Exactly a month ago, we were expecting August home value trends to weaken based on disappointing July existing home sales and pending home sales, a weak September jobs report, and weaker consumer confidence in August. Between then and now, however, August existing home sales were released and they surprised to the upside—up 7.7% between July and August.

Today, the Zillow Real Estate Market Report reveals a market in which home value trends didn’t weaken as much as we feared a month ago. August home values were essentially flat from a month ago, up just 0.09% from July to August (see Figures 1 and 2). On a year-over-year basis, home values were still down, falling 4.5% since August 2010. The peak to current decline now stands at 28.3% (relative to June 2006).We do remain concerned, however, about the impact that recent economic turmoil and renewed fears of another recession will have on September home sales and home value trends.

Home Values

The Zillow Real Estate Market Report covers 157 metros of which 74 showed monthly home value depreciation and 68 metros showed monthly home value increases. Fifteen metros remained flat. There are encouraging signs in some very hard hit markets. Detroit, for example, where home values are still down 6.5% from a year ago, has seen five consecutive months of positive monthly appreciation. Fort Myers, FL, has seen nine months of positive monthly home value appreciation and five months of positive annual appreciation. A table of the largest 25 metropolitan statistical areas that Zillow covers and their month-over-month performance can be found on page 3 of this report.

Foreclosures

The foreclosure liquidation rate remained steady at around 9.2 out of every 10,000 homes in the country being liquidated in August, well down from the rate of 10.9 out of every 10,000 homes in October 2010 before the robo-signing slowdowns (see Figure 3). Foreclosure re-sales made up 19.5% of all sales in August, up slightly from the July level of 18.9%. We believe that both foreclosure re-sales and foreclosure liquidation rates are suppressed currently and that this constraint is improving the supply-demand imbalance in many markets, but doing so at the expense of longer or deeper negative trends in the future.

Home Value Tiers

The market is again seeing a separation in the appreciation trends of the three home value tiers as seen in Figure 4. Figure 5 shows the difference in monthly home value appreciation between the top and bottom tiers of home values (the simple difference between the blue and green lines in Figure 4). Home value trends in the bottom tier out-performed those in the top tier at the outset of the housing recession (July 2006). This likely occurred because buyers of expensive homes became skittish about prices as demand weakened whereas subprime lending was still fueling substantial demand in the lower value tiers of homes. The fates of the top and bottom tiers reversed by early 2009, though, at which time the top tier consistently performed better than the bottom tier.

The difference between the top and bottom tiers was at its greatest in July 2010, after the federal home buyer tax credit had expired and the bottom fell out of the bottom tier. At this time, monthly appreciation in the top tier was -0.02% while appreciation in the bottom tier was -1.57%, a staggering 18.6% annualized difference in home value trends.

Currently, home values in the top tier are appreciating at 0.46% per month while those in the bottom tier are essentially flat at 0.06% appreciation per month.

Outlook

There is no change in our assessment of the two biggest long-term factors affecting home value trends: negative equity and unemployment. In the near-term, the pace of foreclosure liquidations is impacting home value trends, which, in turn affects the REO saturation rate with some lag. We believe the liquidation rate has been lower than it would be otherwise, while the attorneys general of most states try to hammer out a deal with lenders and servicers over foreclosure processes and guidelines. With or without this settlement, the pace of foreclosure liquidations will pick up again, eventually putting more REOs into local markets and putting more downward pressure on prices. Nothing we have seen so far causes us to change our expectation that we won’t see a definitive bottom until 2012 at the earliest.

This report is also available for download in PDF format here.