Understanding the Zillow Buyer-Seller Index

For potential home buyers and sellers, the nature of the nascent housing recovery can have important consequences on the decision to buy a home. Furthermore, given the local nature of housing markets, we might expect the housing recovery and its impact on buyers and sellers to vary considerably by geography. With this in mind, we’ve developed an index to indicate the relative bargaining power of a buyer or seller within a given market, aiming to provide insight into the dynamics of this complex and shifting relationship.

We define a buyers’ market as one in which home buyers are in a position of power relative to home sellers. In these markets, homes for sale stay on the market longer, price cuts occur more frequently, and homes are sold for less relative to their listing price.  Conversely, a sellers’ market is one in which home sellers are in a position of power relative to home buyers.  In these markets, homes are on the market for a shorter time, price cuts occur less frequently, and homes are sold at prices very close to (or greater than) the listing price.

Our index is created using data on the sale-to-list price ratio,  the percent of homes that have been subject to a price cut, and the time-on-market (measured as days on Zillow). These three measures are converted into percentile rank, averaged together, and divided by 10 to generate the final index. This index ranges from 0 to 10 and is roughly evenly distributed around a mean of 5.  Slightly different approaches are employed for the city level and metropolitan level indices. At the city level, percentiles for each variable are computed relative to other cities within the same metropolitan region. At the metro level, percentiles are computed according to all other metropolitan regions.

Analysis of this index reveals several interesting patterns. At the metro level, sellers markets are geographically clustered in the West, with Washington DC being a notable exception on the East Coast. The spatial distribution of sellers’ markets mirrors recent analysis of negative equity at the county level, suggesting that a “negative equity bubble” could be influencing market dynamics.  Given the sensitivity of the buyer-seller index to time-on-market, it is plausible that negative equity-driven supply constraints are leading to a shorter time-on-market, fewer price cuts, and higher sale prices relative to listing price.

A particularly salient example of this dynamic can be found in Phoenix which is both saturated with negative equity (55% of homes are underwater in Maricopa county) and one of the strongest sellers’ markets in the buyer-seller index (1.13). In fact, many of the metropolitan regions hardest hit by the housing recession, and subsequently saddled with the high levels of negative equity are also markets in which homes appear to be selling at a relatively fast clip, with few price cuts, and for close to their list price. Stockton, Vallejo, Modesto, Sacramento, Bakersfield, Fresno, and Merced were all among the strongest sellers’ market in the index.  It is worth noting, however, that not all of the sellers markets fall in this narrative. The top two sellers’ markets are the expensive and economically more resilient markets of San Francisco and San Jose.

Chicago scored highest on the index among large metro regions, suggesting buyers are in a good position in the Chicagoland area. Within Chicago, Downers Grove, Lockport, Buffalo Grove and Palatine score highest on the index, while Crown Point, Bolingbrook, and Valparaiso were places where it’s a good time to be a seller.  Other Midwest metropolitan regions also scored high on the index, with Cleveland, Milwaukee and Cincinnati all among the top places to be a buyer. Interestingly, New York scores third highest on the index, suggesting now is the time to buy in New York; however this is attributable to dynamics in the outlying cities contained within the larger New York metro region, as opposed to dynamics within the city itself, which received an index score of 3.83, putting it in the bottom half of cities within the metro region (making it more of a sellers’ market).