Housing Market Continues to Cool and Normalize (May Market Report)

• The typical U.S. home was worth $226,800 in May, up 5.4% from a year earlier but down 0.1% from April.
• The median monthly U.S. rent is $1,479, up 2.7% year-over-year.
• For-sale inventory in the U.S. fell 0.5% from a year ago, but rose in 23 of the 35 largest U.S. housing markets.

The for-sale and rental housing markets continued to move in opposite directions in May, with home value growth showing gradual slowing and flattening and rent growth showing modest acceleration after a brief period of declines. Both are signs of a normalizing market after years of rapid home value gains.

The U.S. median home value rose 5.4% year-over-year in May, to a Zillow Home Value Index of $226,800, according to the May Zillow Real Estate Market Report. May's annual growth rate is still well above the historic average pace of annual ZHVI growth of 3.8 percent in a given month, but represents a notable slowdown from both the May 2018 rate of 7.5% and the recent high of 8.1% set in December 2018. After a brief acceleration during the last four months of 2018, annual ZHVI growth has slowed compared to the month prior in each of the first five months of 2019.

This national slowdown is echoed in a large majority of the nation's largest housing markets – 33 of the top 35 U.S. markets grew more slowly in May than they did a year ago, with Indianapolis and Cincinnati the only markets bucking the trend. But while most of these large markets have slowed, home values in almost all of them still grew in May – San Jose, Calif., is the lone large market in which home values fell year-over-year, declining 5.7%.

On a monthly basis, the median U.S. home value fell in May, the second straight monthly decline after a stretch of 85 straight months of month-month growth. These monthly declines are notable for their rarity over the past 6+ years, as the housing market came roaring back in the wake of the Great Recession. But their magnitude is fairly minor at this point, and monthly home value growth may be better described as "flattening" rather than meaningfully declining. In March, prior to the past two monthly declines, the median U.S. home was worth $227,200 – just $400 more than currently. As the busy home shopping season enters the summer months and buyers continue to hit the market, even modest monthly growth could easily erase that decline.

Taking a longer-term and higher-level view of the market, the current slowdown in home value appreciation – even the soft declines over the past two months – has long been expected and could be characterized as somewhat welcome in some senses. It has been widely acknowledged that the aggressive pace of home value growth over the past several years was unsustainable. Buyers simply couldn't keep up, and home prices are correcting. This steady return to "normalcy" – something U.S. housing hasn't experienced in two decades – will carry on, and we should expect some continued, but increasingly moderate, volatility. And the significant recent drop in mortgage rates, as well as renewed rent growth, may help U.S. home values get back into positive territory sooner rather than later.

Rent Growth Speeding Up

While home value growth has slowed, rent prices are accelerating. The U.S. Zillow Rent Index rose 2.7% in May, to $1,479/month. After slowing throughout much of 2018, the annual pace of rent growth has accelerated in each of the first five months of 2019 compared to the month prior. Rent was up compared to May 2018 in all 35 of the nation's largest housing markets, and annual rent growth is currently faster than a year ago in 28 of those 35.

But while rent growth has been speeding up, it is still growing at a largely sustainable pace, slightly below recent annual growth in incomes that has been at or above 3 percent for much of the past year. Sustainable rent growth, coupled with still-tight inventory, means renters may stay tenants longer, keeping rental demand high and rent growth on a manageable upward trajectory. Renters comfortable in their apartments may be more able to cover rent increases, and could choose to stay renting longer than they otherwise might have. And a lack of inventory – especially at the entry-level end of the market – means it may take longer for many potential buyers to find the right home for them, also keeping them renters longer.

Inventory Stabilizing

There were 1,584,512 U.S. homes listed for sale in May, down a scant 0.5% from a year ago, though inventory was up year-over-year in roughly two thirds (23/35) of the nation's largest metro markets. For-sale inventory grew the most in Las Vegas (up 41.8% year-over-year), San Jose (40.6%), Denver (25%), Seattle (23.9%) and San Francisco (21.4%).

After an almost 4-year stretch in which U.S. inventory fell continuously year-over-year in every month, the number of homes available for sale appears to have hit bottom but not yet begun to rebound. Instead of moving decisively in one direction or another, over the past 8-12 months inventory has been bouncing up and down by small amounts. Some of this stabilization in inventory is coming from homes staying on the market longer, rather than growth in new listings. In April (the latest month for which data is available), the typical home spent 70 days on the market before selling, up modestly from 67 days in April 2018.

Critically, despite this relative recent stability in inventory, the number of homes available for sale remains far more constrained at the bottom/entry-level market segment than at the top, creating additional pressure and competition among first-time and/or lower-income buyers. There were more than twice as many high-end homes available for sale in May than there were entry-level homes. Almost half (46.7%) of all homes available for sale nationwide were in the top tier; a little more than a fifth (22.3%) of available inventory was priced in the bottom third of all homes.

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