Zillow Blog recently posted a list of The Best Places to Buy in 2011. In thinking through the construction of this list, we thought about the factors that make a place an attractive market for prospective home buyers. We settled on four main criteria and each was given equal weight:
3. Foreclosure Rate
4. Price Appreciation
Affordability measures both 1) how affordable homes are for residents (the “Affordability Factor,” basically a price-to-income ratio), and 2) how does the current Affordability Factor compare to historical levels. These two inputs were equally weighted to rank a city’s overall affordability.
We computed an Affordability Factor as the number of years of income a typical house costs using the city-level Zillow Home Value Index (ZHVI) and median household income data from the Bureau of Labor Statistics. For the 125 cities we looked at, Affordability Factors ranged from 1.67 for Detroit to 7.56 for Santa Cruz, CA. The median was 3.19.
The second element of overall affordability was relative affordability over time. We used 1985-2000 as “historical levels” to avoid the real estate run-up in the early 2000s. Homes might become relatively more or less expensive in an area, and this measures whether a market has room to go up or down. Markets that have room to go up (if the Affordability Factor is lower in 2010 than it was from 1985-2000) are considered “better” than cities where the Affordability Factor is higher today.
Unemployment is considered a proxy for the overall health and stability of the regional economy. From the point of view of the prospective homeowner, low unemployment suggests a stable economic situation.
We also looked at trends in unemployment, specifically whether the current level of unemployment is higher or lower than last year’s level. If a city’s unemployment is lower in 2010 compared to 2009, it’s given a better ranking than a city where unemployment is flat or rising. An improving employment profile suggests that the city’s economy is improving overall.
In computing the over unemployment factor, current unemployment was given a 75% weight and year-over-year change was given a 25% weight.
We used monthly Zillow data on foreclosure liquidations as a percentage of all homes in an area. Lower occurrence of foreclosures in a city is considered more desirable than more because of the negative impact that foreclosed properties and bank sales have on home values.
We have monthly data and summed the past 12 months for an annual rate for each city. This rate ranged from 0.07% to 5.35% with the median at 1.21%. What this means in terms of numbers of homes: in Merced, CA, the city with the 5.35% foreclosure rate, out of every 10,000 homes in the city, 535 went into foreclosure in the past 12 months. Contrast that with Utica, NY at 0.07%, where only 7 homes out of 10,000 went into foreclosure in the past year. The foreclosure frequency was one of four foreclosure-related statistics that were used in the analysis.
Price Appreciation measures the quarter-over-quarter and year-over-year (equally weighted) change in ZHVI for each city. If the median home value in a city is increasing, that suggests that the real estate in that city is very strong. It’s more attractive for a prospective buyer to buy in a city where the market feels stable and will continue to appreciate.
Because so many markets are still declining, ones that have only modest declines in the past year are more attractive than ones with bigger drops because there’s lower volatility.
Top 5 List
1. Utica, NY
Utica, NY scored well in all four categories. The median home price ($104,000) is roughly the equivalent of 2.3 years of median household income . Unemployment in Utica is 7.0%, and is nearly flat, down 0.2% year over year. Utica has the lowest foreclosure rate of any city we looked at for this list with 0.07% of homes being liquidated in foreclosure in the past 12 months. Home values are up nearly 4% quarter over quarter, and up 5.2% year over year–contrast that to national home values down 1.8% quarter over quarter and down 5% year over year.
2. Oklahoma City, OK
Oklahoma City boasts a very strong job market and one that’s improving. It has the lowest unemployment out of the top 5 Best Cities at 6%. The real estate market is healthy as well, with home values up 2.6% year over year and a low foreclosure rate (ranked #3 out of 124 metros).
3. Rochester, NY
Rochester offers buyers an affordable market (median home value is $121,000, the equivalent of 2.4 years of median income) and an improving local economy. Unemployment is down 0.5% this past year. Additionally, the local real estate market is solid: 91% of homes sold for a gain in October 2010 (compared to 70% nationwide).
4. Pittsburgh, PA
Similar to the other featured markets, Pittsburgh is seeing increasing home values on a quarterly and yearly basis. Values are up both quarter over quarter and year over year with 50% of homes seeing an increase in value (compared to 28% of homes nationwide)
5. Tulsa, OK
Tulsa is the most affordable city in the top 10 list: 2.1 years of median income equals the value of a median home ($112,300). Also, the Tulsa market offers home buyers a good bang for their buck with a median value per square foot of $73 (compared with $108 nationally).
Rounding out the top 10:
Green Bay, WI