US residential real estate market set to see unsettling trends in 2014

National home values in the United States ended 2013 on a high note, up 6.4%  year on year in the fourth quarter, according to the latest report from Zillow.

The US Zillow Home Value Index stood at $169,100 as of the end of the fourth quarter, up 1.4% from the end of the third quarter, and 0.6% from November.

The data also shows that after peaking at 7.1% in August, the pace of annual home value appreciation fell below 7% throughout the fourth quarter.

Metro markets that were earliest to begin their recoveries and that had been showing the most robust home value appreciation throughout much of the year, including Southern California and the Bay Area, largely cooled off in the fourth quarter.

Annual appreciation rates in Los Angeles, San Diego, San Francisco and San Jose slowed or were flat in each month of the fourth quarter compared to the month prior, a welcome sign in markets that risk crossing over into bubble territory as rising mortgage interest rates create affordability issues for home buyers.

As the market enters 2014, national appreciation rates are expected to slow considerably. Nationwide, home values are expected to rise another 4.8% through December 2014, according to the Zillow Home Value Forecast.

But local market conditions will not necessarily follow national conditions, a trend that may cause confusion and uncertainty among homebuyers and sellers. Zillow expects all but one of the nation's 35 largest metro areas, St. Louis, to show appreciation this year, but the expected annual appreciation rates vary from 16.1% in Riverside, California, to just 0.4% in Kansas City. None will approach the often breakneck pace set in 2013.

‘The housing recovery is entering the middle innings after an incredible run in 2013. Below the surface of last year's market, a number of unsettling trends started to emerge as a result of rapid and ultimately unsustainable appreciation, setting up a bit of a mixed bag for 2014,’ said Zillow chief economist Stan Humphries.
‘Affordability issues will help put the brakes on many markets that saw huge appreciation rates, like California and the Southwest, creating volatility that could potentially cause whiplash for home buyers and sellers. At the same time, we expect more homes to be available this year as more sellers enter the market and more homes get built, and a decline in investor competition should make for a more hospitable market for many buyers,’ he explained.

‘While a truly normal market remains a ways off, we expect to take more steps in that direction as appreciation moderates, negative equity recedes, federal stimulus is withdrawn and foreclosures wane,’ he added.

Among the largest 35 metro markets covered by Zillow, all but three; St. Louis down 3.8%, Indianapolis down 2.1% and San Antonio down 0.8%, showed annual appreciation in 2013. Home values in two of the top 35 metros, Denver and Pittsburgh, ended 2013 above their pre-recession peaks.

National rents rose by 0.7% in the fourth quarter compared with the third quarter, to a Zillow Rent Index of $1,302. Year on year, rents nationwide rose 2.4%. A total of 4.84 out of every 10,000 homes nationwide were foreclosed upon as of the end of the fourth quarter, down 0.4 homes per 10,000 from the third quarter and down 1.2 homes per 10,000 year on year.