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There was an interesting article in the Wall Street Journal a few weeks ago by David Wessel discussing differences between the housing index produced by the Office of Federal Housing Enterprise Oversight (OFHEO) and Standard & Poor’s Case-Shiller index. Since Zillow recently released our Q4 2007 Home Value Reports, I thought I’d extend Mr. Wessel’s analysis with a comparison of the Zillow Home Value Index (Zindex) to both the OFHEO and Case-Shiller numbers.

First, some background for the uninitiated. Both OFHEO and Case-Shiller utilize a weighted repeat sales methodology originally conceived in the 1960s and subsequently elaborated upon by Professors Karl Case (currently at Wellesley) and Robert Shiller (currently at Yale). This methodology was a significant improvement over the more conventional median sale price as it looks at the price change between repeat sales of the same home versus just looking at the median sale price of homes sold in a given period of time. As noted by Wessel, median sale price is heavily influenced by the type of homes that are selling at a given time, making it a less than ideal measure of home price levels (we’ll address this fact in more depth in a subsequent post).

zindex-cs-ofheo-graph.jpg

Of course, using a repeat sale methodology does have its own important caveats. Most importantly, the index is based only on the sample of homes that have sold at least twice, a fact which serves to exclude all new construction (which can account for more than 10% of real estate transactions). The chief major difference between OFHEO and Case-Shiller lies in the fact that OFHEO numbers are based only on homes sales with conforming home mortgages (loans less than $417,000), which eliminates a fair percentage of real estate transactions. Case-Shiller looks at all home sales, regardless of the mortgage amount.

The Zillow Home Value Index takes a different approach to constructing its market index. We generate valuations several times a week on more than 67 million homes, or roughly three out of four homes in the U.S., and calculate historical values dating back to 1997 (thus creating over 13 billion Zestimates). This complicated process allows us to aggregate these house-level valuations into indexes (what we call the Zindex) at the neighborhood, ZIP code, city, county, metro area, and national levels. This Zindex eliminates the bias present in median sale prices by looking at the value of all homes in a region, not just those homes that sold. The statistical models underlying the Zestimates control for the mix of housing for sale by finding patterns in the types of homes that are selling (no matter how unrepresentative of the overall set of homes) and then applying these patterns to all homes. For example, if only a few homes of a certain type sell in a given period, the models can extract the information from those sales and apply it to all homes of that type.

An important property of the Zillow Zestimate that allows us to aggregate them into a very accurate and reliable Zindex is that they have relatively little systematic error meaning that, while each Zestimate has some margin of error, they are just as likely to be above the actual sale price of a home as below. This means that individual estimates, each with some error, can be aggregated to form a quite accurate measure of all homes. What little systematic error does creep into the Zestimates is removed from all historical data series when we calculate the Zindex for the quarterly reports.

So, how does the Zindex compare to the two most common flavors of weighed repeat sales indexes? The table above compares year-over-year changes in market values for OFHEO, Case-Shiller and Zillow for selected markets between the third quarter of 2006 and the third quarter of 2007 (the same markets and periods compared by Wessel in his article). Also added to this table are the Pearson correlation coefficients between the three measures (an indicator of how similar the various measures are to one another). Zillow and Case-Shiller are fairly similar to each other with a correlation of 95% and median absolute error of 1.5%. OFHEO, on the other hand, is about equally dissimilar to both Zillow and Case-Shiller with a correlation of 50% with both other measures (median absolute error of 5.3% when compared with Zillow). The large difference between OFHEO and both Zillow and Case-Shiller is attributable to both data and methodological differences (e.g., the former using only conforming mortgages, different filtering of data, different weights used in the weighted repeat sales methodology, etc.). In short, the Zindex and Case-Shiller are pretty similar indexes overall, and both are somewhat different than OFHEO.

One important difference between the Zindex and the Case-Shiller index is their respective coverage areas. The Zindex is reported for 125 metropolitan areas whereas Case-Shiller reports on 20 higher level metropolitan areas (although the national Case-Shiller index uses data from about 100 metropolitan areas).

Another advantage of the Zindex relative to both OFHEO and Case-Shiller is reporting latency. Case-Shiller releases reports on a monthly basis with a two month data lag (e.g., data through January 2008 comes out in March 2008) and OFHEO releases data on a quarterly basis, usually about two months after the end of the quarter. Both Case-Shiller and OFHEO released their Q4 2007 reports on February 26th. Zestimates and Zindexes are published multiple times per week on Zillow.com, and our full Q4 Zillow Home Value reports were released on February 12th and our Q1 2008 reports are due to be released in May. Be sure to check back then, or, you can always check out the Zindex for your ZIP code, neighborhood, city, state or US by clicking on the “Zestimate and Charts” link on any home details page.

