How Accurate are Zillow Year-Over-Year Home Price Estimates? – Mish Talk

December 28, 2022

Chart from Zillow article below on its home price methodology

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.

The Zestimate is generated through an ensemble of machine learning models and incorporates data from a variety of sources including public data, user-generated data and real estate data from direct feeds or multiple listing services.

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.