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Would you believe that home values are up?
According to Zillow.com, home values rose 4.8% in the third quarter in the 36 major metropolitan areas covered by its Zindex. That may come as a surprise if you’ve been reading about falling sales prices, but there’s a good explanation for the discrepancy. I think that while Zillow’s number may make things look a little better than they really are, the median sales price numbers from the Census Bureau and the National Assn. of Realtors probably make things look a little worse than they really are.
Obviously one difference is that the Zindex covers just 36 metro areas, not the whole country. But the more interesting difference is that Zillow’s index includes updated estimates of the values of all homes in an area, not just the ones that were sold. That’s important because the sales price indexes can be skewed by changes in the mix of homes sold in a period. If for some reason there are relatively few high-priced homes sold during a quarter, that will skew a sales price median downward.
This ain’t just some technical debate. Richard Berner of Morgan Stanley, who argues that housing will “rust not bust,” points out a big skew in the Census Bureau’s widely quoted figure of a 9.7% decline in median new-home prices from September 2005 to September 2006. As Berner points out, the sales of new homes priced between $300,000 and $400,000 fell 44% over the past year, while sales of those priced under $300,000 fell only zero to 20%, depending on the price bucket. In other words, the sales mix shifted to cheaper homes, and that pulled down the median.
Zillow’s Zindex isn’t the only measure out there that corrects for this mix problem. The Office of Federal Housing Enterprise Oversight index and the S&P Case-Shiller index do, too. But it’s a good one to pay attention to.
(One other thing. This blog has gotten lots of complaints from homeowners who say that the Zestimates for their own houses are wrong. Whenever a house is sold, Zillow checks how close its value estimate was to the actual sales price. It says that in 62% of cases, the estimate was within 10% of the actual sales price. Not bad.)
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.