It's Going to Be Another Long, Hard Winter in Housing

According to the third quarter Zillow Real Estate Market Reports, home value depreciation began to accelerate again in September, fueled by lower transactional volumes and increased inventory levels. Home values dropped 0.4% from August to September and 4.3% from September 2009 (see Figure 1 below). With home values 25% below their peak and 51 consecutive months of declines, the length and severity of the current downturn is fast approaching the length and depth of the Depression-era housing declines. From the end of 1928 to the end of 1933 (60 months), nominal home values fell 25.9% according to Robert Shiller’s reconstruction of long-term home price appreciation in the United States.

Of the 145 markets tracked this quarter, home values were down from year-ago levels in 112 (77%), flat in 13 (9%) and up in only 20 markets (14%). Home values in 22 metropolitan areas became negative again in the third quarter after at least one quarter of increase. In five markets – all in California: the San Francisco, Los Angeles, San Diego, Ventura and San Jose metros – home values began to fall again after five consecutive quarters of increases. We warned of waning appreciation in these markets last month in the wake of the expiration of the California home-buyer tax credits.

Foreclosure liquidations (when a homeowner loses their home to a bank or at an auction) reached a new peak at the end of the third quarter. More than 1.17 out of every 1,000 homes in the U.S. were liquidated in September, the highest number in Zillow’s foreclosure data dating back to 1996 (see Figure 2 below). And these rates of foreclosure will stay at elevated levels because of high negative equity rates which increased to 23.2% from 22.5% in the second quarter. High negative equity is and will be weighing on housing demand for the next few years.

The process of foreclosures working themselves through the system can be seen in the increase in monthly real estate transactions that are foreclosure re-sales. Foreclosure re-sales reached a near-peak level in September, making up 20.1% of all sales during the month. The peak of foreclosure re-sales occurred March 2009 at 20.5% as we will easily break through this prior record this winter when the volume of non-foreclosure sales drops due to seasonality.

More than half (64.2%) of homes in the United States lost value from Q3 2009 to Q3 2010. That’s up from Q2 (59.2%) but down substantially from a peak of 85.5% in Q1 2009. More than one-quarter (27.3%) of homes sold in September were sold for a loss, marking a near-peak level (peak was 27.7% in February 2010).

Nationally, we now don’t expect home values to hit bottom until first half of 2011 at the earliest due to continuing increases in foreclosure volumes.

Photo courtesy of najjie/Flickr.