23 August 2016
From 10,000 feet, the U.S. housing market has been nothing if not predictable in 2016 – inventory has been down, home values have grown at a remarkably steady pace and sellers have largely been sitting pretty. None of these trends shifted meaningfully in August, though there are a precious few signs emerging that hint at potential changes on the horizon.
For the 49th month in a row, the median U.S. home value rose year-over-year in August, to a Zillow Home Value Index of $188,100, up 0.4 percent from July and 5.1 percent from August 2015, according to Zillow’s August Real Estate Market Report. In each month thus far in 2016, annual home value growth has been no slower than 5 percent per year, and no faster than 5.2 percent – a notable stretch of consistency.
This year’s stability in U.S. home value appreciation continues a trend that began roughly two years ago. Throughout much of 2015, home values grew in a similarly narrow range, between 4.4 percent and 4.7 percent annual growth, before accelerating into the 5 percent range at the end of last year – where it has largely stayed since. This long period of steady annual home value growth almost looks like an anomaly when seen next to the sometimes wild up and down swings experienced nationwide over the past two decades.
A potential answer for why the market has been so stable of late, as it happens so often in real estate, could boil down to location, location, location. As we’ve often said, the U.S. housing market is really nothing more than a collection of dozens of local markets, each behaving differently and with their own unique fundamentals. Some once red-hot markets, including the San Francisco Bay Area, have cooled considerably this year. Home values in the five-county San Francisco metro were growing at an 11.7 percent annual pace as recently as January; as of August, the pace had slowed to 6 percent. In the San Jose metro – the heart of Silicon Valley – annual home value appreciation slowed from 11.1 percent growth in January to 5.8 percent in August.
At the same time, home value growth in other markets – particularly in the booming Pacific Northwest – has picked up the pace. In the Seattle metro, annual home value growth has accelerated from a 10.4 percent annual pace in January to 11.3 percent in August. Just to the south, in Portland, annual home value growth has picked up from a 13.2 percent pace at the beginning of the year to 14.8 percent currently.
In 267 of the 516 total metro areas analyzed in August, home value growth has accelerated compared to January. Home value growth was slower in August compared to January in 249 markets. This relatively even distribution of markets where home value growth has picked up steam over the course of the year, and where it has trailed off, stands in marked contrast to the boom and bust years. Then, most markets largely moved in lockstep driven by larger, national economic trends – first up during the boom, then down during the bust. Today, when roughly the same number of markets are pulling one way as pushing the other, it sets up a situation in which the larger market as a whole looks pretty stable.
Home Value Growth: Bigger at the Bottom
Of the 35 largest metro areas analyzed, annual home value growth in August was fastest in Portland (up 14.8 percent year-over-year), Dallas (up 12 percent) and Seattle (up 11.3 percent). Only one of the 35 largest markets experienced annual home value declines (Indianapolis, down 1.6 percent year-over- year). In 25 of the largest 35 markets, the pace of annual home value growth in August was faster than the U.S. average.
Looking beyond the median, annual home value growth at the bottom end of the market continues to far exceed growth at the top end. In August, the typical U.S. home valued in the bottom one-third of all homes was worth $106,200, up 7.3 percent from August 2015. The typical home valued in the top one- third was worth $342,600, up 3.8 percent year-over-year.
In August, national median rents rose 1.7 percent year-over-year to $1,405 per month, according to the Zillow Rent Index. Unlike home value growth, which has remained largely stable for a while now, annual growth in rents has slowed considerably. A year ago, U.S. median rents were growing at a 6.2 percent annual pace.
On a monthly basis, national rents have fallen by 0.1 percent in each of the past two months – the first consecutive monthly declines in rent since April and May of 2014, and the first consecutive July/August monthly declines since publication of the Zillow Rent Index began in late 2010.
Rents rose year-over-year in August in 33 of the country’s 35 largest markets, declining only in Chicago (- 0.2 percent) and Pittsburgh (-0.5 percent). Annual rent growth was fastest in Seattle (up 9.7 percent), Portland (up 7.4 percent) and Sacramento (up 5.5 percent). The two Bay Area markets of San Jose and San Francisco, respectively, remain the most expensive large rental markets in the country, by far. Renters in and around San Jose should expect to spend $3,517 per month on rent; in the San Francisco area, median rent runs $3,406 per month. Los Angeles is the next priciest rental market, at $2,593 per month.
August Inventory: Slim Pickings Continue
The overall number of U.S. homes for sale continued to fall year-over-year in August, down 5.4 percent from August 2015. U.S. inventory has fallen on an annual basis in each of the past 19 months, and in 48 of the past 57. In a somewhat encouraging trend, overall inventory did rise year-over-year in a dozen of the largest 35 markets in August, including both Bay Area markets, which may be contributing to slowing home value gains in those areas.
Still, inventory remains well below peak levels from a few years ago in every large market. In all but one of the top 35 metros, inventory is down from peak by 25 percent or more (Pittsburgh is the only exception, down 24.7 percent from peak). In 31 of the 35 largest markets, overall inventory is down by more than 40 percent from peak levels.
A big driver of faster home value growth overall among more entry-level homes is a lack of such homes to buy relative to the most expensive homes. Nationwide, inventory of bottom-third homes available for sale in August was down by 9.2 percent annually, compared to a smaller 1.8 percent annual decline in the number of top-third homes available.
Looking ahead, Zillow expects national home values to continue growing, though at a slower pace, rising another 2.7 percent through August 2017 to a Zillow Home Value Index of $193,217. U.S. rents are also expected to keep growing over the next year, by 1.7 percent through August 2017 to a Zillow Rent Index of $1,429.
As the busy summer season winds down, the housing market is starting to smooth out ever-so-slightly. This is good news for frenzied buyers tired of tight inventory, rapidly rising home prices and intense competition. Inventory, while still down nationwide and in most areas, is actually starting to rise in a handful of markets, including the Bay Area, Texas and parts of the Southwest. Rent growth has slowed considerably, giving renters a chance to save enough to buy a home. But make no mistake, it’s still tough out there for buyers, especially in Western markets like Seattle, Denver and Portland that have strong job growth. Things won’t switch from a sellers’ market to a buyers’ market overnight, but conditions are improving modestly.
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