially advantageous to itemize deductions. Zillow calculated that under the current tax code, itemizing and claiming the mortgage interest deduction is financially worthwhile on about 44 percent of all U.S. homes. Under the new legislation, itemizing and claiming MID is worthwhile on just 14.4 percent of homes nationwide.

Ultimately, the combination of all new provisions in the tax code will determine if a filer is better or worse off, but changes to the standard deduction and SALT deductions will change the calculus about where some people might choose to spend their money. If the size of their tax return no longer depends on what they bought that year, some homebuyers may decide not to spend as much on mortgage debt as they otherwise might have.

What does the survival of the capital gains exclusion mean for homeowners?

About 10 percent of home sellers last year sold their home after living in it between two and five years. Previous versions of the tax bill upped the requirement for residency to five of the past eight years in order to avoid capital gains, from the current minimum of two of the past five. Were these laws enacted, would-be sellers of homes occupied less than five years may have been on the hook for sometimes hefty capital gains tax bills, and may have decided to hang on to their home a bit longer. This very likely could have had the effect of further limiting inventory at a time when the number of homes for sale is already incredibly low. Keeping the status quo means these sellers no longer need to make that difficult choice, and can instead feel more free to list their home on a more flexible schedule without fear of a potentially hefty tax hit.

How will the new $10,000 limit on state and local income and property tax (SALT) deductions affect homeowners?

Households that pay more than $10,000 in combined state and local taxes each year will be impacted by the new SALT limits. On one hand, taxpayers with SALT liability more than $10,000 who still itemize deductions will get a smaller tax break. However, considering the previous versions of the bill, the continued availability of those deductions in the final plan, even if they are capped, may be the deciding factor between whether or not they choose to itemize deductions. This matters a lot in areas where SALT deductions are a relatively more-significant reason for itemizing - areas with lower home prices, but higher taxes (including places like upstate New York, southern New Jersey and inland California).

What impact will the new mortgage interest deduction cap have on current homeowners?

Homeowners who closed before December 15, 2017 will be grandfathered in under the old $1 million loan cap on mortgage interest deductibility. So their deductions will not be directly affected – at least not until they move or refinance. Most estimates suggest that by limiting some buyers' purchasing power, capping the deduction could contribute to slower home value growth in the priciest communities. This could limit the gains longtime homeowners can expect when they do eventually sell.

Will the removal of deductible interest on home equity loans impact homeownership rates?

People make housing decisions – and transition between renting and buying – for a number of reasons. The deductibility of interest on home equity loans doesn't seem to be very high on that list. While the change is an example of how the tax bill removes some incentives to homeownership, this provision probably won't play much of a role – if any – in influencing the homeownership rate. A host of personal and economic factors matter a whole lot more. This specific deduction is generally more important in helping to finance and offset the cost of major home renovations. It's possible that eliminating this deduction could contribute to homeowners neglecting or delaying important repairs and upkeep, especially those on strict budgets. This potential for underinvestment in existing homes could make it more difficult for struggling communities with an aging housing stock, in particular, to reinvent themselves.

How does the new legislation impact second/vacation homeowners?

Even though the final bill retained the deductibility of mortgage interest on second homes, folks buying a second home could see fewer benefits, but likely for different reasons than others. Taxpayers with second homes are more likely to have enough combined mortgage debt for itemizing to make financial sense, but they’re also more likely to hit the lower MID cap. Combined with the $10,000 cap on property tax deductions, owners of multiple homes may end up worse off under the new bill than under the older legislation.

Why are homeowners/taxpayers in expensive, highly taxed areas more likely to feel a pinch from this new bill?

Consider two hypothetical, relatively well-off, homeowning households (earning an annual income in the top-third of all incomes and owning a home valued in the top one-third of all homes for their area) – one living in the higher-cost New York area, and another in the less-expensive Raleigh, N.C., area.

  • In New York, this household earns $155,300 per year, and pays $11,947 in state income tax. The median value of their home is $790,100, and they pay $11,452 in annual property taxes. All told, they pay approximately $23,399 per year in combined income and property taxes.
  • A similar household in Raleigh earns somewhat less per year, about $132,400, and owns a less-expensive home valued at $405,600. But they also pay much less in taxes – about $6,751 in state income tax and $3,491 in annual property taxes, on average, for a combined total of $10,242.

