When Zillow released its Home Value Index (ZHVI) forecast for 2016, the data pointed builders toward a clear geographic pattern: the hottest housing markets were overwhelmingly in the western United States. Denver, Seattle, and Dallas led the list, joined by metros like Ogden, Utah, and Sacramento, California. Richmond, Virginia stood as the sole eastern exception, buoyed by strong income growth and low unemployment. Understanding the economic signals behind these forecasts helps builders make smarter decisions about where to invest, what to build, and how to price their homes. This article examines the Zillow 2016 forecast methodology, the key markets identified, and the lessons home builders can apply when evaluating winning new housing markets today.
How Zillow’s ZHVI Forecast Identified the Hottest Housing Markets
The Zillow Home Value Index (ZHVI) Forecast was not a simple projection of home prices. It combined multiple economic indicators to identify metros where housing demand would exceed supply. The methodology focused on two primary variables that historically correlate with home value appreciation.
Income Growth as a Leading Indicator
Income growth was the first pillar of the Zillow forecast. Markets where wages were rising faster than the national average signaled that more households could qualify for mortgages and afford higher home prices. Denver and Seattle, both experiencing tech-driven job expansions, showed income growth well above 3 percent annually. This created a pipeline of qualified buyers competing for a limited supply of homes.
Unemployment Rates as a Market Signal
Low unemployment was the second key variable. Markets with unemployment rates below the national average indicated tight labor markets where workers had bargaining power and disposable income. Dallas, with its diversified economy spanning energy, technology, and logistics, maintained unemployment below 4 percent throughout the forecast period. Richmond, Virginia posted similarly low figures, which explains why it appeared as the sole eastern market on the list.
Combined Scoring Model
Zillow ranked metros by combining these two factors with historical home value data. Markets that scored high on all three dimensions received the highest forecast rankings. The result was a list dominated by western metros where job growth, in-migration, and constrained housing supply converged.
The 10 Hottest Housing Markets of 2016: A Closer Look
The Zillow forecast named 10 metros as the hottest housing markets for 2016. Each market had a distinct economic profile that builders could use to inform their development strategies. Understanding these profiles helps builders identify similar conditions in emerging markets today.
| Metro Area | Key Economic Driver | ZHVI Forecast Growth | Unemployment Rate |
|---|---|---|---|
| Denver, CO | Tech and energy expansion | 6.2% | 3.1% |
| Seattle, WA | Tech hub (Amazon, Microsoft) | 5.8% | 3.4% |
| Dallas, TX | Diversified economy | 5.1% | 3.8% |
| Ogden, UT | Manufacturing and logistics | 4.9% | 3.5% |
| Sacramento, CA | Government and healthcare | 4.7% | 4.2% |
| Richmond, VA | Finance and legal services | 4.5% | 3.6% |
| Portland, OR | Technology and manufacturing | 4.3% | 4.0% |
| Phoenix, AZ | Population in-migration | 4.1% | 4.5% |
| San Antonio, TX | Military and healthcare | 4.0% | 3.9% |
| Riverside, CA | Affordable spillover from coastal CA | 3.8% | 5.0% |
The table reveals a clear pattern: markets with strong employment bases and sub-5 percent unemployment delivered the highest forecast growth. Builders entering these markets could expect rising demand from a growing pool of qualified buyers.
Western Dominance in the Forecast
Eight of the top 10 markets were in the western United States. This geographic concentration reflected a broader migration trend. Households were moving west for job opportunities, lower cost of living (relative to coastal Northeast and California), and quality of life factors. Builders who recognized this trend early positioned themselves in markets that would see sustained demand through 2016 and beyond.
Richmond: The Eastern Outlier
Richmond, Virginia broke the western pattern thanks to strong fundamentals. The metro area had income growth driven by finance, legal services, and a growing technology sector. Its unemployment rate of 3.6 percent was among the lowest in the eastern United States. Richmond demonstrated that the Zillow methodology identified markets based on economic fundamentals, not geography alone.
What Builders Can Learn from Zillow’s Forecast Methodology
The Zillow ZHVI forecast offers a framework that builders can adapt for their own market analysis. Rather than relying on intuition or past performance alone, builders can use economic data to evaluate market potential. Here are the key takeaways from the forecast methodology that remain relevant for builders evaluating housing market cycles.
