What is the correct way to score and analyze zip code areas – should you look at CAGR, the color of the micro areas, or something else?
First and foremost, it’s important to point out that zip codes are exponentially harder to ‘score’ because they are NOT a market. Instead, they are small pockets with relatively very few transactions; the small ‘sample size’ creates a lot of random noise with large variances from one period to another.
You, therefore, cannot ‘impute’ the kind of accuracy at the zip code level that we have at the city level. In fact, zip code level data will never replace the metro level for accuracy and reliability – think of zip code data as just the icing on the cake.
With that said, we recommend you analyze zip code areas
by FIRST looking at the the Metropolitan-level scores.
If the overall metro level market is red hot then the micro markets will follow. A mediocre-looking micro market in a hot metro will do much better than a ‘great-looking’ zip code in a mediocre metro.
After you have identified a top performing METRO-market, only then should you visually scan zip codes.
Now, it can be easy to get caught up in the overall color of the zip code areas, but they don’t need to be red, orange, or any particular color.
And that’s because
you’re only looking to see if ANY zip codes performed relatively better over the last 2 to 4 years on a 2-yr or 3-yr CAGR.
Why 2-year or 3-year CAGR?
Due to the very few transactions, the small sample size will often produce wild (meaningless) swings from one period to the next or one zip code to the next.This is the limitation of relying SOLELY on ONE-year appreciation data.
To overcome this limitation, you need to use a longer term CAGR because it’ll smooth out the data by averaging it over a longer time period.
We, therefore, recommend looking at the 2 and 3 year CAGR to discover if there are any zip codes that consistently looked RELATIVELY better than other nearby zip codes over the past few years
(Note: It only takes a few seconds to check CAGR so we recommend looking at even longer CAGR’s as well).
The 2/3-year CAGR should ‘smooth out” some of the wild swings in data – giving you a better indication of the true RELATIVE performance of the micro market (and whether or not it’s an area worthy of your investment).