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Home-price moderation a 'welcome development,' economist says

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Rapid and steep home-price appreciation has left some wondering if another bubble is being blown up — but Zillow’s chief economist says the country is still 16 percent from its peak and has a few years before it will reach that level again.

Stan Humphries, chief economist at Zillow Inc., spoke Thursday at the USD Burnham-Moores Center for Real Estate’s 14th annual Residential Real Estate Conference: Outlook 2014.

Humphries said that many people, especially non-real estate professionals, associate affordability and bubbles tightly with home value appreciation. He used Phoenix as an example, explaining that prices fell 65 percent after the peak in 2006, so appreciating by 20 to 30 percent year-over-year “is not crazy.” He said economists look at affordability relative to other factors, such as how much income it takes to buy real estate and the rental equivalence.

Humphries showed a graph illustrating the percentage of median household income required to buy a median-priced home with a 20 percent down payment and prevailing mortgage rates.

Between 1985 and 2000, the average percentage of income required to buy a median-priced home was 20 percent nationwide. In San Diego, that number was 31 percent. Now, nationwide, it is at about 15 percent, and in San Diego it’s at about 33 percent.

In a year, with San Diego’s forecast appreciation at about 6 percent and mortgage rates expected to be at 5 percent, the percentage of median household income required to buy a median priced home increases to 38 percent.

When homeowners are historically used to spending 31 percent, then it will make its way back to that — either through increasing incomes or flattening prices, Humphries said.

National home prices, excluding distressed sales, peaked in 2007 and fell 24 percent to their trough in 2011, Humphries said. Prices are growing nationally at about 5 percent over last year as of October, and had been growing at 7 percent earlier this year. Appreciation has started slowing down since Fed Chairman Ben Bernanke mentioned tapering.

“Our opinion is that moderation is a welcome development,” Humphries said.

On average, U.S. home prices appreciate by 3.5 percent each year, and appreciating by twice that amount is “fine when bouncing off the bottom,” but there are “problems when it’s sustained over time,” Humphries said.

San Diego home prices historically increased by 4.3 percent per year, and are now up by more than 20 percent from 2012, Humphries said. Across the country, each state is seeing home-price appreciation well above the historical average, showing an “incredibly robust recovery in almost every market,” Humphries said.

Humphries forecast home-price appreciation nationwide to grow in 2014 at half the pace of this year, rising by about 2.7 percent. This prediction is under the assumption that interest rates will increase to the 5 percent range by the end of 2014.

If tapering proceeds slower than anticipated, Humphries said there will be higher appreciation than his current forecast.

The forecast also assumes that there will be a continued increase in construction starts. More supply and higher mortgage rates will mean a continued moderation in home value growth, Humphries said.

Humphries forecast San Diego home prices to appreciate by 6.2 percent.

California markets have had “fantastic housing recoveries” but there were also large housing recessions in the state, Humphries said, and a lot of the robust recoveries are due to the “very hard” housing recession in many markets.

Using a nonjudicial foreclosure process also helped the markets recover more quickly than states that use a judicial process, he said.

San Diego and Los Angeles markets experienced a slowdown with prices roughly flat in the past few months, Humphries said. Prices in Riverside are up about 30 percent, and Humphries said there are few markets that are as volatile as Riverside in the long term.

“To be a consumer in Riverside — buckle up because you’re in for a wild ride,” Humphries said.

Negative equity — which occurs when the value of an asset falls below the balance on the loan used to buy that asset — is down substantially from peak levels, with 21 percent of homeowners with a mortgage nationwide in negative equity. One-third of Americans don’t have a mortgage, including those homeowners in the mix, about 15 percent of all homes are in negative equity nationwide.

In the San Diego metro area, about 15 percent of homeowners with a mortgage are in negative equity. In the city of San Diego, that number is about 12.5 percent.

Negative equity keeps sellers on the sidelines, causing prices to rise. As negative equity goes down, liquidity increases and there’s a moderation in home prices, Humphries said.

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