Tuesday, January 22, 2013

Home Values End 2012 on a High Note, but Don’t Expect Such High Appreciation Rates to Continue

The housing market completed 2012 with such strong momentum, it might be easy for some to forget that the market bottomed only slightly more than a year ago, in October 2011.
U.S. home values ended 2012 up 5.9 percent over the end of 2011, marking four consecutive quarters of national home value appreciation. The Zillow® Home Value Index (ZHVI) rose to $157,400 in the fourth quarter, up 2.5 percent over the third quarter, according to the fourth quarter Zillow Real Estate Market Reports.
The 5.9 percent annual appreciation rate far exceeded yearly rates of appreciation typically associated with healthy markets and represents the largest annual gain since August 2006, near the peak of the housing bubble. Historically, housing markets can expect annual home value appreciation of roughly 3 percent on average, according to Zillow research. Looking ahead, the Zillow Home Value Forecast shows home values increasing by 3.3 percent in 2013, a yearly appreciation rate more in line with historic norms.
In many areas, the past few years have been quite the roller coaster. In the Phoenix metro, for example, home values peaked in the first quarter of 2006 at $282,600. They bottomed in the third quarter of 2011 at $123,900. From peak to trough, a period of roughly five years, home values in the Phoenix area fell by a staggering 56.2 percent. But over the past year, home values in the Phoenixmetro shot up by 22.5 percent — and are expected to rise another 8.5 percent in 2013. Several other metros, including Las Vegas and Miami, experienced similar rides over the past few years.
“It’s important to be cautious moving forward, even as we celebrate the undeniably positive end to 2012, and be careful that consumers don’t grow to expect such high appreciation as the norm,” said Zillow Chief Economist Dr. Stan Humphries. “Buying a home should be a long-term decision, and these swings between a deep housing recession and higher-than-normal appreciation rates can give consumers whiplash and cause some to lose sight of that.”
This is why the anticipated moderation in home value increases in 2013 is actually a positive sign for the market. Yes, we expect home value appreciation to slow this year, which may lead some to speculate the market is cooling off and headed back down. But they will still rise, and at a historically solid rate. Rising home values can be expected to pull more borrowers struggling with negative equity — so-called “underwater” borrowers, or those who owe more on their mortgage than their home is worth — back above water.
As more homeowners are freed from negative equity as a result of rising values, and are given the option of listing their homes and shopping for new ones, current inventory shortages should ease. A deeper pool of available homes for sale will entice more overall buyers into the market, and a wider breadth of home styles and price levels available for sale will help bring in other types of buyers besides bargain-hunters and investors.
Looking forward, we’re confident that continued improvement in negative equity rates, coupled with more moderate home value appreciation, will ensure the housing recovery that began in 2012 will continue in 2013 — and beyond.

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