Residential property values will see appreciation of 3.5% over the next 12 months, but interest rate increases could put a damper on price growth in several markets.

The first-quarter increase is a slight drop from the fourth quarter's 3.7% annual projection made by Veros Real Estate Solutions.

"The big news is that despite the overall market strength, interest-rate-sensitive markets are starting to show signs of cracking," said Eric Fox, Veros vice president of statistical and economic modeling, in a press release. "These markets are predominantly very expensive, and interest rate increases significantly soften demand for consumers on the margin of affordability."

San Francisco home values are expected to increase by 4% over the next year, but this was down from 6% in the fourth quarter. Its Bay Area neighbor, San Jose, would have a similar experience. Over the next 24 months, appreciation is expected to sink in both markets to just 1%.

Seattle should see annual appreciation of 10.7%, as the supply of homes for sale is barely over one month and unemployment of 4.2% is below the 4.8% national average, Fox said. Similarly Denver's forecast of 9.7% appreciation is because of a 1.2 month inventory of homes for sale and unemployment of 2.8%.

There are 12 markets where values will depreciate over the next year, with the three worst in Arkansas: Hot Springs, down 2.6%, Fort Smith, down 2.4%, and Pine Bluff, down 2.1%.

"Consistently, the worst performing markets in the country are areas where population trends have either been flat or on a steady decline for years," Fox said.

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