Zillow Housing Outlook: Mixed Forecast for 2014's Market

Zillow 2013 Q4 map

By Cory Hopkins

After a robust bounce off the bottom throughout 2013 that buoyed national home values 6.4 percent year-over-year by the end of the fourth quarter, the housing recovery has entered its middle stages, setting the stage for a mixed 2014, according to the fourth quarter Zillow Real Estate Market Reports. The U.S. Zillow Home Value Index stood at $169,100 as of the end of the fourth quarter, up 1.4 percent from the end of the third quarter, and 0.6 percent from November. After peaking at 7.1 percent in August, the pace of annual home value appreciation fell below 7 percent throughout the fourth quarter as unsustainably high appreciation rates began to tail off.

Metro markets, including Southern California and the Bay Area, that were earliest to begin their recoveries and had been showing the most robust home value appreciation throughout much of the year, 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. This is a welcome sign in markets that risk crossing over into bubble territory as rising mortgage interest rates create affordability issues for homebuyers.

National appreciation rates are expected to slow considerably in 2014. Nationwide, home values are expected to rise another 4.8 percent 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 home buyers and sellers. Zillow expects all but one of the nation's 35 largest metro areas (St. Louis, -3.1 percent) to show appreciation this year, but the expected annual appreciation rates vary from 16.1 percent in Riverside, Calif., to just 0.4 percent 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 Dr. 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."

Historically, U.S. home values tend to appreciate between 3 and 5 percent annually, so a return to appreciation rates closer to those norms is welcome. But a number of distortions still remain in the market, Humphries said, including mortgage rates that are historically low and high levels of negative equity that will cloud the market likely until the end of the decade in some form.

"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," Humphries said.

Among the largest 35 metro markets covered by Zillow, all but three (St. Louis, -3.8 percent; Indianapolis, -2.1 percent; and San Antonio, -0.8 percent) 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 percent in the fourth quarter compared with the third quarter, to a Zillow Rent Index of $1,302. Year-over-year, rents nationwide rose 2.4 percent. 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-over-year.

More from Zillow about the housing market:
Why Buyers Should Consider Short Sales or Foreclosures
Don't Be Fooled By These 3 Real Estate Myths
Tips for Gen X and Gen Y Home Buyers

More from AOL Real Estate:
Find out how to calculate mortgage payments.
homes for sale in your area.
foreclosures in your area.

Find homes for rent.

Follow us on Twitter at @AOLRealEstate or connect with AOL Real Estate on Facebook.

Read Full Story

Find a home

Powered by Zillow