Zillow?s second quarter Real Estate Market Reports, released today, show home values increased 2.1% from the first to the second quarter of 2012 to $149,300 (Figure 1). On an annual basis, home values rose 0.2% from June 2011 levels (Figure 2), marking the first annual increase in U.S. home values since 2007. In addition to showing both quarterly and annual appreciation, national home values also rose for the fourth consecutive month, increasing 0.7%. Notably, home value appreciation in the second quarter was the highest since the fourth quarter of 2005.
Nationally, home values reached their bottom in February of 2012 and have since appreciated at very robust monthly growth rates. Despite encouraging monthly growth, we do not believe that this monthly rate is sustainable and expect it to taper off towards the end of the year. According to the Zillow Home Value Forecast, we expect national home values to appreciate by 1.1% over the next year (June 2012 to June 2013).
The housing market?s recovery continues to show tremendous variation market by market. Sixty-nine of the 157 markets covered by the Zillow Home Value Forecast are expected to see increases in home values over the next year, with the largest increases expected in the Phoenix metro (9.9%) and the Miami metro (6.1%). We believe that ninety-six out of the 157 markets have already hit a bottom in home values, including Boston, Miami, and Phoenix. In some of the hardest hit markets, the bottoming process has been quite different than we had initially expected. Due to very low inventory levels paired with greater consumer and investor appetite and low mortgage rates, home values have appreciated faster than anticipated in markets like Phoenix and Miami, creating a V-shaped recovery in home values.
Home Values
The Zillow Real Estate Market Reports cover 167 metropolitan areas (metros) of which 98 showed quarterly home value appreciation. Five metros remained flat, while 64 metros show home value losses. Nearly one-third of metros covered by the Real Estate Market Reports posted annual increases in home values. The largest annual increase was in Phoenix, where home values rose 12.1% from the second quarter of 2011 to the second quarter of 2012. Phoenix is benefiting from high demand for homes from investors looking to convert them into rentals, high demand from mainstream buyers pulled back into the market by historical affordability (almost 43% below the historical average) and constrained supply due to high negative equity (55.5% of Phoenix homeowners with a mortgage were in negative equity in 2012 Q1) and natural resistance of sellers to sell at market bottom.
Overall, national home values are back to January 2004 levels, having fallen 22.9% since their peak in May of 2007.
Rents
The June Zillow Rent Index (ZRI) is up 5.2% from year-ago levels, and 68% of the 293 metropolitan areas covered by ZRI in this report experienced year-over-year gains. The rental market remains strong even as home values start to once again appreciate in many markets. Markets that saw extremely strong year-over-year rent increases include Philadelphia (11.9%), Chicago (11%), Baltimore (11%), and San Francisco (9.5%). Continually rising rents will increase consumer demand for home purchases, especially in this low mortgage rate environment.
Foreclosures
The rate of homes foreclosed continues to decline in June with 5.8 out of every 10,000 homes in the country being liquidated (Figure 4). This is the lowest foreclosure pace we?ve seen since December 2007 when 5.5 out of every 10,000 homes were being liquidated. Nationally, foreclosure re-sales also continued to slow, making up 15.6% of all sales in June, down from 16.4% in May (Figure X). The decreasing prevalence of foreclosures in the monthly transactional mix is due to both seasonality (more non-foreclosure sales in the spring and summer) combined with the much slower pace of foreclosure liquidations over the past year. This lower level of foreclosure re-sales is contributing to home value appreciation, as these are usually sold at a discount and influence surrounding non-distressed sales. With foreclosure starts again increasing now that the National Foreclosure Settlement has been approved by the courts, we do expect some increase in foreclosure liquidations in the back half of this year, although lenders are being more aggressive in pursuing foreclosures alternatives for homes in the pipeline.
Outlook
Nationally, we believe that housing has finally turned a corner, and our forecast calls for U.S. home values to increase by 1.1% over the next year. In general, we continue to believe that high levels of negative equity paired with higher than normal unemployment will keep foreclosure rates higher than normal for at least the next 2-3 years. In some markets, we believe this combination will temper near-term price appreciation and lead to a U-shaped recovery in home values.
In other markets, however, we believe the trajectory of home values will look more like a step-function characterized by cycles of price spikes and plateaus. In these markets, negative equity-induced supply constraints in combination with mainstream buyer demand and robust investor demand will lead to short-term price spikes (as we?re seeing now in Phoenix and Miami). These price spikes will free some homeowners from negative equity, allowing them to sell, thereby easing supply constraints and dampening prices until the cycle is repeated.
Downside risks to our outlook are that the pace of foreclosures increases more than expected, job growth becomes even more sluggish, or we have a political train wreck on the budgetary and tax issues we face at the end of this year. We, however, remain optimistic that low mortgage rates, high levels of affordability, rising rental prices, and slowly improving conditions in the overall economy will combine to keep the housing recovery on track, and we expect that both existing and new homes sales will continue to increase for the remainder of the year, being tempered only by low inventory levels (versus anemic demand).
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