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Appreciation in home values is slowing definitively after nearly two years of accelerating year-over-year growth, according to the third quarter Zillow Real Estate Market Reports. Homebuyers who have been priced out of hot markets will welcome the cooling off, and the most recent data should further combat worry about another housing bubble.
The rate of annual home-value appreciation peaked at 8.1 percent in April and has fallen in every month since. U.S. home values were up 6.5 percent year-over-year at the end of the third quarter, to a Zillow Home Value Index of $176,500. The rate of appreciation is expected to continue to slow. Home values are forecasted to grow at three percent, roughly half their current pace, through the end of the third quarter of 2015, according to the Zillow Home Value Forecast.
As the market cools, the dynamic between buyers and sellers is also changing. At the end of the third quarter, there were 18.6 percent more homes on the market than last year, and more homes listed recently had a price cut. In September, nearly 37 percent of listings on Zillow had at least one price cut in the past month, up from 33.6 percent in September 2013. The softening market means homebuyers will find less competition.
The pace of home value appreciation dropped off significantly in markets that had been among the hottest at times during the housing recovery, particularly in California and the Southwest. In Los Angeles, home-price appreciation slowed from 18.5 percent annually in the third quarter of 2013 to 8.3 percent over the past year. Annual appreciation in San Francisco slowed to 8.2 percent, compared to 23.5 percent over the same time period last year.
"What a difference a year makes. At this time last year, we were worrying about a number of frothy markets that looked like they could be on the edge of another housing bubble, places where homes were appreciating at more than 20 percent per year and where buyers' heads were spinning just trying to keep up," said Zillow Chief Economist Dr. Stan Humphries. "We always knew these market conditions couldn't last, and it's good to see us now on a more natural and sustained glide path down toward more normal market conditions of roughly three percent annual appreciation and more balance between buyers and sellers. Home values should continue to grow, but that growth will increasingly be driven by traditional market fundamentals like household formation and job growth, and less by artificial stimulants like decreased supply and widespread investor demand."
Nationally, rents rose 3.5 percent year-over-year in the third quarter, to a Zillow Rent Index of $1,335, rising 1.8 percent compared to the second quarter.