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More Homeowners Under Water in Third Quarter

California hit hardest by continuing declines in value

November 12, 2008

The continued declines in value are causing more homeowners to sell their homes for less than the home's original purchase price. Over the past 12 months, 30.2 percent of homes sold were sold for a loss, up from 23.7 percent at the end of the second quarter. In 17 markets - 14 of which are in California - more than half of homes sold in the past year were sold for a loss.

The percentage of homeowners with negative equity remained fairly steady from the second to the third quarter as more foreclosures were completed and as median down payments rose in 61 markets. One in seven of all homeowners across the country has negative equity, and of homeowners who bought in the last five years, almost one-third are underwater.

Meanwhile 27 of the 163 metropolitan statistical areas covered by Zillow's reports are experiencing longer-term impact, showing negative annualized value changes over the past five years, and 12 of the markets show flat five-year annualized returns.

Most affected by long-term depreciation were hard-hit areas in California's Central Valley, like Stockton, where the five-year annualized change is -3.8 percent. Also affected are areas like Greater Boston, where the five-year annualized change is -1 percent, and the Cleveland area, where the change is -0.8 percent.

Detroit experienced the worst overall long-term depreciation, with five-year annualized change at -3.1 percent and 10-year annualized change at 0.9 percent. Nationally, five-year annualized change for the third quarter is 3.4 percent and 10-year annualized change is 6.1 percent.

"The fact that one-quarter of markets in Zillow's third quarter reports show negative or relatively flat annualized change over five years is an indication of the enormous amount of value that has been taken out of the real estate market through home value depreciation in the past few years," said Dr. Stan Humphries, Zillow vice president of data and analytics. "It's clear we are at a unique point in history; we've had seven consecutive quarters of decline, and we expect that to continue until at least the middle of next year."

The report says most markets are still seeing five-year annualized returns, but predicts more markets will slip into flat or negative long-term change as the economy continues to suffer, factors like job losses begin to further affect foreclosure rates and home values continue to decline.

Foreclosures made up almost one in five of all transactions in the past 12 months. Not surprisingly, areas with the highest foreclosure rates are the markets with some of the greatest home value declines.

In California's Central Valley, 57.6 percent of transactions in Merced were foreclosures, and in Stockton, foreclosures made up 56.4 percent of transactions. The New York metro area continued to have the lowest rate of foreclosures, with only 3.5 percent of all transactions being foreclosures.

It's not all bad news, however: 12 of the 163 markets in the report experienced year-over-year change in value of more than 1 percent. Most of the bright spots were in the Carolinas and upstate New York, with the Ithaca, N.Y. area experiencing a year-over-year change of 5.6 percent and the Rochester, N.Y. area seeing a 3.1 percent increase.

Home values in the Jacksonville, N.C. area increased 3.9 percent and were up 3.4 percent in Winston-Salem, N.C. None of those markets experienced bubbles, but instead have seen steady year-over-year growth for the past eight years.

Some homeowners continue to be largely oblivious to the reality of the housing market, however. According to the third quarter Zillow Homeowner Confidence Survey, nearly half of homeowners believe their own home's value either increased or stayed the same over the past year. But based on the third quarter Real Estate Market Reports, almost three-quarters of all homes lost value in the past year.

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