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Conditions continued to worsen in Q1 as U.S. home values continued their slide down with the Zindex posting a 7.7% year-over-year decline, the sharpest decline we’ve ever seen in our data, which extends back to 1996. Not surprisingly, the market decline brought with it increasing rates of negative equity, with one out of two homeowners who purchased during the national market peak in 2006 currently “underwater” on their mortgage, or owing more on their mortgage than the home is currently worth. Even more alarming is the finding that almost 45% of homeowners who purchased last year (2007) are already underwater on their mortgages, a fact that drives home the rapidity of the market depreciation.

Hardest hit areas in terms of value declines included many parts of California and Florida as well as the metropolitan areas of Las Vegas and Phoenix. The Los Angeles MSA was down 16% year-over-year and down 19% from its market peak in 2006. Values in the Los Angeles area have retreated to levels last seen in fourth quarter 2005, and almost 72% of LA-area homeowners who purchased in 2006 at the market peak, now have negative equity. In the Orlando MSA, prices are down 23% from the market peak in 2006 and down 19% on a year-over-year basis. Among homeowners who purchased at the peak, almost 75% have negative equity in their homes currently.

While we’re clearly in a period of market correction, it’s interesting to note that these large declines are beginning to bring five-year annualized appreciation rates in these markets back down into the range of historical norms. For example, Las Vegas metro posted a 25% year-over-year decline in Q1 2008 but the five-year annualized rate is still 6.5%. The Tampa MSA reported a 17% decline this quarter but still has a 5.5% annualized rate over the past five years. There are, of course, some areas where recent market declines have more substantially dented longer term performance, for example, in Merced, California where the current year-over-year decline is 34% and recent losses have completely wiped out returns over five years (five-year annualized rates of 0%).

There do continue to be bright spots amidst the larger backdrop of widening market deterioration. Many of the bright spots are in the South and Midwest, which for the most part managed to avoid the tremendous, and ultimately unsustainable, appreciation many other parts of the country saw in the first half of the decade. The Charlotte MSA was up 1.8% YoY, Dallas metro was up 1.1% YoY and the Oklahoma City MSA was up 5% YoY. Overall, however, more markets continue to join the ranks of down markets with 130 of the 160 metro areas in our analysis this quarter reporting negative year-over-year performance. Of particular concern is the fact that the magnitude of home value declines has been increasing during each of the last five quarters, a strong indication that home values still have further to fall.

To download graphics and spreadsheets for the national report or one of our 160 local reports, visit http://www.zillow.com/quarterlies/QuarterlyReports.htm.

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