Home Value Declines Pick Up in Fourth Quarter, But Zillow Forecasts Smaller Declines in 2012

The Zillow Real Estate Market Reports, released today, show home values decreased 1.1 percent from the third to the fourth quarter of 2011 to $146,900 (Figure 2). On an annual basis, this represents a 4.7 percent decline (Figure 1). December’s data show that sequential improvements in year-over-year numbers have stopped, and the pace of monthly depreciation has once again picked up, with December’s monthly depreciation rate at 0.6 percent. The main culprits behind December’s weak housing numbers are increasing foreclosure liquidation rates and soft economic data.

New to this quarterly report is the Zillow Home Value Forecast, a forward-looking, model-based estimate of home values one year out from the current reported period. The forecast covers the top 25 metros and the nation and is based on an ensemble of statistical and machine learning models, each with a somewhat different approach to predicting the future movements of home values in a metro region. A closer look at our forecasting methodology can be found in a separate post on Zillow Real Estate Research.

Based on these forecasts, we expect more home value declines nationally in 2012. However, most markets will see improved trends over the course of the year.

Home Values

The Zillow Real Estate Market Reports cover 164 metropolitan statistical areas (MSAs) of which 43 MSAs showed quarterly home value appreciation. Twenty-three MSAs remained flat, while 98 markets showed home value decreases. Among the markets that showed significant appreciation on a quarter-over-quarter basis were El Centro (CA), Destin (FL), Bend (OR), Phoenix, and Punta Gorda (FL) – some of the hardest hit markets when the housing bubble burst. Major markets that experienced some of the highest declines this quarter were Chicago, Cleveland, and St. Louis. Additionally, Chicago is among the top ten MSAs where home values declined the most, falling 10.9 percent year-over-year. With regard to the highest annualized declines in 2011, Chicago was joined by major markets like Atlanta, Tucson, and Las Vegas which all ended the year with home values down more than 10 percent. An interactive chart detailing key metrics is found at the bottom.

Overall, national home values have fallen 24.2 percent since their peak in May 2007. Nationally, home values are back to late 2003 levels. Additionally, mortgage rates remain at historically low levels, and this combination of low home values and low financing rates are creating record levels of housing affordability. This fact will translate into more housing demand this year as broader economic conditions continue to improve, spurring home buyers and doubled-up households to enter the market. Unfortunately, since a lot of this housing demand will be soaking up cheap supply created by foreclosure, we expect home values to continue to fall modestly in most markets, even while home sales are rising.


The rate of homes foreclosed increased in December with 8.2 out of every 10,000 homes in the country being liquidated, up from eight out of every 10,000 homes in November. This is a noteworthy increase relative to the artificially decreased rates that we have experienced over the past year due to slowdowns in foreclosure processing following the robo-signing controversies in the fall of 2010. This higher rate signifies banks, once again, are speeding up their foreclosure process as they work through the backlog of delinquent homeowners.

In turn, this means foreclosure re-sales will increase in the coming months which will put renewed downward pressure on home prices. In December, foreclosure re-sales made up 19.1 percent of all sales, up from 17.4 percent in September.

Price Tiers

The market is again seeing a separation in the appreciation trends of the three home value tiers (Figure 4). While home value trends in the bottom tier out-performed those in the top tier at the outset of the housing recession, the fates of the top and bottom tiers reversed in 2008, with the top tier consistently performing better than the bottom tier thereafter. Beginning mid-2011, the performance of the bottom tier began to improve and, in December, surpassed the top tier as bottom-tier home values were unchanged for the month while top-tier values fell 0.3 percent.

Figure 5 shows the difference in monthly home value appreciation between the top and bottom tiers of home values (the simple difference between the blue and green lines in Figure 4). Housing demand in the bottom tier is benefiting from the bigger reset in home values – the bottom tier has seen home values fall 36 percent since their peak versus 24 percent for the top tier.


As previously stated, we believe 2012 will be a transitional year for real estate. Positive developments will include markets showing organic growth, and home sales increasing as the year proceeds. However, we maintain our forecast that home values will continue to fall in 2012, with the Zillow Home Value Forecast showing a 3.7 percent decline through December 2012.

While we forecast only two markets to end the year higher than they started, most will see better trends over the course of the year. Fourteen out of the top 25 markets are expected to show significant further home value depreciation on a year-over-year basis in December 2012, with the Atlanta, Chicago, and Seattle MSAs showing the largest home value declines by the end of the year.

Negative equity will continue to cast a long shadow over the real estate market, keeping foreclosure rates elevated, and keeping a firm lid on significant home value growth even once values have bottomed in 2013. Negative equity has both demand and supply side implications, sapping demand since homeowners can’t sell their current homes to buy another and increasing supply by significantly increasing the likelihood of foreclosure.

As has been the case for the past year, a key bright spot in the housing sector is the rental market where a large and growing pool of renters is spurring investors to purchase distressed inventory in order to convert it to rental inventory. Recent policy initiatives have supported this development. The Obama administration, for example, announced on Feb. 1 the start of a pilot program to allow investors to buy distressed properties in bulk if they agree to rent them out for a given period of time.

This brief is also available to download in PDF format here.