Zillow’s August Real Estate Market Reports, released today, show that home values decreased 0.1 percent to $152,100 from July to August (Figure 1). This is the first monthly decline after nine consecutive months of appreciation. This year has seen a turnaround in the housing market with sustained appreciation that, at times, has been very strong. As we enter the back half of this year, we expect home values to see more volatility with a saw tooth pattern setting in characterized by months of home value declines interspersed with months of appreciation. Overall, the positive trend will hold as evidenced by home values being up by 1.7 percent (Figure 2) in August 2012 on a year-over-year basis. Rents continued to rise in August, appreciating by 0.2 percent from July to August. On an annual basis, rents across the nation are up by 5.9 percent (Figure 3), indicating that demand, fueled by elevated foreclosure levels, is still outpacing investor-driven increases in rental supply.

Home Values

The August Zillow Real Estate Market Reports, the first indication of August national home value trends anywhere, have been significantly expanded this month to cover 369 metropolitan and micropolitan areas, more markets than any other freely available source of market data. In August, 135 (36.6 percent) of the 369 markets showed monthly home value appreciation. Among the top 30 metros, 13 experienced monthly home value appreciation and 21 saw annual increases. The largest monthly decline among the top 30 metros took place in Atlanta, where home values fell by 1.5 percent from July to August. Leading the pack on the appreciation side are Phoenix, Las Vegas, and Miami-Fort Lauderdale which experienced 1.6, 1.1 and 1.0 percent monthly home value appreciation, respectively. Overall, national home values are down 21.5 percent since their peak in April 2007 and up 2.3 percent from the post-recession trough in October of 2011.

Rents

The Zillow Rent Index (ZRI) covers 296 metropolitan areas and shows year-over-year gains for 201 metropolitan areas covered by the ZRI. Even as the housing market picks up steam again, the rental market remains strong (Figure 3). Markets that saw extremely strong annual rent appreciation include Indianapolis (13.7 percent), Chicago (12.8 percent), Philadelphia (10.5 percent), and Baltimore (12.4 percent). Las Vegas, which has seen extremely high levels of affordability and a flurry of investor activity over the past year, has seen home values increase steadily (up 4.9 percent on a year-over-year basis in August), while rents have seen lackluster growth or depreciation. Currently, rents are down 2.4 percent from August 2011.

Foreclosures

The rate of homes foreclosed continues to decline in August with 5.99 out of every 10,000 homes in the country being liquidated. Nationally, foreclosure re-sales continue to fall, making up 13.8 percent of all sales in August (Figure 4). This is down 2.3 percentage points from August 2011. We do not believe that an expected increase in foreclosure re-sales towards the end of this year will cause monthly home value trends to go negative on a consistent basis, although they will create some monthly volatility and keep a lid on near-term home value appreciation.

Outlook

Nationally, the slow housing recovery continues to unfold with our forecast calling for future appreciation, albeit at a slower than “normal” pace. We expect that most markets will have reached their bottom by the end of this year and will start to show home value appreciation. The implementation of a third round of quantitative easing by the Federal Reserve will ensure that the current low mortgage rate environment continues. While higher mortgage rates would not be particularly helpful to the nascent housing recovery, we believe there isn’t much room for rates to go lower and, even if there were, we don’t seem to be in a particularly rate-driven environment currently as home sales appear more sensitive at this point to employment trends and local supply constraints on for-sale inventory (which is itself often a function of negative equity which is preventing potential sellers from entering the market). Of more concern is the complex of budget and tax changes associated with the year-end “fiscal cliff” which is likely creating uncertainty right now with consequences for employment growth and, if not successfully navigated, will create real disruptions in the economy soon and, if the experience with last fall’s debt ceiling debate is any indication, substantial hits to consumer confidence, both of which will impact home sales and, ultimately, home values.

A PDF version of this full report can be downloaded here.