Under the old legislation, these homeowners could deduct the full, combined total of state income taxes and property taxes. But the new legislation caps this deduction at $10,000. The homeowner in Raleigh is barely impacted, losing the ability to deduct just $242. But the homeowner in New York can no longer deduct more than $13,000 from their federal return. In less-expensive markets with lower tax burdens, current homeowners may not notice much of a difference. But in more expensive, highly taxed areas like California, New York and New Jersey, the differences in the amount of eligible deductions they can file in 2017 versus 2018 could be very striking.

What about other, more corporate-focused tax policies like the Low-Income Housing Tax Credit (LIHTC)? Will changes to the code impact these programs?

LIHTC was preserved in its current form under the new legislation, but the significant lowering of the corporate tax rate – from 35 percent to 21 percent – may make the availability of these credits less attractive. LIHTC is a fairly complex program, but in a nutshell, it allows corporations to lower their effective tax rates in exchange for purchasing tax credits that enable developers to finance construction of affordable housing with the proceeds. Under the new, lower corporate tax rate, some corporations and investors may see less value than they used to in purchasing a credit that lowered their tax rate. And if there isn't as much demand for these credits, it's possible that fewer units of affordable housing get built.

About the Author

Alexander Casey is a Policy Advisor at Zillow.

The post Tax Reform and Housing: All Your Questions Answered appeared first on Zillow Research.

Mortgage Rates Quiet Over New Year's Holiday

The average prime 30-year fixed mortgage rate quoted on Zillow was flat last week for a second consecutive week as markets and lenders were largely quiet between Christmas and New Year's. Mortgage rates ended 2017 at 3.78 percent, about 17 basis points below where they started the year. This corresponds to about the 60th percentile of daily mortgage rates over the course of 2017, meaning that rates were higher in 40 percent of the days in 2017.

The relative tranquility in financial markets continued into the first few days of 2018 with markets largely flat after the Federal Reserve published minutes from the Open Market Committee's December meeting. While there had been speculation about whether the minutes would provide greater insight into the central bank's views on recent fiscal policy changes, the minutes did not convey strong inclinations about how tax cuts could affect growth and what that might mean for interest rates.

Friday's December Jobs Report will be another opportunity for markets to assess the state of the U.S. labor market. If the data come in as expected, they should show a strong job market at the end of 2017.

About the Author

Aaron Terrazas is a Senior Economist at Zillow.

The post Mortgage Rates Quiet Over New Year's Holiday appeared first on Zillow Research.

Zillow's Prediction of 2017 Homeless Numbers in Line With Actual Counts

A Zillow analysis published earlier this year that examined the relationship between rising rents and homeless populations accurately predicted the recently released 2017 point-in-time (PIT) counts, with a median absolute percent error of 8.3 percent. Predictions of the PIT counts in 17 out of 25 metro areas were within the 99 percent predicted interval.

In two areas – Los Angeles and Sacramento – the figures compiled by the U.S. Department of Housing and Urban Development came in higher than we predicted given how much rents rose in those areas. For example, in Los Angeles, Zillow's analysis indicated that if rents rose 5 percent, then 1,900 additional people there would experience homelessness. The local count in January 2017 indicated that, in fact, 57,794 people in the Los Angeles metro area experienced homelessness, an almost 11,000-person increase from 2016. The increase was greater than expected, given that rents rose about 4 percent from 2016 to 2017.

In six other metro areas – Atlanta, Charlotte, Detroit, Houston, Miami and Tampa – the local counts were lower than Zillow predicted. Some areas have disrupted the link between rising rents and homelessness. Houston, for example, had one of the higher homeless counts in the country just five years ago. Now it's dropping fast, so that a 6 percent decrease in rent over the past year translated into 426 fewer people experiencing homelessness in Houston.

The latest results will be incorporated into the dynamic Bayesian hierarchical model that Zillow uses for time-varying homeless count data and will be reflected in our next predictions.

About the Author

Chris Glynn is a Zillow Research Fellow

The post Zillow's Prediction of 2017 Homeless Numbers in Line With Actual Counts appeared first on Zillow Research.

