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National housing market cooling down, could benefit overheated markets

As the housing market cools down, Zillow notes that some markets are on the brink of a bubble and could benefit from a slow down.

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housing market forecast

Housing recovery slowing down

After analyzing over 350 metro areas in America, Zillow’s Q3 Real Estate Market Report reveals that national home values rose again in September, climbing 6.4 percent year-over-year to $163,000. Home values were up 1.2 percent from the second quarter, but unchanged from August. The quarterly pace of appreciation was roughly half that experienced in the second quarter.

The housing market is showing signs of cooling, but the upside is that there are overheated markets that Zillow says could benefit from the slow down, perhaps saving them from the brink of a bubble.

For months, a handful of already expensive metro areas that experienced relatively modest declines during the crash but very robust gains during the recovery, particularly in California, have flirted with being in a bubble. These markets risked potentially becoming unaffordable for typical buyers as home values grew precipitously, mortgage interest rates rose from record lows and income growth failed to keep pace. In order for homes to remain affordable and to avoid a market bubble, the pace of home value appreciation in these markets needed to slow down or even fall.

At the end of the third quarter, the national pace of monthly home value appreciation has fallen in each of the past three months, and was negative in San Diego (-1.2 percent), Los Angeles (-1.1 percent) and San Francisco (-0.1 percent), after reaching into the 3 percent range in all three metros just a few months ago. Among the top 30 largest metro areas covered by Zillow, half showed negative monthly appreciation at the end of the third quarter. As recently as July, all of the top 30 metro areas showed positive monthly appreciation, with none exhibiting a monthly pace slower than 1 percent month-over-month.

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Relieved to see a cooling in the market

“Far from being a negative sign, we’re relieved to see more noticeable signs of cooling in the market. If home values continued to rise as they have, relatively unchecked, we would almost certainly be headed into another bubble cycle, and nobody wants that,” said Zillow Chief Economist Dr. Stan Humphries. “This is more proof that the market recovery is entering a new phase, transitioning away from the bounce off the bottom we’ve been experiencing and finding a more sustainable level. This moderation should help consumers feel more at ease in their decisions to buy and sell, and will help keep the market balanced.”

Despite falling monthly appreciation, home values in most areas continue to grow year-over-year. All 30 of the largest metro areas experienced annual gains in September, with the largest coming in Sacramento, Calif. (34.1 percent); Las Vegas (33.3 percent); and Riverside, Calif. (31.8 percent). Annual appreciation is expected to slow markedly over the next 12 months as moderation spreads, to an annual pace of 3.8 percent nationwide by September 2014, according to the Zillow Home Value Forecast.

Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

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