Home Values – Is the Canary Gasping?

Casey Fleming

This weekend a new piece of data quietly emerged about a home value-related trend that you probably didn’t notice, and that might not seem significant at first.

1.9% of all homes with mortgages are severely underwater
Courtesy of Zillow

Zillow published a report each quarter on the Loan-to-Value Distribution of Homeowners With a Mortgage. This report details the number of homes – expressed as a percentage of the total – in 20% increments across the board. A by-product of this report is we can see how many homes are “underwater” each quarter, and happily that number has been going down every month for years.

Until now.

In the fourth quarter of 2014 16.9% of all homes in the U.S. with a mortgage were underwater – unchanged from the third quarter.

Why is this important? According to Zillow (via the Calculated Risk Blog) “While this may not seem very notable (after all, overall negative equity didn’t go up, merely flattened out), this represents a major turning point in the housing market. The days in which rapid and fairly uniform home value appreciation contributed to steep drops in negative equity are behind us, and a new normal has arrived. Negative equity, while it may still fall in fits and spurts, is decidedly here to stay, and will impact the market for years to come.”

Metro areas with underwater homes
Red areas have the most underwater homes

Now you may think this report is about negative equity. But really it’s about home values. While total mortgage debt outstanding increased in the 4th quarter, little or none of that was for underwater homes; after all, lenders don’t generally lend on homes that are underwater.

So for negative equity to have stabilized, this means home values must have stabilized too, at least in the areas with a lot of underwater homes. The metro areas with the highest percentage of underwater homes are: Virginia Beach, VI, Jacksonville, FL, Las Vegas, NV, and Atlanta, GA, in that order.

“Deeply underwater” homes are most prevalent in Las Vegas, NV, Chicago, IL, Atlanta, GA and Detroit, MI, in that order. These are areas where homes may be underwater for years, and of course represent the biggest risk of future defaults.

So there is some evidence that home values are stabilizing, at least in some areas. What about on the whole?

Home values in the U.S.
Median home prices stopped rising in 2014 Q4

NAR reported today that the median price of existing (used) homes rose to $202,600 in February, up 7.5% from a year earlier. So nationwide home values are still going up, right? One reason prices are rising is that inventories are low, Lawrence Yun, chief economist for the National Association of Realtors said. Inventory in February at 1.89 million homes was down 0.5% from a year earlier, and very low in comparison to recent years.

Home sales hit a 9-month low in January
Home sales hit a 9-month low in January

Well, then, how many homes are selling? January saw a nine-month low for existing home sales across the nation, and February rebounded but less than expected. Severe weather in the east may have had something to do with that, but it has been trending that way over the last year.

Put all these together, and ask the question, “Are home values hitting their top?”

Frankly, it’s not hard to see an argument that we might well be approaching – if nothing else – a plateau period where incomes and savings have to catch up with rising home values.

Meanwhile, back at the farm: Silicon Valley is a special place. Rising stock valuations, employee stock purchase plans, stock options and rising wages due to the competition for high-tech workers have driven incomes and savings sky-high (in the tech world at least) and our values are safe, for now. But even here new listings doubled in February, and anecdotally homes are on the market longer and there are fewer bidding wars.

If you have been waiting for the best time to sell your home, call your favorite real estate agent today. If you are in the market to buy a home, don’t expect a crash in values anytime soon, but take heart – stabilizing values and historically low interest rates might be signaling an opportunity for you – at last.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
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