Total Value of All U.S. Homes: $31.8 Trillion. How Big Is That?

  • The total value of all U.S. homes in 2017 is $31.8 trillion.
  • Homes in the Los Angeles and New York metro areas are worth $2.7 trillion and $2.6 trillion, respectively, the size of the U.K. and French economies.
  • Renters spent a record $485.6 billion in 2017, an increase of $4.9 billion from 2016.

If you add the value of all the homes in the United States together, you get a sum that’s a lot to get your mind around: $31.8 trillion.

How big is that? It’s more than 1.5 times the Gross Domestic Product of the United States and approaching three times that of China. Total U.S. home values have grown $1.95 trillion over the past year — more than all of  Canada’s GDP or two companies the size of Apple.

Altogether, homes in the Los Angeles metro area are worth $2.7 trillion, more than the United Kingdom’s GDP. That’s before this luxury home on steroids hits the market.

In the New York City metro, total home values equal $2.6 trillion, more than the French economy — and enough money to buy 8,494 Boeing 787-10 Dreamliners.

Among the 35 largest U.S. markets, the greatest total home value growth happened in Columbus, Ohio, which gained 15.1 percent to $152.3 billion — enough to buy 634 million club seats at Friday’s Cotton Bowl game between Ohio State and USC (which, you know, don’t exist).

Renters spent a record $485.6 billion in 2017, an increase of $4.9 billion from 2016. Renters in New York and Los Angeles spent the most on rent over the past year. These markets are also home to the largest number of renter households.

San Francisco rents are so high that renters collectively paid $616 million more in rent than Chicago renters did, despite there being 467,000 fewer renters in San Francisco than in Chicago.

The post Total Value of All U.S. Homes: $31.8 Trillion. How Big Is That? appeared first on Zillow Research.

Americans Split on Fairness of Local Property Tax Rates

  • Nationwide, a slim majority (51 percent) of Americans surveyed earlier this year said they agreed with the statement that "the property tax rate in my community is unfair to me."
  • Fifty-seven percent of 18-34 year olds said they somewhat or strongly agreed that local property tax rates were personally unfair, a significantly larger share than those 55 years or older.
  • Fifty-four percent of lower-income households making less than $50,000 per year said they agreed local property tax rates were unfair to them, compared to less than half of households with an annual income of $50,000 or more.

Currently, Americans overall are almost evenly split on the fairness of the property tax rate in their community. Looking ahead, it's unclear how these attitudes may shift as federal tax changes set to take effect in 2018 potentially lead more to fully feel the pinch of local property tax bills.

Many U.S. homeowners are reportedly exploring pre-paying future property taxes prior to the end of 2017 in hopes of taking advantage of current laws that expire in 2018 that are more generous to homeowners – though the ability to pre-pay local property taxes differs by state and jurisdiction. In 2017, homeowners could deduct all of their local property taxes on their federal return, in additional to all state and local income taxes. Under new rules beginning in 2018, those deductions are collectively capped at $10,000.

Nationwide, a very slim majority (51 percent) of Americans surveyed earlier this year said they agreed with the statement that "the property tax rate in my community is unfair to me," according to the most recent Zillow Housing Aspirations Report.[1] A majority of respondents in 13 of the 20 metro markets surveyed said they agreed with the assessment that their local property tax rate was personally unfair, with the biggest majorities in Chicago (64 percent agreed with the statement), New York (63 percent) and San Jose (60 percent).[2]

Somewhat clearer differences emerged when looking at responses by age and income, with younger and lower-income groups more likely to say they agreed that their local property tax rate was unfair to them.

The share of respondents indicating they agreed with the statement that local property taxes were unfair was highest among younger Americans: 57 percent of 18-34 year olds said they somewhat or strongly agreed. That's similar to the share of middle-aged, 35-54 year olds (55 percent), but much higher than the minority (42 percent) of those aged 55-plus that said they agreed with the statement.

Fifty-four percent of lower-income households making less than $50,000 per year said they agreed local property tax rates were unfair to them, compared to less than half (49 percent) of households with an annual income of $50,000 or more.

Republicans and Democrats differed in how they see the fairness of property taxes. Republicans said they believed property taxes are unfair to high-income households, while Democrats think they're unfair to low-income households.

