‘The grass is always greener on the other side of the fence’ may be a common colloquialism, but all it takes is a guy comparing grass blades on a color wheel to clear up any misconceptions about whose lawn is truly greener. That’s what we’re attempting to do with the Market Health Index. The Great Recession and the aftermath of the housing bubble hit many markets hard, while others traveled through the last five years largely unaffected. Some devastated markets are bouncing back with vigor, while others languish. We know all this because of the fleet of metrics created and reported by Zillow, each one useful in describing some aspect of the complex animal that is the housing market.
But any one number on its own can’t tell the full story, and may obscure the true lay of the land. Checking all the numbers reported for your area can tell this story, but it may leave many thinking about the other side of the fence. The Market Health Index is our guy with the color wheel, carefully comparing metros along one summary metric. The Index combines ten measures capturing home value rebounds (or continued declines), the time homes stay on the market, and the financial health of homeowners. The Market Health Index is created separately for metros, counties, cities, ZIP codes and neighborhoods. Figure 1 maps the Market Health Index across metros, from the negative equity-laden metros in Florida to the booming coast of California. Figure 2 allows you to explore zip codes in your area.
Ranging from 0 to 10, the Market Health Index illustrates the current health of a region’s housing market relative to other markets across the country. For example, San Jose ranks as the healthiest of the nation’s largest 30 metros, with a value of 9.26 on the Market Health Index. With strong current and forecasted appreciation, and low levels of negative equity and foreclosures relative to other metros with even stronger appreciation, this metro is healthier than almost 93% of all metro areas covered by Zillow nationwide. By construction, the index says nothing about the magnitude of health, only the order. It shouldn’t be claimed that San Jose is twice as healthy as Phoenix, which has an index value of 4.55. Also, the Market Health Index as currently formulated does not incorporate the conditions for future market health. By design, the Index captures current vigor relative to other markets. This is important when considering markets like San Jose and San Francisco, who have outstanding numbers at present, but may froth themselves into local bubbles in the following year.
To capture the recent and continued rebounds from housing value troughs we include month-over-month and year-over-year changes in the Zillow Home Value Index (ZHVI), the percentage of homes selling for a gain and the percentage change in ZHVI forecasted for the coming year. Figure 3 illustrates the relationship between these three metrics and the Market Health Index, with green representing the healthiest areas and red the least. The healthiest regions are usually those with strong appreciation that is forecasted to continue into the future (the upper right area of the graph with large dots). But notice that in amongst the dominantly green section of the cloud, red unhealthy regions lurk, and vice versa for the dominantly red quadrant. This highlights the importance of the following 6 metrics.
In many areas, home values are skyrocketing due to constrained inventory (fewer homes for sale this year relative to past years). In these locations, homes are selling in record time (see Figure 4). Ranking time on market by itself, however, would be inappropriate. Even in the healthiest markets, the expected days on market could fluctuate greatly with the seasons or if a location has proven able to attract investor attention. To reflect a healthy time on market, we use a standardized version where values near zero indicate metros experiencing typical days on market and the largest values correspond to those metros that are selling either much, much slower or much, much faster than usual (see the methodology piece for a more specific description).
For many, the most painful component of the housing bubble burst was the precipitous fall in home values that trapped many homeowners in negative equity, owing more on their homes than they were worth. Lost jobs lead to delinquency and the spread of foreclosures. We dedicate the final five measures to capturing this pain. We include the percentage of mortgage holders with negative equity, the percentage of these underwater homeowners delinquent on their loans, the number of foreclosures out of 10,000 homes, the percentage of sales composed of previously foreclosed homes, and our estimate for the number of homes still held by banks (unsold REOs) for every 10,000 homes out there.
For each of the ten metrics used in the Market Health Index, we assign each region a score along a continuous scale from 0 to 10, where 10 corresponds to the healthiest value and 0 to the least healthy among all regions in the US with available data. For regions with at least 5 of these adjusted scores available, we estimate the average score and rescale to range from 0 to 10. This becomes the Market Health Index.