Despite recent economic turmoil around the European debt crisis, dragging levels of domestic consumer confidence, and high unemployment and negative equity, home values have remained essentially flat over the last quarter. According to the Q3 Zillow Real Estate Market Reports, released today, home values fell only 0.2 percent from the second to the third quarter of 2011. On a monthly basis, home values fell 0.09 percent between August and September, a higher rate than the 0.08 percent decline between July and August (Figure 1). This is in line with our previous forecast, which anticipated continued declines as we progress towards the bottom.
On a year-over-year basis home values were down 4.4 percent (Figure 1) with the Zillow Home Value Index at $171,500 (Figure 2). Overall, this quarter could have looked a lot worse considering all of the economic headwinds and turbulence that materialized over the summer. In terms of strict fundamentals, housing affordability looks compelling with big resets in home value levels and historically low mortgage rates. At this point, however, it’s clearly an issue of confidence, and high unemployment and economic uncertainty are not helping on this front. While we still have a ways to go in terms of home value depreciation, the pace at which home values are falling has declined considerably during the course of this year. This slower pace signals that a stabilization is on the horizon.
The Zillow Real Estate Market Report covers 157 metros of which 105 showed quarterly home value depreciation and 26 metros showed quarterly home value increases. Twenty-six metros remained flat. There are five markets that have experienced a decline of more than 10 percent from their peak and have also had three or more quarters of positive home value appreciation: Bay City (MI), Springfield (OH), Destin (FL), Fort Collins (CO), and Pueblo (CO). The hard hit Michigan markets of Ann Arbor, Bay City, Grand Rapids and Detroit have all seen at least two quarters of positive appreciation. Fort Myers (FL) saw a decline this quarter after two quarters in positive territory.
The foreclosure liquidation rate declined to 8.7 out of every 10,000 homes in the country being liquidated in September (Figure 3). In September 2010 before the robo-signing slowdowns, homes were foreclosed at a rate of 10.7 out of every 10,000 homes. Foreclosure re-sales made up 18.9 percent of all sales in September, up slightly from the Q2 level of 18.8 percent. Foreclosure re-sales have, however, significantly increased from their Q3 2010 levels of 15.1 percent. This long-tailed foreclosure pipeline will continue to depress home prices moving forward.
National negative equity edged up slightly to 28.6 percent of all single-family homes with mortgages, compared to 26.8 percent in the second quarter. Negative equity fell in the second quarter on the basis of sharp improvements in depreciation rates and flat foreclosure rates. This quarter, however, home values remained relatively flat while foreclosure rates slowed further, and these two factors combined to increase negative equity.
Home values nationally have fallen 28.8 percent since their peak in June 2006, and we expect them to decline another 3-5 percent before reaching a definitive bottom in 2012, at the earliest. Unemployment and negative equity, paired with fragile consumer confidence, remain the key factors preventing the housing market from stabilizing. We see little evidence that the recent reductions in the conforming loan limits have materially impacted the market, and data from the Zillow Mortgage Marketplace indicate that borrowers below the old limit and above the new limits are getting rates about 25 basis points higher than they were before. According to our estimates, these changes affected less than 0.75 percent of all homes in the country.