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January 2017 Market Report: The Rest Overtake the West
In January, U.S. median home value growth continued to accelerate year-over-year, the 22 month out of the past 23 in which annual growth was similar to or faster than the prior month. But while the national trend has remained roughly the same for two years, a slowdown in growth in a handful of pricey West Coast markets, particularly in California, has opened the door for more affordable markets in the South to top the list of the nation’s fastest-growing metros.
- U.S. home values rose 7.2 percent over the past year to a Zillow Home Value Index (ZHVI) of $195,300 in January, just 1 percent shy of peak value hit in April 2007.
- Several of the nation’s fastest growing housing markets can be found in the South — three Florida markets are among the fastest appreciating, as well as Nashville and Dallas.
- Rents rose 1.4 percent over the past year to a Zillow Rent Index (ZRI) of $1,404 per month.
- There are 3 percent fewer homes to choose from than a year ago, with Minneapolis and Detroit reporting the greatest drop in inventory over the last year.
In housing, sometimes the more things stay the same, the more they change.
In January, U.S. median home value growth continued to accelerate year-over-year, the 22 month out of the past 23 in which annual growth was similar to or faster than the prior month. But while the national trend has remained roughly the same for two years, a slowdown in growth in a handful of pricey West Coast markets, particularly in California, has opened the door for more affordable markets in the South to top the list of the nation’s fastest-growing metros.
The median U.S. home value climbed to a Zillow Home Value Index (ZHVI) of $195,300 in January, up 0.6 percent from December and 7.2 percent from January 2016, according to the January Zillow Real Estate Market Reports. After 13 straight months of slowing annual appreciation between February 2014 and February 2015, home value growth has picked up over the past two years, reaching highs not seen in more than a decade. The 7.2 percent annual growth recorded in January was the highest such figure since July 2006 (also 7.2 percent).
But when the current stretch of home value acceleration began, the top-10 list of local market growth leaders looked a little different. In January 2015, among the nation’s 40 largest metro markets, four of the 10 fastest-growing were located on the West Coast – San Jose, Portland, San Francisco and Riverside. Today, just two of the ten fastest-growing large markets are located on the West Coast: The red-hot Pacific Northwest markets of Seattle and Portland. On the flip side, four of the 10 fastest-growing markets two years ago were located in the South (Miami, Austin, Houston and Tampa). Today, half of the 10 fastest-growing large markets are located in the South: Nashville, Dallas, Orlando, Tampa and Miami (figure 1).
To a certain extent, choosing a top-10 list is an admittedly arbitrary exercise. With annual home value growth of 8.9 percent, for example, Milwaukee just missed out on making the most recent top-10 list to Miami, at 9.2 percent. If Milwaukee had made the list instead of Miami, there would be four Southern markets on the list – same as January 2016. But beyond the metros that just missed the top-10 cut, the list is notable for those markets that are no longer on it – particularly the once-scorching-hot Bay Area markets of San Francisco and San Jose.
Exactly a year ago, in January 2016, home values in the five-county San Francisco metro were growing at an annual rate of 13 percent; the San Jose area wasn’t far behind at 12.7 percent. Today, those two markets are growing at an annual pace of 4.4 percent and 4.0 percent, respectively. Some of this can be attributed to simple gravity – expecting markets to sustain double-digit annual growth over a long period isn’t very realistic.
One of the major drivers of this return to earth is likely attributable to rapidly deteriorating affordability in these markets and the fact that a smaller pool of buyers can realistically afford to buy a home in these areas. Currently, a typical buyer making the median income in the Bay Area and looking to buy a median-priced home should expect to spend roughly 35 percent of their income on a mortgage payment in both the San Jose and San Francisco markets – well above the national average of just 14 percent. Continued rapid appreciation in home values would only cause this number to swell more quickly, so much of the slowdown we’re seeing in home value appreciation is likely a natural reaction to worsening affordability itself. Buyers are only willing and able to spend so much on a home, and sooner or later home values will reflect this shifting tolerance.
Growth in markets like Nashville, on the other hand, could be driven in large part by their renewed popularity among buyers seeking good affordability and a similarly vibrant quality of life. Buyers seeking a home in Nashville or Dallas, for example, should expect to spend 13.8 percent and 11.5 percent of their incomes on a mortgage for a typical home in those areas, respectively – well below the national average.
The West Coast gets a lot of attention, but strong markets exist throughout the country. Florida and Texas home values, in particular, have grown quite a bit over the past several years – stealing the spotlight from slower moving markets like San Francisco, San Jose and Los Angeles. Slowdowns in the Bay Area, in particular, are driven by the fact that these markets are so expensive that many people can no longer realistically afford to buy there – limiting demand and reducing pressure on home values.
Inventory Keeps Getting Lower, Rents Stay Largely Flat
U.S. median home values are just 0.7 percent below the all-time high of $196,600 reached in April 2007, and 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 January among homes valued in the bottom one-third of all homes (up 9.7 percent year-over-year in January) continued to outpace home value growth at the top-third of the market (up 5.4 percent year-over-year).
In January, among the 40 largest metros nationwide, annual home value appreciation was fastest in Nashville (12.4 percent); Portland, Ore. (up 12.1 percent year-over-year); and Tampa (+11.9 percent). Annual growth was slowest in January in Virginia Beach (+3.2 percent); Washington, D.C. (+3.6 percent); and Indianapolis (+3.7 percent).
The annual pace of U.S. rental growth has slowed considerably since peaking at 6.6 percent in July 2015, the Zillow Rent Index stood at $1,404 per month in January, up 1.4 percent from January 2016 and a scant 0.1 percent from December ($1,403 per month). Among the 40 largest markets, rents grew the fastest year-over-year in January in Seattle (+7.7 percent); Portland, Ore. (+6.2 percent); and Sacramento (+5.9 percent). Rents grew slowest year-over-year – actually, rents fell – in Pittsburgh (-2.9 percent); Houston (-2.0 percent); and Milwaukee (-1.7 percent).
Nationwide, the inventory for homes for sale in January was 2.9 percent below the level from January 2016. Overall inventory has fallen year-over-year nationwide in each of the past 24 months. In January, the inventory of bottom-third, more entry-level homes was down by 4.6 percent year-over-year; the number of homes for sale in the top-third was down 1.3 percent over the same time.
In January, large metros with the largest annual declines in overall inventory were Minneapolis (-17.7 percent); Detroit (-16.8 percent); and Cincinnati (-15.5 percent). Among the nation’s largest markets, 12 actually had more homes for sale this December than last. Large metros with the biggest annual inventory gains in January were Las Vegas (+23.5 percent); Austin (+22.7 percent); and Miami (+18.2 percent).