Author: Stan Humphries

The February Zillow Real Estate Market Reports come out today, and show continued depreciation in home values across much of the country. The national Zillow Home Value Index fell 5.4% year-over-year, and fell 0.5% month-over-month.

The good news is that the rate of monthly decline has improved over the past year. Home values fell 0.8% from January 2009 to February 2009, compared with a 0.5% decline from January 2010 to February 2010.

But the bad news is that, in early 2009, the rate of decline was shrinking (from -1% in January to -0.8% in February), signaling the market was heading toward a bottom. In the past few months, month-over-month changes are holding flat or getting worse – a trend which could slightly extend the time it takes to reach bottom. See Figure 1 for historical context.

Of the 25 largest markets for which we have data, two – Las Vegas and Philadelphia – saw positive month-over-month change, while another two – L.A. and San Francisco – remained flat. Additionally, almost 1 in 1,000 homes foreclosed in February, which is near the historical high-water mark. Foreclosure re-sales as a percentage of all transactions notched up again in February to 22.35%.

Current monthly changes in home values add substantial downside risk to our forecast that home values will reach bottom by June 2010. We’ve been expecting that monthly depreciation rates would stay negative but improve slightly in the first half of this year, but we’ve seen much less traction in reducing monthly depreciation rates than we expected.

Consistent with trends that materialized in December, home value change continued to weaken in many markets around the country during January.  Nationally, while the annualized appreciation rate continued to improve -– increasing from -5.5% in December to -4.8% in January –- home values declined 0.33% from the prior month (a slightly larger monthly depreciation than the 0.27% recorded in December).  See Figure 1 for the national performance in historical context.

Of the markets I focus on in the table below, four stayed in positive or flat territory in terms of month-over-month appreciation: Los Angeles (0.2%), Philadelphia (0.2%), San Diego (0.0%) and San Francisco (0.3%).  Five markets stayed in positive territory in terms of year-over-year appreciation: Boston (1.7%), Denver (0.4%), Los Angeles (0.9%), San Diego (0.2%) and San Francisco (0.9%).   It was just four months ago that sixteen of the twenty-four markets shown in the accompanying table had recorded four or more months of positive monthly appreciation in home values.

The number of homeowners losing their homes to foreclosure across the country remained unchanged from December, but was still pegged at the highest level seen in Zillow’s data, which began in 1996. In January, more than one in every thousand homes in the U.S. reached the final stage of foreclosure.

Foreclosure re-sales as a percentage of all transactions notched up in January to 22.28%, largely as a function of the decreasing volume of non-foreclosure sales in the winter months relative to the steady stream of foreclosure re-sales.

It seems that the home buyer tax credits are keeping some additional incremental demand in the marketplace during the winter, but they are not having the same powerful impact on home sales seen in the late summer and fall of 2009.  This suggests that most of the incremental buyers who could be coaxed off the fence and into the marketplace were already persuaded to purchase before the extension of the tax credit last November.  Undoubtedly, there will be another mini-frenzy of home buying around the expiration of these tax credits in June but we expect this spike to be a very muted version of the November spike.   In line with our smaller expectations for a spike in sales before expiration, we also think that the payback in diminished sales post-expiration will be more muted.

December brought signs that the fledgling recovery of home values in many markets is slowing again. U.S. home values got a bit lower again in December relative to November levels and the rate of decline got just a little bit higher as well.  The national Zillow Home Value Index (ZHVI) was down 0.21% on a monthly basis in December to $186,200 versus a monthly decline of 0.16% in November.  Annualized depreciation was 5.0% nationally. See Figure 1 below for monthly and annualized rates of change for the ZHVI.

More significantly, a number of large markets saw an end to their streak of consecutive monthly gains, including Atlanta, Baltimore, Boston, Denver, Minneapolis, and Portland, Ore. In total, one in five (29) of the 143 markets tracked by Zillow saw monthly depreciation or flattening  of home values in December after having experienced at least five consecutive month-over-month increases in home values during 2009.  If these declines are sustained, as we expect to happen in many markets, the result will be a “double dip ” in home values, defined as two periods of sustained declines in home values separated by a brief period of stabilization or recovery.

Home values in an additional 29 markets, including the Los Angeles and New York metropolitan statistical areas (MSAs), increased on a month-over-month basis each month throughout the fourth quarter. However, the rate of increase slowed from November to December in 21 of those markets, and several appear likely to experience several months of sustained decline in early 2010.

The percent of single family homes with mortgages in negative equity was essentially flat from the third to the fourth quarter, changing from 21 percent in Q3 to 21.4 percent in Q4. This comes after a decrease in negative equity from the second quarter’s 23 percent.

The number of homeowners losing their homes to foreclosure across the country reached a peak in December, with more than one in every thousand homes being foreclosed – a number not reached since Zillow began recording national foreclosure data in 2000.

While we’ve had a brief respite in mid-2009 from home value declines in many markets, the larger market correction has still not fully run its course.  The recent stabilization owed a lot to policy support in the form of tax credits, lower mortgage rates and increased Federal Housing Administration lending. The remaining correction in home values we’ll see in the first half of this year is a function of market fundamentals, such as the increasing flow of foreclosures, high levels of inventory in the market and a probable decrease in demand as the impact of the tax credit wanes and mortgage rates rise.

While the next few months are likely to bring further home value declines in most markets, we do expect to see a national bottom in home prices by the middle of this year. Thereafter, home values are likely to bounce along the bottom with real appreciation remaining negligible for some time.  This sustained period of languid real estate performance will really constitute the final leg of the housing downturn, as our possibilities are either sharper depreciation now followed by a sharper rebound off the bottom, or modest depreciation now followed by a long period of minimal appreciation.  Either path results in home values getting to the same level ultimately in real, inflation-adjusted terms.  The second path appears more likely at this point.