- In February, U.S. home values rose 6.9 percent year-over-year, to a Zillow Home Value Index of $195,700.
- Rents rose 1.2 percent over the past year to a Zillow Rent Index of $1,406 per month.
- Inventory shortages will be a big concern for buyers going into home shopping season – there are 2.6 percent fewer homes for sale this year than last.
- Minneapolis, Cincinnati and Detroit reported the greatest drop in homes for sale over the past year.
Median U.S. home values rose 6.9 percent in February compared to a year ago, the 55th consecutive month of annual home value growth and the 18th month in a row in which annual appreciation exceeded 5 percent, according to the February Zillow Real Estate Market Report.
The median U.S. home was worth $195,700 in February, according to the Zillow Home Value Index, up 0.4 percent from January and a scant 0.5 percent below all-time home value highs of $196,600 set in April 2007. Median rents nationwide rose 1.2 percent in February from a year ago and 0.2 percent from January, to a Zillow Rent Index of $1,406 per month.
The main driver of the strong home value growth experienced over the past year-and-a-half is well-known by now: There’s a lot of demand from homebuyers, and a low supply of homes available to buy to soak it up. At roughly the same time as home values began growing rapidly, inventory of homes for sale began falling. In February, overall inventory of homes nationwide listed for sale on Zillow fell by 2.6 percent year-over-year, the 25th straight month of annual inventory declines. You don’t need to be an economist to know that when demand is high and supply is low, prices go up.
What’s Driving Demand?
The factors behind strong demand are fairly easy to identify. Over the past several years, the U.S. economy overall has performed solidly, adding jobs at a steady pace. Lately, this growth in employment has been accompanied by decent gains in wages, as well. Simply put, when Americans find good work and begin getting raises, they can more easily save and potentially start shopping for a new place to live.
Helping goose demand more is the fact that still-low mortgage interest rates, even though they’ve risen somewhat over the past few months, help buyers stretch their home buying dollar even further. Especially as rent continues to grow without the offsetting benefit of low mortgage rates to keep monthly payments low, buying a home looks like an increasingly attractive financial option for those Americans deciding whether to rent or buy.
Finally, there are added demographic tailwinds helping keep home buying demand at a boil as well. Millennials are the largest generation in history, and are just beginning to age into their prime home buying years, in which many have moved beyond entry-level work and have established more of a career, are beginning to settle down and get married, and choosing to start families. Marriage and children, in particular, traditionally push many to purchase their first home. Given the sheer size of the millennial generation, this accounts for a lot of home buying demand – not to mention additional demand from older homeowners looking to upgrade or downsize, depending on their situations.
The Sticky Supply Situation
The forces keeping inventory down are a bit more nuanced, but no less logical. In the simplest sense, high demand itself isn’t helping the market build up an inventory cushion of homes for sale – in many markets, homes are scooped up seemingly as soon as they’re listed. A second driver of low inventory has been anemic new construction activity, which has struggled in the wake of the recession to get back to early 1980s levels, let alone the heights reached prior to the recession.
This lack of new construction is impacting markets in a number of ways. It is helping push up the prices of newly built homes and the overall age of homes that do sell. With little new construction, yesterday’s new homes aren’t being replaced by today’s new homes, which means older homes aren’t being pushed down in value as quickly as they otherwise might. And this all leads to a situation in which those homes that are affordable to rent are often older, which can pose health risks to tenants.
Another contributor to low inventory is the negative equity rate — the share of homeowners with an underwater mortgage, owing more on their home loan than their home is worth. The national negative equity rate has fallen consistently over the past few years, but remains high at 10.5 percent. Put another way, 5.1 million American homeowners are underwater on their mortgage – and it’s likely many of these 5.1 million Americans would choose to list their homes for sale if they could. Except being underwater can make it incredibly difficult, if not impossible, to sell. The only real options are to undergo a risky and lengthy short sale, or bring some of their own money to the closing table to close the gap between what is owed and the selling price. What’s more, lower-end, more entry-level homes of the kind most likely sought by first-time and younger buyers are more than twice as likely to be underwater as more expensive homes, contributing more forcefully to inventory woes at the bottom.
Finally, homeowners themselves could be contributing to the lack of inventory simply by not listing their homes for sale. As it stands, the housing market right now is very much in sellers’ favor – for the most part, they can expect to get very close to the price they’re asking for, and sell in a relatively quick window. But the majority of sellers, once their home is sold, must turn around and become buyers themselves. And, as noted, it’s tough out there for buyers. This leads many otherwise would-be sellers to instead stand pat in a kind of musical chairs paralysis – they’re afraid to stand up from their current home, lest they find it impossible to find another one to settle down in.
And rising mortgage interest rates, while unlikely to seriously deter many serious buyers just yet, may be giving some current homeowners pause. As rates rise, many current homeowners may find that their mortgage payments on a home very similar to the one they’re already in will actually become more expensive – to say nothing of a larger home or a home in a more expensive neighborhood. So they may decide to stay put instead, especially if there aren’t any external factors (a new job, or changing family dynamics etc.) that would otherwise force a move. This so-called mortgage rate lock-in phenomenon is likely to only get worse as mortgage interest rates rise.
Weak Signals
There are some signals that rapid home price growth and persistent inventory shortages may be about to fade. February represented just the fifth month in the past two years in which annual U.S. home value appreciation failed to exceed the month prior (home values grew at a faster 7 percent annual pace in January), potentially signaling more of a slowdown to come. And inventory, while still declining, fell at its lowest annual pace since February 2015, potentially signaling some annual inventory gains to come in subsequent months.
Then again, those are admittedly pretty weak signals, and any meaningful shift in market dynamics will take place over the coming months and years, and not from one month to the next. As it stands, low inventory, strong demand and tough competition will be the defining characteristics of this year’s home shopping season. Buyers are likely eager to start their home searches, but there are headwinds out there. If you’re a prospective buyer about to enter the market, keep in mind that it’s rare to get the first home on which you make an offer, and homes in particularly hot markets frequently sell for more than their asking price. Buyers should give themselves enough time to get their finances in order and find a real estate agent they know and trust before jumping into the market.
Tampa, Seattle, Dallas and Orlando reported the highest year-over-year home value appreciation among the 35 largest metros nationwide. In Tampa, home values rose 11.6 percent to a median home value of $182,100. Home values in both Seattle and Dallas were also up more than 11 percent from last February.
Seattle, Portland and Sacramento, Calif. reported the highest year-over-year rent appreciation among the 35 largest U.S. housing markets. Rents in Seattle are up 7.2 percent to a Zillow Rent Index of $2,100. Rents in both Portland and Sacramento are up slightly more than 5 percent.
Minneapolis, Cincinnati and Detroit reported the greatest drop in inventory since last February. In Minneapolis, there are 18 percent fewer homes on the market than a year ago, and 14.9 percent fewer in Cincinnati.
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