After peaking in the second quarter of 2006 and reporting its first year-over-year decline in January of 2007, the US Zillow Home Value Index turned in 27 consecutive months of increasingly larger annual depreciation rates between 2007 and the end of the first quarter 2009. That all changed in the second quarter of 2009 when the annual depreciation rate of the national ZHVI changed direction for the first time since turning negative back in 2007. From 12.4% annualized depreciation in March 2009, the depreciation rate moved to 12.3% in April, 12.2% in May and 12.1% in June. Anyone who ever doubted that 12% annual depreciation would be a possibly hopeful sign clearly never experienced a real estate market that has seen a total drop in values of more than 22% from their peak.
Not only that, but several hard-hit markets like Los Angeles, Riverside, San Francisco, San Diego and Stockton have now reported between five to eight months of consecutive monthly improvements in their annualized depreciation rates (see Figure1 for year-over-year changes in the Zillow Home Value Index for Los Angeles and San Francisco).
There are, unfortunately, some markets that still show no signs yet of slowing depreciation, such as Las Vegas (-34.6%), Phoenix (-26%) and Fort Myers (-29.4%). And these are hard-hit markets too, with peak-to-current value declines of 45.8%, 53.8% and 57.9% respectively (see accompanying table). Of course, all of these peak-to-current value declines pale in comparison to that seen in Stockton where values have dropped from a high of $411,227 in February 2006 to a current value of $160,794 – a decline in real estate values of 61%. The New York metro region is also in this list of areas where annual depreciation has not yet started to improve. There values have already fallen more than 21% from peak and Manhattan only started chalking up negative year-over-year depreciation in the latter part of 2008, joining the rest of the metropolitan region which had been turning in negative annual growth rates much earlier. The strongly negative depreciation in Manhattan (-20.2%) will likely continue to weigh down the overall metro region which overall reported an annual depreciation rate of 12.3%.
There continue to be a very few places where real estate values have actually increased over the past year. These tend to be places that never experienced the huge increases in real estate values during the real estate boom and places that have some combination of oil, military or large university and/or government employment. Typical of these communities are Fayetteville, NC (13.4% annual appreciation, home of Fort Bragg), Jacksonville, NC (0.7% annual appreciation, home of Camp Lejeune), Oklahoma City (4.8% annual appreciation, state capital with lots of energy employment and named in 2008 by Forbes Magazine as the most “recession proof city in America”), Tulsa (1.3% annual appreciation, also lots of energy employment) and Boulder (2.3% annual appreciation, home of University of Colorado).
So why not an unalloyed optimism about the current second quarter performance? As noted previously, there are still numerous substantial downside risks to home values. These include:
- Continued high levels of for-sale inventory. Sales volumes have undoubtedly bottomed but lots of new supply is being put on the market to take the place of those homes that are selling, keeping overall inventory levels high. This number may prove a stubborn one to move as all the homeowners who’ve wanted to sell in the past three years but either couldn’t or didn’t even try (i.e., pent-up supply) will start dipping their toes back into the market now.
- High rates of negative equity. We currently estimate that 23% of single-family homes with mortgages are in negative equity. High negative equity is a fertile breeding ground for foreclosures, particularly during a recession with high unemployment such as we are experiencing now.
- Large numbers of foreclosures and possibly even more coming down the pipe as many areas are reporting increases in notices of default and notices of foreclosure sale, the precursors to actually foreclosures. Foreclosures equal more supply and cheaper prices, both which push down values on non-distressed sales.
- Increasing mortgage rates, particularly if the Fed stops buying Treasuries as they are likely to do in mid-September.
For now, enjoy some less depressing real estate news and keep a keen eye near-term on foreclosure rates and for-sale inventory levels. To see all data on all markets, visit our new local pages.
Dr. Stan Humphries is a real estate economist and real estate expert for Zillow. Stan is in charge of the data and analytics team at Zillow, which develops housing market data for most major metropolitan statistical areas in the U.S., and provides economic research for current real estate market conditions. He helped create the algorithms for the popular Zestimate® home value and the Zillow Home Value Index (ZHVI).
Source: zillow.com