The Long and Winding Recovery

Posted by: Svenja Gudell    Tags:  , , , , , , , , , ,     Posted date:  July 20, 2014  

Zillow’s second quarter Real Estate Market Reports show that national home values rose 1.0 percent from the first quarter of 2014 to $174,200 (Figure 1). On a year-over-year basis, home values were up 6.3 percent (Figure 2) from June 2013. The last time national home values were at this level was in March 2005. Rents were up 2.5 percent on a year-over-year basis (Figure 3). The Zillow Home Value Forecast calls for 4.2 percent appreciation nationally from June 2014 to June 2015. Home values in half of the nation’s 100 largest metro areas will not reach their pre-recession peak levels again for another three-plus years, proof that the recovery is still very much in its middle stages. Many metros will indeed take much longer than three years to recover. Nationally, home values remain 11.3 percent below their 2007 peak. Assuming a steady rate of appreciation at the forecasted level, it will take 2.7 years for national home values to re-achieve their pre-recession levels. Given that home value appreciation will continue to slow down, that time estimate is an optimistic one. Notable large metros where full recovery in home values will take longer than a decade include Minneapolis (14.5 years), Kansas City (12.5 years) and Chicago (11.7 years). Again these are even optimistic measurements.

Figure1  Figure2

 

 

 

 

 

 

 

 

Figure3

While many markets are still experiencing above-normal rates of home value growth, a general slowdown in appreciation is evident. Among the nation’s 35 largest metros, all but Kansas City, Indianapolis and St. Louis experienced year-over-year home value increases in June. Those with the most notable annual increases include Las Vegas (22.6 percent), Riverside (21.4 percent), Detroit (19.6 percent) and Atlanta (18.0 percent).

Home Values

The June Zillow Real Estate Market Reports cover 522 metropolitan and micropolitan areas. In June, 402 (77 percent) of the 520 markets showed monthly home value appreciation, and 420 (80 percent) saw annual home value appreciation. Among the 35 largest metro areas covered by Zillow, only Kansas City and Indianapolis exhibited monthly depreciation in June, with declines of -1.3 percent in Kansas City and -0.8 percent in Indianapolis. Overall, national home values are still down 11.3 percent from their peak in May 2007.

Rents

The Zillow Rent Index (ZRI) covers 862 metropolitan and micropolitan areas and shows year-over-year gains for 649 metropolitan areas covered by the ZRI. Currently, national rents are up 2.5 percent year-over-year. Large markets that saw extremely strong annual rent appreciation include San Jose (13.5 percent), San Francisco (11.0 percent), Denver (7.9 percent) and Austin (7.6 percent).

Figure4Foreclosures

The rate of homes foreclosed continued to decline in June, with 4.3 out of every 10,000 homes in the country being liquidated. The last time it was at this rate was in August 2007. Nationally, foreclosure re-sales also continued to fall, making up 8.0 percent of all sales in June (Figure 4), compared to 8.8 percent in May. As we return to more normal market conditions, we expect the share of the distressed market to keep declining and take on a smaller and smaller role in the housing market.

Inventory

Nationwide, the number of homes listed for sale on Zillow was up 17.7 percent annually in June on a seasonally adjusted basis, the fourth straight month in which inventory has increased (see Figure 5). Inventory rose on an annual basis in 81 percent of metros covered by Zillow. Despite the continued increases in inventory, in most metros inventory is still not back to normal levels. Tight inventory is especially pronounced in the lower end of the market, which we define as the bottom third of the housing stock. Of the largest metros, most saw very few for-sale homes come from the bottom tier, and more so from the top tier (Figure 6). This tightness of supply will continue to impact first-time home buyers and others trying to buy a lower-end home.

Figure5

Outlook

In this somewhat uneven housing recovery, with above average home value appreciation, we still have many markets that will take a very long time to make it back to pre-recession levels. Home values in half of the nation’s 100 largest metro areas will not reach their pre-recession peak levels again for another three-plus years. Our forecast calls for another 4.2 percent appreciation from June 2014 to June 2015. We believe five challenges remain for the housing market: 1) Negative equity remains high, with 18.8 percent of mortgaged homeowners nationwide underwater. Negative equity is especially focused among the least expensive homes, which is having an adverse effect on inventory in the bottom tier. 2) Therefore inventory remains too low, which is one of the factors impacting existing home sales, making it our second challenge. 3) Household formation is still relatively low, and we currently see more households being formed on the rental side. 4) Mortgage and rental affordability will remain key topics over the next few years. Rental affordability in most metros is much worse than historically, while mortgage affordability is currently quite good due to still depressed home values and low mortgage rates. Income growth will play a key role in alleviating both constraints in many markets going forward. Luckily, slowing home value appreciation and future employment and income growth will help in staving off future housing affordability issues in much of the nation. 5) Mortgage rate lock-in, however, will become an issue as mortgage rates rise and homeowners find it cheaper to stay in their homes with a low fixed mortgage rate versus buying a more expensive house with a higher mortgage rate. Again, this has the potential to seriously affect existing home sales in the future.

Figure6

June Real Estate Market Overview



About the author
Svenja Gudell
Svenja is the Senior Director of Economic Research at Zillow. To learn more about Svenja, click here.



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