June Data Shows Markets Continuing to Limp Toward Stability; Hoping We Won't Fall Back Down the Stairs After Losing Our Crutches


That’s the number of consecutive monthly declines in home values since the national market peaked in June 2006, according to Zillow’s Q2 Real Estate Market Reports. That’s a lot of months. Home values have fallen 24% since the peak and are now back to levels last seen in February 2004. At the end of the second quarter, annualized home value depreciation was 3.2% and monthly depreciation was 0.16% (See Figure 1 below).

Nominally, one could infer that conditions are improving, since the trend in home values is moving in the right direction by getting less negative each month. Unfortunately, extrapolating this trend forward is problematic since the data for June, based on closed sales in that month, is still affected by the federal homebuyer tax credits which applied to home purchases under contract by the end of April. We’ve already seen home sales slacken significantly with the end of the tax credits, as existing homes sales in May and June were down 2.2% and 5.1% respectively, on a monthly basis. Predictably, pending sales have fallen even more, down 30% and 2.6% on a monthly basis in May and June respectively.

Falling home sales will have a negative impact on home value trends but the magnitude of this impact isn’t yet known. Will it slow the deceleration of monthly depreciation in home values or reverse it altogether, causing home values to fall even faster?

As previously noted, the near-term picture of supply of homes on the market looks pretty cloudy. Foreclosures, negative equity and unemployment breeding further foreclosures, and lots of sidelined sellers looking to unload their homes into local markets where home values have stabilized somewhat will all combine to create an over-abundance of supply. On the demand side, we’ll have a lot less demand short-term as we pay back the demand that was pushed forward due to the tax credit and, near-term, we’ll have less demand because of elevated unemployment (which, it’s becoming clearer now, is not headed down rapidly any time soon). The demand picture is made a bit better by the continued low mortgage rates available now (30-year fixed rates in the Zillow Mortgage Marketplace are 4.28% as of Sunday) and substantially improved affordability of homes (see the reference above about how far back one needs to look to find home values as low as they are now).

Those looking for any good news can look at California. Twenty of the 26 California markets tracked by Zillow have seen increased home values since last quarter and 10 have seen home value appreciation above 5%. Los Angeles home values have risen 5% since last year and San Diego has seen 7% appreciation in home values. Unfortunately, those trends are likely a by-product of the dual stimulus in California (where residents have had access to both the federal homebuyer tax credits and an additional state homebuyer tax credit). As such, we expect this market exuberance to wane over time (federal tax credits are now expired and it’s unclear how much longer California can continue its largesse in the fact of severe state budget woes).

Negative equity is also a good news/bad news story. The good news is that it’s down in the second quarter to 21.5%, from 23.2% in the first quarter. The bad news is that most of the downward pressure on the overall negative equity rate is coming from a tremendously high foreclosure volume which is cleaning out homes in negative equity. So the rate comes down but only at the expense of lots of homeowners losing their homes.

July and August will be defining months in terms of whether our forecast of a bottom in home values in the third quarter of this year will come to fruition or not. If declining home sales reverse the trends of the past several months, then the bottom will likely be delayed. If, instead, they merely slow the improving trend, then we could still be on track. I’m sure everybody already has their own opinions here but we’ll be here in thirty days to provide some empirical confirmation.

Stairwell photo courtesy of Flickr.