When It Rains, It Pours

The third quarter Zillow Home Value Reports, released today, show a continued deterioration of home values across the country. Home values are down 5.7% on a year-over-year (YoY) basis, marking the fourth consecutive quarter of declines and the largest year-over-year national decline seen in our data, which extendsback more than 10 years (see the chart below). Last quarter, the quarter-over-quarter performance was slightly positive (up 0.1%) at least possibly suggesting some slowing in the decline of values, but there’s no such silver lining in the Q3 results as the year-over-year decline accelerated and home values dropped 2.8% from the second quarter.

California and Florida continue to lead the pack in terms of depreciation (see the map of Zindex appreciation below). Moreover, this quarter, we see further slowing in markets like Seattle and Portland (up only 1.7% and 0.6% respectively) which have largely escaped the market declines seen elsewhere in the country over the past two years. In short, it’s pretty dreary almost everywhere with a handful of exceptions.

In those few areas that have seen stronger-than- average appreciation over the past year, Grand Junction, CO continues to lead the metro areas we monitor in terms of appreciation (up 13.8% YoY) and Charlotte, NC and Columbia, SC also turned in another quarter of strong value growth (up 8.9% and 5.9% YoY respectively).

In order to get a better idea of the impact of these home value declines on homeowners, this quarter we looked at the amount of equity that homeowners have in their home based on when they bought it – 1, 2 or 5 years ago. Among homeowners who purchased in the past year, almost 16% nationally have negative home equity, meaning that the estimated current value of their home is less than the original loan amount (to be conservative and consistent with other industry measures of owner equity, we excluded principal payments since initial loan origination from our analysis). For homes bought two years ago, almost 18% of these homes currently have negative equity. By comparison, only 1.8% of homeowners who bought 5 years ago have negative equity.

Predictably, the areas with the highest proportion of homes with negative equity are those with the greatest depreciation of values in the past couple of years. Southern California, Florida, Las Vegas and Phoenix are among the hardest hit areas (see table below). In the California cities of Merced and Stockton, more than 70% of homeowners who purchased in the past year are now “upside down” on their mortgage. The bar chart below shows 10 metro areas, representing the five highest and five lowest proportion of negative equity for homes purchased in the last year.

Despite the continuing value declines and increases in negative equity situations, it’s important to note most U.S. homeowners still have positive equity in their homes. In fact, the 16% of those home purchases in the last year that now have negative equity account for less than 1% of all homes nationally. And, keep in mind, homeownership is typically a long-term investment. As such, short-term value declines don’t affect most homeowners unless they either must sell, refinance or want to withdraw equity. For most, it’s a matter of riding out the market lows.

As always, Tommy Unger did a fabulous job pulling all the data together for the quarterly reports and coming up with lots of innovative ways of slicing the data and the Zillow PR team of Dawn Lyon, Amanda Hoffman and Sarah Mann did a fantastic job of making it all digestible to a wider audience. Look out for some more blog posts from Tommy on other interesting parts of this data.

Dr. Stan Humphries is a real estate economist and real estate expert for Zillow. Stan is in charge of the data and analytics team at Zillow, which develops housing market data for most major metropolitan statistical areas in the U.S., and provides economic research for current real estate market conditions. He helped create the algorithms for the popular Zestimate® home value and the Zillow Home Value Index (ZHVI).