Home Prices Up 6%, Markets Retreat from Bubble Brink

Home prices are up more than 6% on a year-over-year basis, according to the third quarter Zillow Real Estate Market Report, but a summer-long cool down in home value appreciation has helped some markets step back from the brink of bubble territory.

Zillow’s Home Value Index was at $163,000 by the end of the third quarter of 2013—unchanged from August, but a 6.4% increase from the previous year and up 1.2% from the second quarter. On a quarterly basis, the pace of appreciation slowed by around half compared to the second quarter.

A few metro areas have been “flirting” with reaching bubble status for months, says Zillow. These already-expensive markets—most located in California—experienced relatively modest declines during the crash, but robust gains during the recovery. 

With home values growing quickly and record-low mortgage interest rates climbing upward once more while income growth has failed to keep pace, some metros risked becoming unaffordable for the typical buyer.

But the national pace of monthly home value appreciation has fallen in each of the last three months as of the end of the third quarter, Zillow finds, and actually went negative in three markets: San Diego (down 1.2%), Los Angeles (down 1.1%), and San Francisco (down 0.1%) in September. 

“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 Zillow Chief Economist Dr. Stan Humphries in a statement.

Still, home values in most areas stayed on an upward trend on a year-over-year basis. All 30 of the largest metro areas experienced annual gains last month, according to Zillow.

The September leaders include Sacramento, Calif., up 34%, and Las Vegas, up more than 33%, followed by Riverside, Calif., up nearly 32%. 

In the next 12 months, Zillow predicts that annual appreciation will slow “markedly” as moderation spreads, to an annual pace of 3.8% nationwide by September 2014. 

“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 of slowing home value appreciation. “This moderation should help consumers feel more at ease in their decisions to buy and sell, and will help keep the market balanced.”

Written by Alyssa Gerace

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