The potential impact of the recent tax changes varies greatly from market-to-market, with homeowners in some less-expensive and/or less tax-burdened markets unlikely to notice much of a change, while others may get hit with a much higher tax bill thanks to the hard cap on deductions.

According to a Zillow analysis of incomes and property values conducted for the Wall Street Journal, a New Yorker in the top income tier who owns a home in the top-third price range for the metro would pay more than $23,000 in property and state income tax per year – more than twice the amount they can deduct under the new cap. An affluent homeowner with an expensive home in Raleigh would pay just over $10,000; a homeowner in similar circumstances in Chicago would pay about $12,000 in property and state income tax. Homeowners in the same circumstances in Nashville would pay a little more than $3,000,[3] unlikely to be adversely impacted by the new $10,000 cap.

 

 

[1] The Zillow Housing Aspirations Report is computed from an IPSOS poll which combines sample of 10,000 U.S. adults from 20 U.S. core-based statistical area (CBSA) metropolitans (Atlanta, Boston, Chicago, Dallas, Denver, Detroit, Los Angeles, Las Vegas, Miami, Minneapolis, New York, Philadelphia, Phoenix, St. Louis, San Diego, San Francisco, San Jose, Seattle, Tampa, and Washington, D.C.) age 18+, surveyed online in English. The survey is conducted twice annually, with the most recent version fielded in the first half of September, 2017. The survey has a credibility interval of plus or minus 1.1 percentage points for all respondents from the 20 U.S. metropolitans and approximately 5.0 percentage points for an individual U.S. metropolitan. Post-hoc weights were made to the population characteristics on gender, age, region, and race and ethnicity. For more information about conducting research intended for public release or IPSOS’ online polling methodology, please visit the Public Opinion Polling and Communication page.

[2] The 13 markets in which a majority of respondents agreed with the statement that "property taxes in my community are unfair to me" include: Boston (51 percent); Chicago (64 percent); Dallas (52 percent); Los Angeles (52 percent); Miami (56 percent); New York (63 percent); Philadelphia (54 perecnt); St. Louis (51 percent); San Diego (57 percent); San Francisco (54 percent); San Jose (60 percent); Seattle (55 percent); and Washington, D.C. (51 percent). Exactly half of respondents (50 percent) in Denver said they agreed with the statement.

[3] Tennessee does not have a state income tax on wages/salaries, but does levy a 6 percent tax on investment income.

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Mortgage Rates Ending 2017 Slightly Below 2016

The average prime 30-year fixed mortgage rate quoted on Zillow was flat last week as markets and lenders were largely quiet around the Christmas holiday. However, mortgage rates had risen sharply the previous week, matching their highest levels since late October. The last time mortgage rates were higher was in early July.

Lenders tend to price conservatively during the holidays – generally preferring to err on the side of caution when quoting consumer rates, so the data should be interpreted with due context. But the yield curve has flattened substantially over the past year, so some upward pressure was due. Despite three rate hikes by the Federal Reserve over the past year (four if one counts the last 13 months), the standard 30-year fixed mortgage rate ends 2017 about 20 basis points below where it stood at the end of 2016. It is difficult to imagine this continuing much into 2018.

About the Author

Aaron Terrazas is a Senior Economist at Zillow.

The post Mortgage Rates Ending 2017 Slightly Below 2016 appeared first on Zillow Research.

Case-Shiller October Results and November Forecast: Still Defying Gravity

The last few months of 2017 have clearly demonstrated the extent to which the housing market refuses to be knocked off its stride. Sales of existing homes have risen strongly and unexpectedly, despite a severe and worsening shortage of homes actually available to buy. To cope, buyers simply linger longer on the market, even into the slower winter months if needed.

The Case-Shiller National Index of home prices for October climbed 6.2 percent year-over-year, while its gain from September was 0.7 percent.

The 10-City Composite Index increased 6.0 percent year-over-year and 0.7 percent from September, while the 20-City Composite Index grew 6.4 percent year-over-year and 0.7 percent from September. Seattle, Las Vegas and San Diego continued to post the strongest annual gains among the 20 cities, with increases of 12.7 percent, 10.2 percent and 8.1 percent, respectively.

