Second Quarter Housing Performance…Ouch

With Zillow’s Real Estate Market Reports for the second quarter of 2008, the U.S. housing market turned in another dismal quarter of performance with a year-over-year decline in the Zillow Home Value Index of 9.9 percent. This marks the sixth consecutive quarter of year-over-year home value declines and, as in the previous five quarters, represents another record-breaking decline, the magnitude of which has not been seen in the previous twelve years of Zillow data stretching back to 1996.

The extent of the current housing woes is revealed not just in the magnitude of the annual depreciation but also in the widespread scope of the poor performance with 140 of the 165 markets (85%) covered this quarter experiencing year-over-year declines in the Home Value Index as of the second quarter. Since the peak of the national housing market in the second quarter of 2006, home values have fallen more than 13 percent, taking values back in time to levels last seen in the fourth quarter of 2004 (see chart below).

Market performance varied widely with parts of California’s Inland Empire again topping the list of weakest markets as seen in Merced and Stockton where year-over-year declines were 40 percent and 38 percent respectively. Other large metropolitan areas hit hard with market declines included Las Vegas (-27% year-over-year decline), Los Angeles (-21%), Miami (-21%), Orlando (-20%) and Phoenix (-19%). Those few bright spots out there still experiencing positive appreciation included several metro areas in the Midwest and Southeast such as Oklahoma City (1.1%), Austin (1.2%), Chattanooga (2.9%), Mobile (3.3%), Tulsa (3.9%) and, always in the list of top performers, Grand Junction, CO (4.9%) [Can somebody in Grand Junction tell us what the magic is out there?]. See the map below for home value changes across the country.

All of this real estate depreciation was translated predictably into high rates of negative equity across the nation with more than 29 percent of homeowners who purchased in the past five years currently owing more on their mortgage than their home is currently worth (leaving them “upside down” or “underwater” on their mortgages). Among those homeowners who purchased at the height of the market in 2006, almost half (45%) are currently underwater on their mortgages.

To get more insight into the difficulties in these various markets, we began reporting this quarter on a variety of Distress Signals such as percentage of homes with declining values, percentage of homes selling for a loss, and rates of foreclosures. Nationwide, 77 percent of homes declined in value over the past year (although only 38 percent of homeowners in a recent Zillow/Harris Interactive survey believed their homes had declined in value which is a whole other story). In Q2, about a third of homes (32.7%) actually sold for less than the value for which they were purchased. In Los Angeles, more than half the homes sold in the second quarter were sold for a loss (51.1%) and in Las Vegas the percentage of homes selling for a loss reached almost 70 percent. For the nation at large, more than 18 percent of sales transactions in the second quarter were foreclosures, up markedly from just 7 percent in the second quarter of 2007. Commensurate with the large home value declines and high rates of negative equity, the metro areas of Stockton and Merced both saw foreclosure rates in excess of 50 percent for the second quarter (and percentages of homes selling for a loss of greater than 70 percent).

While predicting the bottom of the market is difficult, it’s clear that with year-over-year depreciation currently in the near double-digit range, we’re going to remain in negative territory in most of the hardest hit markets for the next several quarters (even were the market to bottom out now). And stabilization of home values must be preceded by a substantial clearing of the glut of unsold homes that is clogging a lot of these metro areas, an event which is made all the harder given the large numbers of foreclosures flooding into these same markets right now. And while negative equity is a contributing factor to foreclosure rates even in normal times, there’s anecdotal evidence that the high rates of negative equity currently seen in the market are having an independent effect on foreclosure rates by inducing homeowners who haven’t experienced an acute financial hardship that typically leads to foreclosure (e.g., job loss, death, mortgage resets making payments untenable) to walk away from their homes —  frustrated with making payments on an asset than is now worth substantially less than it was originally. All in all, not a cheery picture in this quarter’s numbers.

We offer up this data in all 165 metro markets (the most comprehensive set of real estate data you’ll find anywhere) with the hope that knowledge will set you free. Even in bad times (especially in bad times), knowledge of the local real estate market is a consumer’s best friend and it’s Zillow’s mission to provide consumers with the most detailed and up-to-date information on what’s happening in the real estate market around them.