Housing is better when it is boring

Housing Is Better When It's Boring

November 27, 2013

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The housing market is changing – for the better.

It’s been a big day for housing news: building permits rose to a five-year high, and the Case-Shiller Index showed home prices jump a whopping 13.3% year-over-year in September.

It’s impressive data, and it’s easy to think the market has turned back into a runaway train. But looking at these two data points without context might lead you to the wrong conclusion, when in fact, the housing market is slowing down. But that’s a good thing, and here’s why:

Since bottoming in late 2011, the housing market has really bounced back. As recently as this summer, home values were rising 7% year-over-year, according to data put together by our economics team here at Zillow, and some very hot metro markets have experienced annual appreciation above 30 percent, levels not seen since the height of the housing bubble.

For homeowners who watched their home values plummet in earlier years, this has been a boon. At the same time, historically low mortgage interest rates and a slowly but surely improving jobs market helped lure more buyers into the market.

But now we’re seeing things slow down. The Zillow Home Value Index – which is more timely than the Case-Shiller Index – showed U.S. home values falling for the second consecutive month in October. Those were the first consecutive monthly declines in two years. The pace of annual appreciation fell to 5.2 percent, and we expect it to moderate further over the next 12 months, to 2.7 percent.

Historically, homes in the U.S. appreciate at roughly 3 percent to 5 percent per year, so sustained appreciation much above that is a red flag. Additionally, home values were rising much faster than incomes in many areas, and while very low mortgage rates helped plaster over this growing affordability problem, it is becoming more exposed as rates rise. If homes get too expensive for local homeowners to buy, then home prices by necessity have to slow their growth or even fall.

In other words, slow and steady wins the race, and housing is better when it’s boring.

So why the high numbers today? First, Case-Shiller: Zillow Chief Economist Stan Humphries this morning said: “Honestly, I’m just not sure what to make of these numbers. A slew of recent reports, including Zillow’s October data out today, pending home sales and new home sales, all indicate a slowing market with formerly stratospheric home price appreciation rates beginning to fall back to earth. Zillow’s own data, which excludes REO re-sales, shows the same markets that dominate the Case-Shiller indices – particularly some of the California markets – to be cooling. This suggests that Case-Shiller’s inclusion of REO re-sales is heavily skewing overall appreciation in these markets. If people are really focused on REO appreciation, they should take a closer look at Case-Shiller. But I think most people are more concerned about the broader market, and I’m not sure Case-Shiller is doing a good job of characterizing that market.”

And as for the building permits, that’s likely due to short inventory of available homes. Low inventory was one of the drivers of the robust appreciation earlier this year, and there’s been a lot more demand for homes. Now, builders are really beginning to pick up steam in order to meet this strong demand. And as more housing units make their way onto the market, the supply crunch will fade, and some of the huge price increases we’ve seen because of many buyers fighting over few properties will begin to ease.

All of this adds up to a housing market that currently looks much different than even a few months ago, and will continue to evolve and find its footing over the next several months. The key words are moderation and balance, as the market slows to more sustainable and healthy levels.

Photo: Shutterstock

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