How Accurate are Zillow Year-Over-Year Home Price Estimates?

 Home prices are falling, but how fast, and by what measures?

Down Markets 

Four Major Markets 

Investigating Zillow's Home Value Index

Please consider Zillow Home Value Index Methodology, 2019 Revision: Getting Under the Hood. 

The Zillow Home Value Index (ZHVI) is Zillow’s flagship measure of both the typical home value as well as housing market appreciation currently and over time. It offers a number of advantages over other housing indices, including better timeliness, better coverage of the market and more visibility into changes in small market segments.

One of the core functions of the ZHVI is to calculate total housing stock appreciation in a market. Total market appreciation is calculated as a weighted average of each home’s appreciation in the property universe.

For example, a home worth $100,000 that appreciates 10% month-over-month adds $10,000 in value, while a home worth $1 million that appreciates 10% adds $100,000 in value. And because the more expensive home adds more dollar value, it represents a larger portion of the total market appreciation.

Zillow Example Based On Its Stated Methodology 

• 1 home originally priced at $3,000,000 rises 15 percent to 3,450,000
• 10 homes originally priced at $300,000 decline 10 percent each to $270,000.

In my example above, the Zillow model would say the market is rising despite the fact that 10 out of 11 homes fell in price. 

My estimate says the average home price decline in the example was 7.7 percent (10*10-15)/11 * 100.

Bear in mind that Zillow is not based on repeat sales of the same house but rather "data from a variety of sources including public data, user-generated data and real estate data from direct feeds or multiple listing services."

User generated data? Multiple listings?

Case Shiller Methodology

In contrast to whatever the heck Zillow is doing, please consider the S&P CoreLogic Case-Shiller Home Price Indices Methodology.

The S&P CoreLogic Case-Shiller city indices reflect the average change in home prices in a particular geographic market. The indices are calculated monthly and cover 20 major metropolitan areas (Metropolitan Statistical Areas or MSAs), which are also aggregated to form two composites – one comprising 10 of the metro areas, the other comprising all 20. 

Percentage changes in the indices measure percentage changes in housing market prices given a constant level of quality. Changes in the types and sizes of houses or changes in the physical characteristics of houses are specifically excluded from the calculations to avoid incorrectly affecting the index value.  

The monthly S&P CoreLogic Case-Shiller Home Price Indices use the “repeat sales method” of index calculation – an approach that is widely recognized as the premier methodology for indexing housing prices – which uses data on properties that have sold at least twice, in order to capture the true appreciated value of each specific sales unit.  

And whereas Case-Shiller strips out quick transactions (likely flips with improvements) Zillow doesn't. 

Case-Shiller Home Prices

Case-Shiller home price data as of September via St. Louis Fed, chart by Mish.

Zillow Says Home Price Correction is Over

"Nationally, the Zillow model thinks the home price correction is over."

Oh Wait, No It Isn't.

What a hoot. And what is Zillow's track record?

Zillow Reports $880M Loss on Failed Home-Flipping Business

Please recall Zillow Zillow Reports $880M Loss on Failed Home-Flipping Business

Listings giant Zillow lost more than $880 million on its failed home-flipping business in 2021, the company reported late last week.

According to the Wall Street Journal, the otherwise profitable home-listing and real estate advertising company ended up losing nearly $530 million overall, with the bulk of the losses coming from its since shut-down Zillow Offers, which was responsible for the majority of Zillow’s income — $6 billion of the $8.1 billion it generated — but none of its profits.

That article was from February 13, 2022. 

Zillow did not make money flipping real estate in an up market. How pathetic is that? 

And we are supposed to have faith in its pricing model and year-over year estimates. 

Case-Shiller Percent Change Year-Over-Year 

The Case-Shiller chart above is from current, September data.

But September is based on three-month average of repeat sales which are hugely lagging (June, July, August), and it's now the end of December. 

We will have new data tomorrow for October. I will post new charts with more closeups after the St. Louis Fed posts the data. 

Timely vs Accuracy

Zillow says "It offers a number of advantages over other housing indices, including better timeliness, better coverage of the market and more visibility into changes in small market segments."

All of the above is at the key expense of accuracy so bad that it could not use its own data to make a profit in a strongly rising market.

Case-Shiller is not timely, but it is the best methodology available. I don't care how timely Zillow pretends to be if the methodology is flawed.

Curiously, Zillow and Case-Shiller have San Francisco as the weakest market, but it's difficult to really say how much prices are down year-over-year.

Zillow's statements that the home price correction is over is truly a joke. 

What we can say is home prices have peaked in every major national market with prices falling rapidly in most. There is no reason to believe a major trend change is at hand.

https://mishtalk.com/economics/how-accurate-are-zillow-year-over-year-home-price-estimates