Risk of price bubble in some US markets falls back

Image The risk of a real estate price bubble in some overheated markets in the United States is receding with the latest analysis report from Zillow suggesting that fewer markets are at risk of becoming unaffordable.

The firm’s Home Value Index stood at $163,000 as of the end of the third quarter of 2013, up 6.4% year on year and up 1.2% from the end of the second quarter, but unchanged from August. The quarterly pace of appreciation was roughly half that experienced in the second quarter.

The report points out that 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.

As of the end of the third quarter, the national pace of monthly home value appreciation has fallen in each of the past three months, and turned negative in San Diego with a fall of 1.2%, is down 1.1% in Los Angeles and down 0.1% in San Francisco in September, after reaching into the 3% range in all three metros just a few months ago.

Among the top 30 largest metro areas covered by Zillow, half showed monthly depreciation 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% month on month.

‘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 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,’ he added.

Despite falling monthly appreciation, home values in most areas continue to grow year on year. All 30 of the largest metro areas experienced annual gains in September, with the largest coming in Sacramento with growth of 34.1%, growth of 33.3% in Las Vegas and growth of 31.8% in Riverside, California.

Annual appreciation is expected to slow markedly over the next 12 months as moderation spreads, to an annual pace of 3.8% nationwide by September 2014, according to the Zillow Home Value Forecast.

The data also shows that national rents rose by 1.3% in the third quarter compared with the second quarter. Year on year rents nationwide rose 2%.

A total of 5.12 out of every 10,000 homes nationwide were foreclosed upon as of the end of the third quarter, down 0.2 homes per 10,000 from the second quarter and down 1.4 homes per 10,000 year on year.