Read more about the Zillow Home Value Index vs OFHEO and Case-Shiller.

Dr. Stan Humphries is a real estate economist and real estate expert for Zillow. Stan is in charge of the data and analytics team at Zillow, which develops housing market data for most major metropolitan statistical areas in the U.S., and provides economic research for current real estate market conditions. He helped create the algorithms for the popular Zestimate® home value and the Zillow Home Value Index (ZHVI).

About the Author

Stan is Zillow's Chief Economist. To learn more about Stan, click here.

  • http://www.jmaproperties.com/ Milan Cole

    Nice to know about the correlation to the Case-Shiller and it seems that Zindex can be used in markets where that statistic is not available.

  • http://www.alansharpbarker.com/ogden_utah_homes_for_sale.htm Ogden

    I’m surprised they were that close. In my market Zillow Estimates are usually substantially higher.

  • http://www.kingofcondos.ca For Sale By Owner

    To be honest with every one I strongly beleive that Zillow is the king of real estate. I love its any kiind of services

  • http://www.ExpertHomeOffers.com Sell My House

    I purchase properties all over the nation and to get a quick look at what a home is worth I use Zillow. I think you need to get a better CMA when purchasing but it gives me a ball park estimate.

  • Rick Springfield

    You forgot to mention that OFHEO also includes refinance transactions in their index, which can introduce significant bias. They do have an index based only on purchases, but it’s only available at the state level.

    What’s your weighting scheme? Case-Shiller is valuation weighted, OFHEO is housing stock weighted. Can I infer from the high correlation that the Zindex is also valuation weighted?

  • http://www.leonardoteam.com Leonardo M.

    Interesting article to say the least.
    Zillow in my market (california desert area) varies even from street to street. Some of their zestimate are very accurate, others are not. As a reference i do research on different sites and even on listing presentations i always refer to sites like zillow as a consumer’s end point of reference and thus should be taken as is. Thank you for bringing it up. Leonardo

  • http://alwaysannmarie.com Always Annmarie

    Zillow home valuations in Northern NJ are very inaccurate. Perhaps they will improve in time.

  • RWL

    Zillow is way off in Madison, WI. The Dane County website has estimated fair market value shown which is much closer to the actual selling prices of homes in the area, as opposed to what zillow has them vauled at.

  • Pingback: Debunking the Median Sale Price | Zillow® Blog

  • http://www.postyourpad.com john

    Zillow index is best as they update very frequently and have accurate data

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  • http://www.3PoundsOfRealEstate.com Rob Aubrey

    Trying to nationalize real estate is like trying to nationalize the weather. It is different everywhere.

    However there are seasons and currently we are in real estate winter. We came out of a long hot summer with a brief fall and bang winter. Not all places are cold, this winter Miami, Vegas and Phoenix are not the warm spots.

  • Shawn

    Has anyone from Zillow ever been on my street ?

    Has anyone from Zillow been in my town ?

    Has anyone from Zillow been in my state ?

    How can people put any faith in a computer program that does not know how many homes are
    for sale in my area ?

    It does not know anything about the local market yet somehow it decided 1 month my $325,000 home was worth an additional $59,000 and another month it was worth $11,000 less.

    Which month do you pick ?

    If it were only that easy …

  • http://www.zillow.com/profile/DavidG David Gibbons

    Shawn,

    It’s important to remember that the Zestimate value is an estimate. The most recent Zestimate value is best understood as the current best estimate. The real estate market in much of the country has been volatile for the past year and so we’re seeing more volatility in some home’s Zestimates.

  • Pingback: Every House’s Value is Dropping Except Mine! | Zillow® Blog

  • http://www.leondari.com Leo

    how well does the zindex correlate to the RPX? (radar logic’s residential price index). I bring this up only because more derivatives are traded on the RPX than any other real estate index in the U.S.

  • HaroldK

    RPX ?? imho and a few others I know familiar with that site, those “indexes” are a complete hack-job and wired to blow

  • http://dsahomes.com DON

    I’ve had to deal with a number of people coming into our market (Wilmette, IL) who want to use Zillow as THE pricing bible. The reality is that Zillow uses “dirty” comps – homes that sold that aren’t true or good comparables to the subject property. Without boots on the ground, a computer model is not going to be accurate. That said, I consult Zillow before every CMA b/c I know my seller will do the same.

