Credits’ Effects May Determine Future Price Trend

What happens to home values going forward may be a test of whether or not the latest round of government stimulus works long-term.

“The next several months will be critical,” Zillow’s chief economist Stan Humphries said in commenting on a study by Zillow Real Estate Market Reports that showed negative equity dropped slightly between the second and third quarters.

“We’d been expecting to see increasing foreclosure rates during the real estate market’s slow winter season, a confluence of events that would likely drive inventory up and prices down. But now, with the extension of the $8,000 first-time homebuyer tax credit and a new $6,500 credit for some repeat homebuyers, we could see a bump in demand that could partially offset the increased supply of foreclosed homes on the market. “The credits are likely to bring continued stabilization in prices over this period vs. the price declines that we almost certainly would see otherwise. Whether this stabilization will be sustainable after the tax credits expire, however, is yet to be seen. Some of the demand that we are buying with tax credits we are also borrowing from the future, and will likely have to pay for later in the form of weaker-than-normal demand,” he said.

Zillow attributes the decline from 23% of homes with mortgages that are underwater at the end of second quarter to 21% at the end of the third to two factors: home values stabilizing in the short term and more of these homeowners being foreclosed upon.

The Zillow Home Value Index was at $190,400 for the nation, a decline of 6.9% when compared with the same quarter in 2008. But it is the third consecutive quarter where the year-over-year decline narrowed. Prices are down over 20% from their peak. Nearly 27% of the homes sold during the month of September were sold at a loss.

There are actually 24 markets where home values increased year-over-year. This group is lead by Fayetteville, N.C., where values are up nearly 11% when compared with the third quarter of 2008. Rounding out the top five are Cumberland, Md.; Gainesville, Ga.; Rochester, N.Y. and Green Bay, Wis. Another 16 markets (out of 156) were flat in home value movement. There were nine that showed an increase between the year-over-year decline in the second quarter and the year-over-year decline in the third quarter.

The market with the biggest decline year-over-year in home prices is Merced, Calif. Prices are down nearly 39% from third quarter 2008, and off 72% from the market peak. In Las Vegas, values are down nearly 32% from third quarter 2008 and single-family homes with mortgages in negative equity are nearly 82%. Rounding out the worst-performing markets are El Centro, Calif., Fort Myers, Fla., and Stockton, Calif.