Home Price Depreciation Helping Some Markets Avoid Bubble

Many of the larger markets throughout the country that were on the brink of a housing bubble are now in safer territory as home price appreciation slowed down in the third quarter.

According to the latest Zillow real estate market report, the U.S. Home Value Index stood at $163,000 at the end of the third quarter, up 6.4% year-over-year and 1.2% from the conclusion of 2Q13.

Meanwhile, the pace of appreciation during the third quarter of 2013 was only half of what occurred during the second quarter, the Seattle-based firm said.

“Far from being a negative sign, we’re relieved to see more noticeable signs of cooling in the market. If home values continued to rise as they have, relatively unchecked, we would almost certainly be headed into another bubble cycle, and nobody wants that,” said Stan Humphries, chief economist at Zillow.

In the beginning of 2013, many metropolitan cities, particularly those in California, were flirting with the territory of being in a bubble due to relatively modest home price declines during the crash but very robust gains seen through the recovery process. These markets risked potentially becoming unaffordable for typical buyers as home values grew quickly, mortgage interest rates rose, and income growth failed to keep pace.

To keep these homes affordable, price appreciation needed to slow down and that has happened over the past three months, Zillow revealed.

Furthermore, from August to September, property values have turned negative in markets like San Diego (down 1.2%), Los Angeles (1.1%) and San Francisco (0.1%). Just a few months ago, Zillow said these cities experienced home price appreciation into the 3% range.

Among the top 30 metropolitan markets covered by Zillow, half showed monthly declines in home values at the end of the third quarter. As recently as July, all 30 of these cities had appreciation greater than 1% on a monthly basis.

“This is more proof that the market recovery is entering a new phase, transitioning away from the bounce off the bottom we’ve been experiencing and finding a more sustainable level,” Humphries said. “This moderation should help consumers feel more at ease in their decisions to buy and sell, and will help keep the market balanced.”