Annual Home Value Growth Continues to Slow, But the Market may be Turning (August 2019 Market Report)

• The median home in the U.S. was worth $229,600 in August, up 4.9% from a year ago. Quarterly growth reached an annualized rate of 3.4% – up from 0.4% in May – suggesting the market may be re-accelerating even as annual growth continues to slow.
• Rent growth continued to accelerate, up 2% year-over-year to $1,595.
• For-sale inventory – which has been persistently low for the past few years – fell 3.9% from a year ago, the biggest drop in 16 months.

The annual pace of U.S. home value growth continued to slow in August, falling below 5% for the first time since 2015. But more-timely, quarterly data indicates the market may have begun to turn over the summer, showing modest acceleration in growth compared to earlier in the year.

The median U.S. home value grew by 4.9% year-over-year in August, to $229,600. It marked the eighth straight month in which U.S. home values grew more slowly year-over-year than in the month prior, and was the first month since August 2015 in which annual growth failed to exceed 5%. Annual home value growth also slowed last month compared to August 2018 in 46 of the nation's 50 largest metros.

But while annual growth continues to slow, quarterly growth is picking up somewhat. Quarterly growth reached an annualized rate of 3.4% in August – up from 0.4% in May – suggesting the market may be re-accelerating even as annual growth continues to slow. And this growth was echoed in local markets: Quarterly growth in 38 of the 50 largest metro areas was faster in August than it was in May.

Quarterly growth may be a better indicator of more-recent market shifts and inflection points, since it compares the most recent market conditions to those from only a few months ago instead of a full year ago, when conditions were much different. Over the summer, for example, the Federal Reserve cut key benchmark interest rates and consumer mortgage interest rates fell to near-historic lows – a marked contrast to a year ago, when mortgage rates spiked to their highest level in years. This may not yet be reflected in annual growth figures, but lower rates may be pushing more buyers into the market – which is likely to have a strong upward push on home values recently and in months to come.

Starved for Inventory

Still, while it may be a good time to lock in a low, 30-year fixed mortgage rate, conditions aren't all rosy for would-be buyers. The market remains starved for inventory – the (seasonally adjusted) number of U.S. homes available for sale in August fell 3.9 percent from a year ago and stands at its lowest level since at least January 2013, when Zillow first began tracking the measure. After a six-month stretch from September 2018 through February 2019 in which inventory grew modestly year-over-year in every month, inventory levels have fallen year-over-year in each of the past six months. This sustained inventory drought, coupled with strong demand from buyers attracted by incredibly cheap mortgage financing, is another factor that's likely to keep upward pressure on home values.

And inventory shortages are widespread – the number of homes available for sale in August was lower than a year ago in 34 of the nation's 50 largest markets. For-sale inventory fell the most from a year ago in Pittsburgh (-19.2% year-over-year), St. Louis (-17.9%) and Memphis (-17.1%). Inventory was up the most from a year ago in Las Vegas (+34.9%), San Jose (+10.2%) and Detroit (+9.4%).

Rents: Steady as She Goes

Would-be buyers grappling with low inventory and the prospect of re-acceleration in home value growth can maybe take some solace in a rental market that is largely stable for now. The median U.S. rent grew 2% year-over-year in August, to $1,595 per month. National rent growth is faster than a year ago, and while 46 of the 50 largest markets are showing deceleration in annual home value growth, annual rent growth is accelerating in 41 of the largest 50 markets. Annual rent growth was fastest in August in Las Vegas (up 6% YoY), Phoenix (+6%) and Atlanta (+4.7%).

But it's important not to overstate this acceleration in rent growth, and to instead take a wider view of general stability in the national rental market. Annual rent growth was very rapid (3% or higher in each month) over a two-year stretch from September 2014 through August 2016. And annual rent growth was minimal (less than 1% in each month) for a brief stretch spanning the end of 2017 and into early 2018. But over the past 12 months, annual U.S. rent growth has not been slower than 1.5% year-over-year, nor faster than 2.5%. Since the end of 2011, the average annual pace of U.S. rent growth in a given month has been 2.4%, so current growth is in line with the long-run.

This steady-as-she goes rental market could give would-be buyers some more time to find the right home for them in a tight inventory environment and/or to save up more money for a down payment, with little fear of a large rent hike hanging over their heads – for now, anyway. But much of the new construction of rental properties has been focused in more-expensive downtown cores in recent years, and even these newer, generally pricier buildings are having little problem leasing up and staying full. That points to a recipe for continued rent growth. If/when more people stay renters longer, this added demand – coupled with the reality that apartment construction overall has been inadequate for years, aside from the recent surge in urban construction – could mean rent growth once again starts to become unmanageable.

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