U.S. Home Value Growth Slows, Signalling Potential Price Decline to Come (May 2020 Market Report)

• The typical U.S. home value grew 4.3% year over year in May, to $251,598. But monthly growth slowed noticeably from April, perhaps signalling a modest price fall to come. 
• Rents grew 2.2% year over year to $1,657, a slowdown from 3.4% annual growth in March.
• Inventory was down 9.6% year-over-year, but was up slightly from April. 

The typical U.S. home value continues to grow at a healthy annual pace that is somewhat faster than prior months, a signal of the housing market's relative strength even as the coronavirus pandemic continues to batter the overall economy. But the pre-pandemic momentum that has buoyed the housing market the past few months may be wearing off, and signals are emerging of a potential housing slowdown to come.

The typical home value in the U.S. was $251,598 in May, up 4.3% year over year — a small acceleration from April's 4.2% pace of annual growth. But by more recent measures the growth rate has begun to slow: In April, home values grew 0.41% month over month. In May, that slowed to 0.35%, the biggest one-month slowdown since March 2019 and a possible indicator that the market is headed for home value declines in the coming months. 

Zillow's most-recent forecast calls for a 1.8% drop in prices through October 2020 from the highs in February, with a slow price recovery by mid-spring in 2021. The year-over-year change is expected to bottom out at -0.7%.

In 27 of the nation's 35 largest metro areas, monthly home value growth in May was slower than in April, and in five large markets (San Francisco, San Jose, Pittsburgh, Los Angeles and Sacramento), home values actually fell in May compared to April. Home value growth slowed the most over April in a mix of the most expensive areas (San Francisco, San Jose, Los Angeles and Seattle), formerly fast-growing markets (Phoenix, Columbus and Indianapolis) and metros in states with a relatively high number of COVID-19 cases (Detroit and Pittsburgh).

The slowdown isn't limited to the for-sale market, either. The typical U.S. rent was up 2.2% year-over-year in May, to $1,657/month, the slowest annual growth rate since at least 2014 and a notable slowdown from 3.4% annual growth as recently as March. Annual growth in rents slowed from the previous month in 27 large metros – and rent was lower than a year ago in both the New York and San Jose metros.

In a somewhat positive sign, the number of homes available for sale nationwide rose modestly (1.5%) in May from April, to slightly more than 1.47 million — a small bit of welcome news to potential buyers starved for choice after years of tight inventory. Still, inventory is only barely above lows of 1.45 million set earlier this spring, and is not growing at the rate typically seen during what is usually the busiest time of the year for the housing market. 

In 2019, May inventory was up 4.5% from April, and even with this May's small monthly gain it remains down 9.6% from a year ago. Increased buyer demand is helping to keep inventory low — newly pending sales were up 28.5% month over month as of the first week of June, and page views on for-sale homes on Zillow were 41% higher than a year ago at the end of May. But as the pool of willing and able buyers that remain on the market from the immediate pre-pandemic period dries up, demand is likely to wane — especially if unemployment remains high. 

This diminished demand, in turn, could contribute to the softening in home value growth we are already beginning to see.

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