For comparison, refer to our methodology. Recently, we revisited and updated this methodology to both better account for the stock of homes that actually rent and to capture small but important changes in rent levels. These changes, summarized below, have been incorporated into a new Zillow Rent Index methodology that will apply to all published ZRI data series going forward.
The largest changes include:. Individual Rent Zestimates are computed for all homes, whether or not those homes are currently or ever were available for rent.
Indeed, many of the homes for which we compute Rent Zestimates, especially single-family homes, are neither for-rent nor renter-occupied. Because single-family homes are, on average, higher-valued than apartments, including all of them in the ZRI and computing a median based on that full universe of homes creates an upward bias in the index.
We also re-worked our methodology to calculate ZRI as the mean of the middle quintile of included Rent Zestimates, rather than the median. Doing so better captures small changes in the market, while also reducing noise.
This is reflected in the algorithm that computes individual Rent Zestimates, but is somewhat problematic when creating a median-based index. Taking the mean of the middle quintile alleviates this problem. Why not just take the mean? We believe these changes will better reflect both the actual level and predominant trends in the rental market, while also reducing noise. Otherwise, the effects are heterogenous and mostly small.
Every month, a Rent Zestimate is created for more than million U. The sources of this data include public records property taxes, transactions , real estate listings and user-generated data. We take advantage of these retroactive histories in the first calculation of the Zillow Rent Index using our updated methodology. Zillow Home Value Index ZHVI : A smoothed, seasonally adjusted measure of the typical home value and market changes across a given region and housing type.
It reflects the typical value for homes in the 35th to 65th percentile range. The raw version of that mid-tier ZHVI time series is also available. Check out this overview of ZHVI and a deep-dive into its methodology. ZORI is a repeat-rent index that is weighted to the rental housing stock to ensure representativeness across the entire market, not just those homes currently listed for-rent.
The index is dollar-denominated by computing the mean of listed rents that fall into the 40th to 60th percentile range for all homes and apartments in a given region, which is once again weighted to reflect the rental housing stock. As we show, some of this acceleration would simply represent a return to the normal pre-pandemic shelter contributions to inflation, and we note that these housing price dynamics are included in inflation forecasts, including our own , which show overall price growth decelerating in coming quarters.
The pandemic has seen higher-than-normal volatility and uncertainty in the economic data; so, while included in our analysis, we also recognize that historical relationships between housing prices and CPI may not hold in these unprecedented economic times.
As with most economic variables, demand growth and supply constraints can act in tandem to boost home prices. In a recent blog post , CEA outlined some of the longer-run issues affecting U. The pandemic has prompted more recent supply issues as well, driving the prices of key commodities to record highs and increasing the cost of home construction.
For example, lumber prices increased percent over the 12 months ending in May —the highest month growth for which there are data. Similarly, in June, prices of iron and steel had increased by 73 percent over the prior 12 months. However, between June and July, lumber prices declined by over 20 percent, indicating that some of the price pressures are easing Figure 3. In addition to supply factors, there are also potential pandemic-related demand factors stemming from increased at-home work and heightened mobility.
At the start of the pandemic, there were elevated levels of migration away from city centers and into suburbs and other less population-dense areas. This created higher than usual churn in the housing market. Moreover, mortgage rates —which have declined to all-time lows over the past year—are making borrowing more affordable for those with relatively good credit histories , thereby contributing to stronger demand for new homes.
Taken together, these dynamics mean the wedge between supply and demand has widened. According to Redfin , the seasonally-adjusted inventory of homes has declined by over 50 percent since February Other measures find similarly large declines. For example, the Census Bureau estimates that the inventory of for-sale homes has declined by 37 percent since Q4.
Rising home prices have direct effects on household wealth and neighborhood affordability. They also play an important role in overall inflation.
The Consumer Price Index CPI , for example, measures the prices of a basket of household goods and services that households regularly consume, with weights assigned to each item in the basket based on their average shares of total expenditures.
Among these is a shelter component that includes both rental costs and the consumption value of owner-occupied housing, in addition to other forms of lodging such as hotels. Shelter makes up nearly a third of the basket for CPI inflation, and 40 percent of the basket for core CPI that excludes the volatile food and energy components.
Understanding how housing affects inflation means understanding what our inflation data tries to measure.
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