The Zillow Real Estate Market Reports, released today, show home values remained essentially flat from October to November falling only 0.1 percent (Figure 1) to $147,800 (Figure 2), representing a 4.6 percent decline on a year-over-year basis. While we still expect home values to fall further this year with a definitive bottom probably a year away, encouraging precursors to a true stabilization of home values are falling into place as the new year begins. Signs of a thaw in the broader economy include the lower unemployment claims number released on Thursday, the addition of 200,000 jobs in December, a string of three consecutive months of improving consumer confidence, and holiday retail sales that were much stronger than year-ago levels.
These events will lead to home sales showing a more consistent upward trend this year. With stronger home sales, we’ll see a reduction in the amount of vacant housing inventory and an improved ability to absorb foreclosed homes. This increased demand will eventually start to put a floor under home values later this year.
The Zillow Real Estate Market Reports cover 165 metropolitan statistical areas of which 66 showed monthly home value depreciation and 66 metros showed monthly home value increases in November. Thirty-three metros remained flat. This is encouraging in comparison to the November 2010 reports in which 125 metros experienced home value depreciation. Overall, home values have fallen 23.8 percent since their peak in May 2007. A table of the largest 25 metropolitan statistical areas that Zillow covers and their month-over-month and year-over-year performance can be found on Page 3 of this report.
Home values are back to late 2003 levels and mortgage rates are still below 4 percent for a 30-year fixed rate mortgage. What’s been holding buyers back has been a combination of unemployment, consumer confidence, and negative equity. Stronger payroll growth will help the first two of these factors. Jobs and improved confidence will also increase the household formation rate as some of the 22 million doubled-up households will dissolve and form individual households.
The foreclosure liquidation rate continued to decline with 8.1 out of every 10,000 homes in the country being liquidated in November (Figure 3). For context, just prior to the robo-signing controversy, the foreclosure liquidation rate reached an all-time high of 11 out of every 10,000 homes in October 2010. This is the fifth consecutive month that the foreclosure liquidation rate has fallen. With an impending attorneys general settlement, the foreclosure liquidation rate is likely to increase significantly as banks increase their pace of foreclosure processing. Increased foreclosures in the monthly sales mix will put renewed downward pressure on prices. Thus, while many markets appear to be improving organically (i.e., without tax credits), the market isn’t entirely free of policy intervention at this point due to what we believe is an artificially lower foreclosure liquidation rate.
Foreclosure re-sales made up 19.1 percent of all sales in November. After foreclosure re-sales took a dip earlier in 2011, we’ve seen a continual increase in re-sales over the last several months, a reflection of the continual progress of working through the foreclosure pipeline.
Overall, we are seeing several encouraging signs in the housing data such as; the sequential months of slowed depreciation rates, stabilizing markets, and organic improvement in value trends in the absence of government policy intervention. Essentially, look for 2012 to be a transitional year in real estate. Lots of things will look more positive than they have in a long time, specifically home sales and housing starts. Other things will unfortunately look quite familiar, like high foreclosure liquidation rates (as we start to clean out a pipeline that became engorged) and decreasing home values (since even with increased demand, we still have an imbalance of supply and demand). But the positive factors will lay the groundwork for better things to come, a true stabilization in home values latter this year or in early 2013.
It will be very important for consumers to draw a distinction between the end of sustained home value declines, which are maybe a year away, and the return to normal market conditions with historically normal appreciation rates. Even if we do get higher home sales this year and stable home values next year, it’s still going to take markets two to four years after that to deal with elevated foreclosure rates and negative equity. We can expect below-trend housing appreciation during this interim period of time, placing the arrival of ‘normal’ housing market conditions at least three to five years out.
This brief is also available to download in PDF format here.