Usually when an asset starts to grow in value less quickly than it had before, it’s a bad sign. When it comes to the U.S housing market, however, analysts say it means healthy stabilization.
Home prices in the U.S. continued to decelerate in the third quarter this year, growing 6.5 percent from the same period in 2013, according to a report released Thursday from Zillow. The average home price was $176,500.
The annual rate of appreciation peaked at 8.1 percent in April and has fallen every month since then, quelling fears of a bubble in certain markets. Prices will continue to cool as certain market fundamentals, like job and wage gains, replace factors like decreased home supply and widespread investor activity that have driven price gains since the housing crisis.
“We’re transitioning from a fast form of recovery to a slow form of recovery, particularly since a lot of those factors driving us forward – household formation rates and income growth – have not fully recovered,” says Stan Humphries, Zillow’s chief economist.
Typically in the U.S., property prices rise 3.5 percent per year, Humphries says, and since about the middle of 2013, they’ve gone up 6 to 8 percent a year.
“Because 65 percent of us own homes, we tend to value it when homes appreciate quickly, but that’s really bad for people who are not in the market … buyers. For them, really high price appreciation makes homes less affordable,” Humphries says.
The rate of home price appreciation decreased most in markets that had been considered the hottest during the housing recovery. For example, in San Francisco, home value growth slowed from 23.5 percent annually in the third quarter of 2013 to 8.2 percent over the past year. Zillow anticipates they’ll grow at 2.9 percent in 2015.
Changing market dynamics put more power in the hands of buyers than sellers, Humphries says. At the end of September, there were almost 19 percent more homes on the market than last year. Nearly 37 percent of listed homes on Zillow had at least one price cut in the past month, up from 33.6 percent in September 2013.
“Sellers have had their day in the sun for several years in a row now. It’s time to get back to a balanced market and for buyers to have their day,” Humphries says.
Brian Walters, a Redfin real estate agent who works in Alexandria, Virginia, has seen changing dynamics among his clients, too.
“It seems like buyers have definitely picked up on what’s going on in the marketplace a little bit faster than sellers,” Walters says. “They’re willing to go in and offer significantly lower than what would be expected to be successful offers that seem to pan out. They’re being a lot more aggressive during the home inspection period and asking for things to be repaired.”
Zillow anticipates that over the next 12 months, home values will grow at about 3 percent, roughly half of their current pace. Affordability, coupled with lower mortgage rates and recently announced plansthat would might make it easier to secure a loan, could therefore make home ownership more possible for first-time homebuyers, often younger adults.
But Humphries says the combined effect of millennials buying homes later in life than earlier generations, and the fact that they were hit particularly hard by the recession, probably means only time – and more jobs and higher wages – will prompt them to start buying. The homeownership rate for those under 35 is 35.9 percent, compared with the national rate of 64.7 percent, according tocensus data.
“Those cyclical and structural factors hit each other at exactly the same time and benched a whole bunch of first-time homebuyers,” Humphries says.
Following the Great Recession, a high appreciation rate had been a boost for millions of homeowners who found themselves underwater, owing more on their mortgages than their homes were worth. Slowed price growth is not such great news for them, the nearly one-third of Americans effectively locked out of trading up their homes. But Humphries suggests they think long-term.
“If you want to look at the grey outer shell of the silver lining of moderating home price growth, it’s that you work down negative equity at a slower pace going forward,” Humphes says.