Home builders have managed to start construction on more homes than at any point since prior to the recession, despite high and rising land, labor and materials costs. An economy that keeps adding jobs and wages that continue to grow both have consumers feeling confident. And they're boosted by mortgage interest rates that remain near all-time lows, defying expectations and conventional wisdom alike that both say – and have been saying for years – that rates have to begin rising at some point.

The housing market's resistance to these headwinds is a testament to the enduring value Americans place on homeownership. Whether and how long the housing market can continue to defy gravity, and whether the good times last into 2018, remain open questions. But for now, the fundamentals driving the market today look unlikely to change any time soon.

About the Author

Aaron Terrazas is a Senior Economist at Zillow.

The post Case-Shiller October Results and November Forecast: Still Defying Gravity appeared first on Zillow Research.

Rapid Reaction: November New Home Sales

  • November new home sales surged, jumping 17.5 percent from October to 733,000 (SAAR), according to the U.S. Census Bureau. Sales of new homes were up 26.6 percent from a year ago and reached their highest level since July 2007.
  • The inventory of new homes for sale was flat in November, at 283,000. Roughly 70 percent of the increase in sales over the month was driven by homes for which construction has not yet started.
  • The median, non-seasonally adjusted price of homes for sale was also largely flat, falling a scant $900.
  • The biggest jump in sales came in the $300,000-$399,000 price range, a relatively affordable sweet spot for many buyers and a sign builders are beginning to cater to lower ends of the market.

These are the exact kinds of new home sales numbers the market has been desperate for the past few years. New home sales data in general are pretty volatile — data from the previous three months were all revised downward from initial reports — but if the numbers hold in coming months and if builders can keep up this pace, it bodes very well for 2018. In general, 2017 was a decent year for home builders, especially given the difficulties they face finding desirable, affordable and ready-to-build lots; rising and unpredictable materials costs; and fierce competition for skilled workers. But while the year seems to be ending on a high note, there's no question 2017 could have been a lot better and that more needs to be done by builders to address the ongoing inventory crunch the market has been enduring for the past several years. As we look ahead at 2018, it will be fascinating to see the extent to which tax reform – essentially a national exercise in reducing regulatory costs for C corporations, including many builders – impacts builder behavior. Whether they use their tax savings to expand production, build at lower price points and/or hire more workers will go a long way in determining how the housing market shakes out next year and beyond.

About the Author

Aaron Terrazas is a Senior Economist at Zillow.

The post Rapid Reaction: November New Home Sales appeared first on Zillow Research.

Rent Growth Catches Up to Income Gains After Slowdown (November 2017 Market Report)

  • For the almost two years leading up to and including May 2016, rents grew faster than incomes, at times more than three times as fast. Then incomes outpaced rents for more than a year. Now rent growth is catching back up.
  • Home values gained 6.7 percent year-over-year in November to a median home value of $205,100 – the slowest rate of appreciation since last November.
  • Nationally, inventory is down 10.5 percent from a year ago.

The holidays mean it's bonus time for many workers, and those extra dollars may be especially welcome for renters this season, as the pace of rent growth ticks up again.

Rents remain at historical highs – the typical renter today pays a far greater share of her income on rent than she did historically – and their rate of growth is almost matching income growth for the first time since June 2016.

The Zillow Rent Index – what the typical renter paid, a reflection of typical asking rents – in November was $1,435, up 2.4 percent from a year earlier – which is nearly in line with the 2.5 percent annual growth in incomes during the same month. It's the second consecutive month during which rents and incomes have grown almost in lock-step: In October, the ZRI climbed 2.2 percent year-over-year, just 10 basis points slower than the 2.3 percent annual income growth, according to the U.S. Bureau of Labor Statistics.

It's also a turnaround from the previous 14 months, when renters had a reprieve from rapid growth as income growth handily outpaced it at the national level. For almost two years leading up to and including May 2016, rents grew faster than incomes, at times more than three times as fast. Rent growth peaked in July 2015 at annual growth of 6.5 percent.

The fastest rising rents are in Sacramento, Calif., Riverside, Calif., and Seattle – each with annual gains topping 5 percent.

