Zillow?s fourth quarter Real Estate Market Reports, released today, show home values increased 2.5% from the third to fourth quarter of 2012 to $157,400 (Figure 1). This quarter marks four consecutive quarters of national home value appreciation. On an annual basis, the Zillow Home Value Index (ZHVI) rose 5.9% from December 2011 levels (Figure 2), a significantly higher level of annual appreciation than what would be considered ?normal? in a historical context. For example, in the 1990s the average annual home value appreciation was 2.6%. The housing recovery has become supercharged, especially in markets such as Phoenix and parts of California. Despite strong national appreciation, the housing recovery is uneven across the country with markets such as Atlanta and Chicago still lagging behind. We don?t believe that the current pace of home value appreciation in many parts of the country is sustainable, due in part to the origin of this appreciation, which we believe to be negative-equity fueled inventory shortages. High rates of negative equity continue to keep homeowners locked in their homes thereby limiting the overall supply of for-sale homes and helping to fuel intense price appreciation.
Home Values
The Zillow Real Estate Market Reports cover 366 metropolitan areas (metros) of which 278 showed quarterly home value appreciation. Four metros remained flat, while 84 metros show home values losses. Nearly 70% of the metros covered by the Real Estate Market Reports posted annual increases in home values ? a sign of the national housing recovery continuing to take hold. Among the largest metros, Phoenix showed the largest annual increase with home values rising 22.5% from the fourth quarter of 2011 to the fourth quarter of 2012.
Overall, national home values are back to June 2004 levels, down 18.8% since their peak in May 2007. From their peak in April 2007, home values fell 23.4% to the trough in home values in October 2011, and are now 6% above the trough level. A table of the top 30 metros can be found at the end of this report.
The Zillow Rent Index (ZRI) covers 459 metropolitan areas, and 64% of those metros reported annual increases in rents in December. As a point of comparison, nearly 70% of the metro areas covered by the ZHVI experienced annual home value increases. Nationally, rents increased 4.2% in December from year-ago levels, and rent growth continues to be robust, fueled by the entry of foreclosed households into the rental market and increasing household formation itself (newly formed households often choosing to rent before buying). Markets that saw extremely strong year-over-year rent increases include Boston (6.6%), Denver (6.5%), Chicago (5.3%), and San Francisco (5.1%).
The rate of homes foreclosed continued to decline in December with 5.22 out of every 10,000 homes in the country being liquidated through foreclosure. This is the lowest foreclosure pace we have seen since November 2007, when 5.18 out of every 10,000 homes were being liquidated. Nationally, foreclosure re-sales remain low, making up 12% of all sales in December, down 4% from the fourth quarter of 2011, underlining the limited inventory of foreclosure re-sales, especially given that we would normally expect their share to increase in the back end of the year as non-foreclosure sales reach their low point. The lack of foreclosure re-sales in many markets is contributing to home value appreciation, as investors are buying up the distressed and non-distressed inventory, especially on the lower end of the housing market, squeezing out many conventional buyers, especially those requiring a mortgage instead of paying cash for a home.
Outlook
While the housing recovery has been rather uneven across the country, most metros are experiencing some form of home value appreciation and have seen a bottom in home values. We are in unusual times as many markets, such as California and Phoenix, are seeing a return to bubble-era home value appreciation fueled by supply shortages and intense investor activity. These conditions will carry well into 2013, however many markets will start to normalize and switch to more sustainable rates of appreciation. This volatility is hard on buyers and sellers, making long-term planning more difficult as they are tossed from one extreme of home value appreciation to the other. We do expect some moderation in this breakneck appreciation of home values over the next year (an increase of 3.3% over the next 12 months versus an increase of 5.9% over the past 12 months).
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