    Too often I need to point out that a home two zip codes away or in the next town with different tax bases and school systems are too different to be useful. We always need to price according to these more granular details.

    I worked on a similar product in 1997 with Experian and we found that there were just too many errors in the data provided by the counties to be reliable as pricing mechanisms and trying to get to the local level was insanely hard.

    Regardless, this data gets buyers in the ballpark and the locals can take it from there.

  • gary moos

    zillow is way off.

    when a house is purchased in a distressed state of repair then fixed, zillow has no function to take that into acount. so that house is under valued on zillow. and that hurts the very people who make neighborhoods nicer and help bring up prices for all of the houses in the neiborhood.

  • http://www.modifyloan.net Loan Modification Attorney

    The Zillow Home Value Index generate valuations through a complicated process that allows us to aggregate data to make fast decisions.

  • http://www.shortsaleoutpost.org/ Short Sale Fourm

    I agree loan mod attorney.

  • Frank Scales

    I’ve been following real estate prices for ten years
    I find zillow to be one of the most accurate estimating tools.

  • http://fedmod.tv federal loan modification

    It was good to see that home sales are finally starting to climb again, and if the new stimulus plan puts an emphasis on buying new homes, we’ll see a lot more home purchases go up as well.

  • http://floridaloanmodifications.info/tampa/tampa-fl-loan-modification-resources/ Tampa Loan Modification

    Just checking for our condo on Zillow, and I couldn’t actually find our unit.

    The Microsoft Live Earth didn’t have updates for when our building was built. The building went up in July, but wasn’t yet on the Zillow radar. I think for the majority of new homes and subsequently foreclosed homes, they may not even be on the map as existing, but instead will just be empty lots.

  • http://wisestartupblog.com Wise Startup Blog

    How accurate are these listings going to be with this current foreclosure crisis? Whenever I look at the map of listings, it isn’t 100% complete, which makes me wonder when the price estimates are calculated, if they take into account the number of foreclosures or vacant homes on a street.

    If a house is $350,000 but the neighborhood is 50% filled, the house might not appear to be worth less than $350,000 to Zillow, but in reality is worth much much less.

    Good luck with tweaking that algorithm, eager to see how you can work it out.

  • http://wiseloanmodification.com Loan Modification

    For those of you actively still selling homes, are your clients able to get any interest only loans or has everything reverted back to the 80/20?

    With the interest only loans, they were really not a bad solution for homeowners. If the entire payment is interest, you will be able to deduct the entire amount for tax purposes. Additionally, paying off the entire balance of your mortgage really only benefits the bank.

    In the case of parents wanting to pass on a home to the children, if the home is paid off upon their passing, the children just end up selling the home instead. In a new method we’re using, instead of contributing payments to paying down the principal, instead we buy life insurance, and upon payment of the life insurance, the life insurance goes to pay off the balance on the home, and the children are able to receive all of the proceeds of the life insurance tax-free, a win win for everyone, except the bank of course.

  • Robert V.

    David Gibbons, states..”the Zestimate value is an estimate.” But if you fail to consider all factors including zoning, neighborhood, condition, ect. the you have a flawed estimate. not to mention that in areas where REO prop account for the majority of sales, this does not come to true estimate of value.

  • http://www.zillow.com/profile/Drew Drew Meyers

    Robert-
    You’ve probably heard it before…but a Zestimate is an estimate. Not the final word on home values or a replacement for a CMA or appraisal by a local professional.

  • Cynthia Parker

    After looking at the data on zillow.com, it seems view properties are undervalued. The value of a view is difficult to measure but a view does have value. New homes with views typically sell for more than the same floor plan and elevation on a lot without a view. Ten years later, the view home should still be worth more than a similar home without a view. This is common sense but is not reflected in the Zestimates I reviewed.

    Any suggestions on how to correct for this? For housing tracts, could we use a percentage increase factor for view lots based on how much more the view lots sold for when the homes in the tract were new?

  • Mike

    For all the complainers:

    First of all, with all that’s happened in the market in the last year (or 8), no index is going to be perfect. It might even be fair to say that sale prices don’t represent the “true market value.” We’re in the middle of the greatest market correction any of us have ever seen, and many analysts think we may yet be years away from the bottom. And your view? Has Bob Schiller seen your view? Has anyone from OFHEO seen your countertops?

  • Cynthia Parker

    For Mike and his comments to “all the complainers”:

    I think you are confused regarding the intent of the comments by people you refer to as “all the complainers”. If we stop looking for ways to improve our models, we stop moving forward. The people you call “complainers” may simply be trying to encourage discussion so we can improve in the future. Don’t you want to improve in the future? It is obvious that we have room for improvement.