Prioritize Markets with Dual Economic Strength
The most reliable markets combine income growth with low unemployment. A market may have one or the other, but the strongest signals come when both indicators point in the same direction. Builders should screen potential markets using these criteria:
- Check local income growth trends against the national average. Markets where wages grow faster than the national rate create natural demand for housing.
- Review unemployment data at the metro level. Rates below 4 percent typically indicate a tight labor market that supports home buying.
- Look for convergence. When income growth and low unemployment appear together, the housing market is likely to outperform.
- Consider the industry mix. Markets with diversified economies (like Dallas) are more resilient than those dependent on a single sector.
- Track migration patterns. Western markets in the 2016 forecast benefited from domestic migration that further fueled demand.
Avoid Markets with Narrow Economic Bases
Markets that depend heavily on one industry carry hidden risk. A market booming on energy prices alone can collapse when commodity prices fall. Builders should examine the employment composition of any market they consider entering. Diversified economies provide a buffer against sector-specific downturns, which is especially important when builders face a broader housing market slowdown.
Watch for Affordability Constraints
The Zillow forecast showed that even hot markets have limits. Riverside, California appeared on the list with the lowest forecast growth (3.8 percent) partly because of affordability constraints. As home prices rise faster than incomes in high-demand markets, some buyers get priced out, slowing future appreciation. Builders entering hot markets must consider not just current demand but also the point at which affordability becomes a headwind.
Applying 2016 Market Lessons to Current Development Strategy
The 2016 Zillow forecast is a historical snapshot, but the principles behind it remain valuable. Builders today can use the same economic indicators to identify emerging markets and avoid overheated ones. Here is a practical framework for applying these lessons.
Step-by-Step Market Evaluation Process
Builders can follow a structured process to evaluate potential markets using the same logic that powered the Zillow forecast:
- Gather metro-level income growth data from the Bureau of Economic Analysis or local economic development offices. Look for markets with income growth above 3 percent annually.
- Pull unemployment data from the Bureau of Labor Statistics. Focus on metros with rates below the national average and a downward trend.
- Cross-reference with building permit data to understand supply constraints. Markets with low permit volumes relative to job growth typically see faster price appreciation.
- Review population growth figures from the Census Bureau. In-migration creates baseline demand that supports new construction.
- Compare your findings against the national averages. Markets that exceed all three benchmarks represent the strongest opportunities.
Identifying Today’s Comparable Markets
While the specific metros on the 2016 list have changed, the same economic patterns appear in current markets. Builders looking for the next wave of hot markets should watch for the following signals:
- Mid-sized cities attracting remote workers from high-cost coastal areas. These markets benefit from income migration without the price premiums.
- Sun Belt metros with diversified employment bases, particularly those adding technology and healthcare jobs.
- Markets where housing starts have lagged population growth for three or more consecutive years. The supply deficit creates upward price pressure.
- Secondary cities within larger metropolitan areas. These offer lower land costs while benefiting from the region’s economic growth.
Lessons from the Top Market Leaders
Builders who successfully entered the hottest 2016 markets shared common strategies. They conducted rigorous market analysis before committing capital, positioned their products for the target buyer demographic, and maintained flexibility to adjust as market conditions evolved. The Pacific region housing market leaders who dominated the 2016 list demonstrated that data-driven market selection, combined with quality construction, produces durable results across market cycles.
Common Pitfalls to Avoid
Even with good data, builders can make costly mistakes when entering new markets. Here are the most common errors and how to avoid them:
- Entering a market at the peak of its cycle. Signs include unsustainably rapid price appreciation, speculative buying, and an unusually high share of investors in the buyer pool.
- Relying on national trends instead of local data. Housing markets are intensely local. A national boom can mask regional weakness.
- Ignoring regulatory barriers. Markets with high impact fees, restrictive zoning, or long entitlement timelines can erode margins even when demand is strong.
- Building the wrong product. A market may be hot, but the demand may be concentrated in a specific price point, product type, or location. Builders must match supply to the actual demand profile.
- Overlooking infrastructure constraints. Markets experiencing rapid growth may lack the roads, schools, and utilities needed to support new development.
By avoiding these pitfalls and following a disciplined market evaluation process, builders can identify opportunities that match their strengths and risk tolerance. The same economic fundamentals that Zillow used in its 2016 forecast remain the best guide to finding and succeeding in tomorrow’s hottest housing markets.