A months-long streak of accelerating home value growth was met with an equally long stretch of flattening rents to end 2016, a trend with interesting implications for the housing market as a whole as attention turns to the busy 2017 home shopping season to come.
A months-long streak of accelerating home value growth was met with an equally long stretch of flattening rents to end 2016, a trend with interesting implications for the housing market as a whole as attention turns to the busy 2017 home shopping season to come.
The median U.S. home value climbed to a Zillow Home Value Index (ZHVI) of $193,800 in December, up 0.6 percent from November and 6.8 percent from the end of 2015, according to the December Zillow Real Estate Market Reports. National home values have grown year-over-year for 53 straight months, and the annual appreciation recorded in December was the fastest such pace since July 2006. After stabilizing somewhat at the end of 2015 and into the start of 2016, the annual pace of national home value appreciation has accelerated in each of the past seven months compared to the month prior.
At the same time, median U.S. rents in December were unchanged from November and up just 1.5 percent from the end of 2015, to a Zillow Rent Index (ZRI) of $1,403 per month. At $1,403 per month, national median rents are exactly where they were in April. Essentially, over the final three quarters of 2016, rents flattened and home value growth accelerated.
Zillow expected rents to flatten in 2016, and it will have lasting impacts on the market going forward. The headline trend from 2016 is one of very high demand from home buyers, driven by millennials aging into their prime home-buying years, a generally stable and healthy economy and solid wage gains. The rental market, too, played a role in this demand: When rents were rising at a faster clip, it’s likely many renters pursued homeownership as a means of stabilizing their monthly housing costs. And thanks to low mortgage interest rates and home values that still remain below pre-recession peak levels in many areas, the monthly costs associated with a mortgage were not only more stable than rents, but also a lot lower for many, furthering incentivizing many renters to become homeowners.
But the supply of homes available for sale has largely been inadequate to meet this high demand, for several reasons. Builders have been slow to fully ramp back up to pre-recession levels, and what construction there has been has focused on the more-profitable higher end of the market or on multifamily projects. Negative equity, even as it falls consistently, could be keeping as many as one quarter of mortgaged homeowners from realistically listing their homes for sale. And otherwise “normal,” would-be sellers are not listing their homes for sale, perhaps fearing rising mortgage interest rates making it more expensive to purchase a new home of comparable size, or a musical chairs-type situation in which many don’t list a home for sale for fear of not finding one to buy.
Slower rental growth now and going forward may take some of the heat off those renters thinking of buying a home just to escape the volatility of steep annual rent hikes. They may still choose to transition into homeownership, but may feel like they have a bit more time to save or to be more patient to wait for the home that’s right for them to hit the market. This, in turn, could lead to a small softening in demand, enough to potentially take some of the frenzy out of the market, with homes potentially staying on the market a bit longer and some of the rampant bidding wars the market is experiencing beginning to fade away. And this softening in demand, however slight, could lead to slower home value growth – and as home value growth slows, those homeowners waiting to sell until they could extract maximum profit from their home might be more tempted to begin doing so.
Flattening rents could also lead developers to re-focus their attentions. In the immediate aftermath of the recession, when rents were still growing and home value growth was weak, large developers focused on larger rental and multifamily projects. This was done in part to capitalize on high rental demand from millions of foreclosed upon and displaced former homeowners. As those developments begin to come on line, the added supply is contributing to flattening rents, which leads to less urgency to begin new rental projects. As a result, the pendulum could again swing back toward more single-family and for-sale development, which will help ease supply constraints.
Finally, the prospect of rising mortgage interest rates and still-growing home values will likely erode some of the affordability advantages of owning a home versus renting. As of the third quarter of 2016, the typical U.S. home buyer could expect to spend roughly 14 percent of their income on a monthly mortgage payment, compared to 29 percent of income for a typical renter. But that affordability advantage comes when we assume 30-year, fixed mortgage interest rates of roughly 4 percent. If/when rates rise to 5 percent, and assuming home value growth in line with our forecasts, home buyers will need to spend 17 percent of their income on a mortgage. At 6 percent mortgage rates, buyers would need to spend 20 percent of their income on a mortgage. Rising mortgage rates and continued home value appreciation won’t entirely erase the financial advantages of owning over renting, but the gap can be expected to get noticeably narrower.
Looking ahead, 2017 is nothing if not a blank slate. We simply don’t know yet the extent to which these emerging trends may impact the market, if at all, or if other unforeseen factors will begin tilting the market away from sellers and toward buyers, or toward renters and away from homeowners. Right now, the trends that helped define 2016 are continuing to impact the start to 2017. It will likely be a few months yet – just in time for the start of the busy spring and summer home shopping months – before we can begin to measure the impacts of these changing dynamics. But if anything, this should serve as a reminder that even when the data seems unrelated, the housing market is interconnected and complex and very few things happen in a vacuum.
U.S. median home values remain 1.4 percent below the all-time high of $196,600 reached in April 2007, though if growth continues at the same pace we’ve seen for the past few months, those peaks will be exceeded very soon. Annual home value growth in December among homes valued in the bottom one-third of all homes (up 9.3 percent year-over-year in December) continued to outpace home value growth at the top-third of the market (up 5.1 percent year-over-year).
Annual home value growth was faster at the end of 2016 than at the end of 2015 in 19 of the 35 largest metro markets nationwide. Among all metros covered in the December market report, more than half (roughly 56 percent) are currently growing faster than they were a year ago. In December, the fastest-growing large metros nationwide were Portland, Ore. (up 13.8 percent year-over-year); Tampa (+11.8 percent); and Seattle (+11.7 percent). Annual growth was slowest in December in Indianapolis (+2.1 percent); Washington, D.C. (+3.4 percent); and Baltimore (+3.8 percent).
After peaking at 6.6 percent in July 2015, the annual pace of U.S. rental growth slowed to 1.5 percent in December – and essentially all of that annual growth happened in the first quarter, with median U.S. rents currently standing exactly where they did in April ($1,403 per month). Rental appreciation accelerated at the end of 2016 relative to the end of 2015 in only 10 of the largest 35 markets covered by Zillow nationwide. Rents fell year-over-year in December in four large markets (Pittsburgh, Houston, Virginia Beach and Chicago).
In December, rents grew the fastest year-over-year in Seattle (+8.4 percent); Portland, Ore. (+6.8 percent); and Sacramento (+6.7 percent). Rents grew slowest year-over-year – actually, rents fell – in Pittsburgh (-1.9 percent); Houston (-1.5 percent); and Virginia Beach (-1.1 percent).
Nationwide, the inventory for homes for sale in December was 4.6 percent below the level at the end of 2015. Overall inventory has fallen year-over-year nationwide in each of the past 23 months. In December, the inventory of bottom-third, more entry-level homes was down by 6.9 percent year-over-year; the number of homes for sale in the top-third was down 2.4 percent over the same time.
In December, large metros with the largest annual declines in overall inventory were Boston (-21.6 percent); Minneapolis (-19.9 percent); and Kansas City (-18.4 percent). Among the nation’s largest markets, eight actually had more homes for sale this December than last. Large metros with the biggest annual inventory gains in December were Las Vegas (+25.7 percent); Austin (+15.1 percent); and Miami (+14.6 percent).