    Closed minded attitudes and name calling don’t move us forward. This kind of attitude has slowed progress through the ages.

  • http://www.100-mortgage.com 100% Mortgage

    Interesting that Zillow figures are slightly higher, is that a fairer representation do you think?

  • http://www.release-equity.org.uk Equity

    I agree with Cynthia, closed mindedness will hinder us, we need to progress.

  • http://www.mortgagesbuytolet.co.uk buytolet mortgages

    Very useful, good to see Zillow up against Case Schiller.

  • Don Gooding

    I’m wondering if there’s a way to improve the data through cooperation with real estate professionals and firms, without threatening their business. Since CMAs and appraisals are usually conducted on computer, there is lots of useful transaction and valuation information distributed across the country, beyond transaction data that counties proved… that one commenter noted was full of holes. I can’t say that I understand the competitive dynamics the would either drive or hinder such potential cooperation, but on the surface it seems like Zillow could be a platform enabling it… and we’d all be better for it.

  • http://www.portlandhomesearch.org/ Jesse Rivera

    I’ve always wondered about the accuracy of Zillow. It’s very interesting to see it compared in this fashion.

  • Mike

    Zillow’s numbers have consistently been wrong for my neighborhood. Years ago, I started tracking every single transaction and have created a database of them with medians and averages.
    In short, Zillow’s numbers are wacky in comparison to reality and generally way too low.
    In the last few months, Zillow says our median has dropped by nearly half and yet in the same period, actual transactions show healthy gains and a record-setting high. My guess is they have lumped in some new condos being sold “nearby” but actually distant enough to not have any real impact on our prices. Close enough in Zillow’s sampling to take a whallop.

    Their “algorithm” needs help. I noticed that they count special private or refinancing-type sales in their numbers. (Say a couple divorce and the settlement includes one spouse selling half the home value to the other.)
    So now we have a house plummet in value by half according to Zillow. And that translates into a drop for the whole area. Of course, their answer can only be that they process the transactions as they are recorded at the county. But this is part of what is inherently flawed in their numbers.

    There are many neighborhoods where the values are dramatically different if you are on “this side of the tracks” or that side of the highway or creek or whatever. But Zestimates steamroll right over those well known local differences. So if you are on the lesser side, you benefit and if you are on the greater side you lose.

    The reason this is not insignificant griping is because way too many professionals are just plopping Zestimates out to save them time. I cannot count how many times I have heard people say their appraiser, broker, real estate agent, and even banks refer to Zestimates. All with a legal disclaimer of course but some in the know say it is used far more than they will admit.

    What a monster that has been created! All I hope is that Zillow works harder at undoing the damage it is causing to people’s home values by improving their algorithm to take into account many more details than they are presently.

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    Superb information, the widget seems to work a treat.

  • RealtyMe

    I live in a part of Orlando Fl. where prices in one year has gone down more than 20%. I find the values given are pretty close to what has been selling and seems to be ahead of what new properties will list at then anything else. It is showing an uptick in value for the neighborhood I live in for the first time in two years. I wonder how this will play out.

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    Dead on in Harrisburg PA. You guys have some amazing technology!

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    You forgot to mention that OFHEO also includes refinance transactions in their index, which can introduce significant bias.

  • Mike Moultak

    There are obvious and self-evident flaws with the Zillow method for current home market price. I have been monitoring the site for quite a few years and the errors in your methodology result in home estimates which are too high when the market is increasing and too low when the market is decreasing. Your tool tends to exaggerate the moderately recent trend while lagging the actual activity. You might want to hire your statisticians and mathematicians from better schools.

  • http://new-phone.co.uk Orange

    Different sets of stats always vary, its the way you use them that makes the difference.

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    The Zillow Home Value Index generate valuations through a complicated process

  • http://www.woodlandshomelistings.com Creekside Park The Woodlands

    Wow those are some old stats there. I’m glad to see that most of those markets have started to recover some of their lost value.

  • Kerry

    In our particular neighborhood,your home estimates are 10 to 30 percent lower than the more credible home evaluations;It seems that this is mostly due to the one and only short sale in our community that caused all values to be lowered by 15 to 20 percent…Your evaluations are so low now that they are not even in the ballpark of being the least bit credible.

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    The info you have given in the table was very impressive.

  • Pingback: Zillow: US home prices gained 4.7% annually and 1.2% monthly in October, largest increases in more than 6 years | AEIdeas

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