• In a majority of the nation’s 50 largest metros, homes in the most-affordable market segment are appreciating in value the fastest, indicating that the demand for the least expensive homes is strongest in many parts of the country. 
• In Midwest metros including Cleveland, Detroit and Indianapolis, there is relatively more demand at the low end of the market, and the gap between appreciation rates across the top and bottom of the market is growing. In other areas, including Boise, Charleston and Dallas, demand is largely uniform across segments, and spreads between appreciation rates are tightening.
• In Austin, top-tier home values have grown faster than low-tier home values in every month since March 2020, a reversal of the overriding trend in most other markets. 

In a majority of U.S. metro areas, homes in the entry-level segment of the market most likely to be sought by first-time and/or lower-income home buyers have also grown the most in value over the past year. And in many areas, the gap in appreciation rates between the most- and least-affordable homes is widening, evidence of the intense competition between buyers on a budget.

The U.S. market is hot in virtually every segment. Nationwide, annual home value growth in February among homes in the bottom one-third of the market was 9.8% (from $129,158 to $141,832) — largely on par with home value appreciation in the next-priciest middle segment (9.9%, from $247,973 to $272,446) and faster than annual growth in the most valuable tier (9.5%, from $490,944 to $537,815). But because real estate is local, the national aggregates don’t tell the full story — in 44 of the nation’s 50 largest markets, home value growth was fastest in the bottom third segment, sometimes markedly so.

Among a wider pool of the nation’s 100 largest markets, bottom-third home values grew the fastest year-over-year in February in Boise (27.2%), Phoenix (19.4%) & Spokane (18.4%). Rapid growth in the most-affordable segment of the market is not a particularly new phenomenon — these homes have long been in high demand from budget-conscious buyers, and it can be difficult for builders to profitably build in these segments, further restricting already-tight inventory. But a widening gap between annual growth in the top and bottom segments of the market is illustrative of the intense heat specific to the bottom of an already generally hot market — particularly in a handful of typically more-affordable Midwestern metros.

The spread of home value growth between the low-, middle-, and top-tier market segments is increasing in metros including Cleveland, Detroit and Indianapolis. For example, the bottom third of the market in Cleveland grew by 13.1% and the top third grew by 9.8% year-over-year in February, a gap of 3.3 percentage points. That gap has more than doubled in Cleveland — a year ago, in February 2020, the gap between top and bottom tiers was 1.6 percentage points (5.6% annual growth in the bottom tier, 4% at the top).  This widening gap reflects a surge in demand for starter homes relative to top-tier homes — potentially related to, among other factors, first-time buyers taking advantage of historically low interest rates. 

This market divergence comes with challenges and opportunities.  Down payments for first-time buyers looking to purchase a home are increasing, a clear challenge.  But for households that currently own these more affordable homes and have built wealth through rapidly growing home equity over the past few years, it is possible to sell and realize significant financial gains (assuming they can find another home to move into — a challenge of its own in this current, low-inventory market).  

Relative demand for homes in different market segments, measured by the gap between appreciation rates in ZHVI tiers, varies widely by region.  In Boise, Charleston and Dallas, demand for higher-valued homes is catching up to demand for lower-valued homes. In these markets, homes in the most-affordable segments are still growing in value fastest, but the spread between the least- and most-expensive tiers is tightening — and has been since the middle of 2020.  For example, bottom-tier Boise home values grew 27.2% year-over-year in February — from $246,131 in February 2020 to $313,007 in February 2021 — while homes in the top tier grew by 25.9% over the same period (from $476,853 to $600,043), a difference of 1.3 percentage points. In February 2020, Boise’s most-affordable homes grew 2 percentage points faster than the most expensive market segment (+11% vs +9%).  

Austin stands out as a metro where growth of top-tier home values has outpaced low-tier home value growth, although the demand for low-tier homes is catching up to the top-tier homes. In February 2021, the top-tier homes grew the fastest at 14.9%, followed closely by the mid-tier homes at 14.5% and low-tier homes at 14.0%. This sits at the intersection of two common themes in housing during the last year: A push towards relative affordability and year-round living.  A recent Zillow survey of economists nationwide identified Austin as one of the hottest markets coming into 2021, which is reinforced by the increasing demand for homes across all market segments.