For those who didn't get bonuses – or big enough bonuses to cover their rents – here's a calculator that might help during the upcoming annual review season:

Home Values

Home values also continued to rise in November, gaining 6.7 percent year-over-year to a median home value of $205,100 – the slowest rate of appreciation since last November.

San Jose, Calif., led the country in home value growth, at 17.4 percent, surging to a median value of $1,128,300. That gain is due in part to limited inventory: There were almost 55 percent fewer homes for sale in San Jose in November than there had been a year earlier.

Inventory

Nationally, inventory is down 10.5 percent from a year ago. Tight inventory has weighed on existing home sales throughout 2017 and, despite some jumps in late summer and early fall related to market disruptions during and following the hurricanes that hit Texas and the Southeast in August and September, overall home sales have been flat this year. However, expectations around the tax bill may have pushed some home shoppers to pull the trigger on buying earlier than they might have otherwise.

Mortgage Rates

Mortgage rates moved in a very tight range throughout the month of November, reflecting stable financial markets and a predictable monetary policy outlook despite looming leadership changes as the Federal Reserve. Longer-term lending rates have remained low even after the Federal Reserve has hiked short-term interest rates, giving buyers more buying power in a competitive housing market. Mortgages rates[i] on Zillow started and ended the month of November at 3.75 percent, which was also the month high[ii], and hit a low of 3.68 percent in the first week of the month[iii]. Zillow’s real-time mortgage rates are based on thousands of custom mortgage quotes submitted daily to anonymous borrowers on the Zillow Mortgages site and reflect the most recent changes in the market.

[i] Mortgage rates for a 30-year fixed mortgage

[ii] Month high occurred on November 1st and 14th

[iii] Month low occurred on November 6th, 7th, and 8th

About the Author

Aaron Terrazas is a Senior Economist at Zillow.

The post Rent Growth Catches Up to Income Gains After Slowdown (November 2017 Market Report) appeared first on Zillow Research.

Housing Data 101: Why Use the Zillow Home Value Index (ZHVI) Instead of a Median Sale Price Series

Zillow publishes several different measures of home values monthly including median list prices, median sale prices, and the Zillow Home Value Index (ZHVI), but for almost all use cases we believe ZHVI to be the most representative measure of changing home values over time.

The methodology for ZHVI can be read in detail here, but the one-sentence explanation is that Zillow takes all estimated home values for a given region and month (Zestimates), takes a median of these values, applies some adjustments to account for seasonality or errors in individual home estimates, and then does the same across all months over the past 20 years and for many different geography levels (ZIP, neighborhood, city, county, metro, state, and country).  For example, if ZHVI was $400,000 in Seattle one month, that indicates that 50 percent of homes in the area are worth more than $400,000 and 50 percent are worth less (adjusting for seasonal fluctuations– e.g. prices tend to be low in December).

We recommend using ZHVI to track home values over time for the very simple reason that ZHVI represents the whole housing stock and not just the homes that list or sell in a given month. Imagine a month where no homes outside of California sold.  A national median price series or median list series would both spike. ZHVI, however, would remain a median of all homes across the country and wouldn't skew toward California any more than in the previous month. ZHVI will always reflect the value of all homes and not just the ones that list or sell in a given month.

A more realistic example of the California hypothetical is that the housing collapse affected different regions and different segments of the population very differently. Non-distressed sales became less frequent because of negative equity and foreclosures, so the hardest hit regions became underrepresented in median sale series during the worst years of the collapse.  This falsely attenuated the effects of the housing crash.

Or imagine a scenario where no homes sell in a month.  This is a frequent occurrence for small regions like ZIP codes. With no sales, the median sale price would be undefined. But with ZHVI,  estimates of home values[1] can still track the median value of homes.

[1] This might seem strange that Zillow can estimate home values when there are no sales, but say there are no sales in a ZIP code: We still most likely will have sales data in adjacent ZIPs or other nearby areas. From these sales, the models can estimate how much home values are increasing or decreasing. Similarly, we might not have home sales in a given month, but if we see sales in the surrounding months, we can reasonably interpolate values in the middle month.

The post Housing Data 101: Why Use the Zillow Home Value Index (ZHVI) Instead of a Median Sale Price Series appeared first on Zillow Research.

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