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Sorry to spoil the party, but we're not at the bottom!

There's an interesting thread in Zillow Advice right now discussing whether we're at a bottom in the housing market. And the discussion is very timely because today Zillow released its 1st Quarter Home Value Report, detailing what is happening to home values in 161 cities. It's by far the most comprehensive report about the housing market in terms of its breadth and depth. True, individual Zestimates have their issues (more about Zestimate accuracy), but the Zillow Home Value Index is very reliable because it has enough aggregated data to wash away inaccurate Zestimates -- in other words, statistically speaking, for every Zestimate that's too low, there's another one that's equally too high, so the ZHVI is highly reliable.

So, what does the data say?

First a reminder about methodology. Zillow's reports speak to the value of almost every single home in the country, not just those that sold in the period. This is a very improtant distinction, especially in the current market environment in which less expensive homes have become a much bigger part of the market than traditionally. As a result, data that reports on median sales price (e.g., NAR's data) is very unreliable and dramatically overstates the level of decline to the typical homeowner. I previously discussed the unreliability of median sale price here.

OK, here are the highlights -- er, the lowlights, I mean:

the USA ZHVI (the median value of almost every home in America) declined 14.2% in 1Q09 versus 1Q08, the 9th straight declining quarter
Americans lost about $700 billion in home values in the 1st quarter alone
1 in 5 American homeowners (20.4 million homes) are now underwater on their mortgage

Was there any good news?

A few markets were bright spots, including Fayettville NC (military bases) Oklahoma City (solid local economy) actually gained in value
Some markets that have been very hard hit (e.g., Los Angeles and San Diego) are no longer increasing in the rate of decline. In other words, although home values are still declining there, they're not declining any faster than they already had been declining. So things are still bad, and getting worse, but not getting more worse. I guess that passes for "good news" nowadays.

And now for the really bad news:

There is a massive amount of "shadow inventory" waiting to come online. Specifically, 12% of homeowners say they're "very likely" to put their home on the market if there was evidence that the market was turning around. Another 8% were "likely" and another 12% were "somewhat likely". In short, there might be another ~20 million homes waiting in the wings to come onto the market as we see signs of a recovery. When asked what "sign of recovery" they needed, 71% said "increasing home sales in my neighborhood". That's a massive amount of potential new listings, when considering our current ~4 million listings. To be fair, some of the current 4 million would have been sold before those new sellers come on the market. But the point is the same: as I said in Forbes, this is going to be an L-shaped recovery. New listings are going to come onto the market rapidly as soon as people believe we've bottomed, and the new listings will sop up what little new demand there is.

Sorry to be a party-pooper. I'm not going to spin things overly positively or overly negatively. I'm just calling it like I see it.

Links:

Zillow Home Value Reports media room

Master spreadsheet for the USA

Find all 161 cities here

Stan Humphries' (Zillow's head of analytics) post on Zillowblog

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Posted by Spencer Rascoff on 05/06/2009 10:38 AM

Comments (68)

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68 Comments on Sorry to spoil the party, but we're not at the bottom!

MAY

Hi Spencer, Good article, and I'm with you. In Jacksonville, FL, I know of many people who have been told by their realtors over the past 2 years to not put their home on the market. They are all waiting and waiting and many are getting anxious to sell and move on. The inventory will jump up in numbers again soon.

Every party has a pooper that's why we invited you, Party Pooper, Party Pooper!....

Spencer.............GREAT post....and I agree........although, I do see a glimmer of hope in South Florida...but am very concerned about the shadow inventory..right on! And we cannot trust pending sales count..this is a spin!

I could be wrong here but don't we know we're at the bottom when we're already climbing out of the hole and we've actually bounced???

Glad I hadn't popped the cork on the champagne yet, Spencer. Nice gold star too!

Oh I was going to sing it but Rich beat me to it... trying to decide whether or not to reblog.... this.

Will there every truly be a bottom? We are seeing house go under contract at a very strong rate right now but there is still asegment of the market that is flat and even declining. You say there is shadow sellers but the pent up demand is the same for buyers.

There are buyers waiting for the bottom and there are sellers waiting for signs of life and you have the smart ones who are out there right now cherry picking the best inventory.

The buyers who are waiting for the bottom will miss it because it will take you and other 6 months to report the statistics.

Right on point. I was loking at the Cyberhomes data for my area and, with the exception of three towns, all of the greater Waterbury area in CT has seen an increase in home prices over the last month. But the shadow inventory is something to be worried about, not only in other parts of the country, but in Connecticut as well.

According to our local appraiser here in Florence Oregon on the coast we have bottomed out. This report was released a couple months ago also stating we don't know how long we will be on the bottom. Except for a few overpriced ones that have been chasing the market down,we have seen much drop in prices for quite awhile. We did really drop fast a couple years ago. I think all depends where you are. We don,t seem to have more than a half dozen REO's and a half dozen short sales at any given time. WE are 80% retirees in a town of 8,000 and most paid cash. Even tho its slow and starting to pick up, I do feel fortunate to be here!

Arghhhhhh.

Hi Spencer -- While your macro analysis may have some validity, since all real estate is local, actually, hyper-local today, and there more sophisticated ways to selling homes these days, one such great technique is redesign and renovation to out perform the competition, individual homeowners should take great caution in reading too much into what you present. After all, all anyone need to do is buy or sell one home. In the worse real estate market in 60 years, I've sold 2 of my last three listings in multiple offers and just lost out as a buyers agent in multiple offers when over 50% of the competition is under contract at near list price -- evidence that hyper local markets and understanding these are the keys for an individual seller.

Well, since you said Oklahoma City is doing well I guess I have to like Zillow today. I have to say I will wait for Nouriel Roubini to declare a bottom before I believe in a bottom. I think that your shadow market should include independent builders around the country who are about to tank. Even in Oklahoma City that has low inventory, low foreclosures, we are seeing banks stop lending to independents for new home specs. The lack of continuing financing will increase bank owned new properties even in the markets that seem okay. I would also add that not enough attention is being paid to the affordability factor. Without a bubble or subprime, markets have to adjust to the local market economy. If people can qualify and close, maybe the bottom is near. If not, look out below!

Spencer, how interesting. Is there any regional data? I looked but couldn't find on zillow, am sure I am just being dense... would really appreciate the link.

Here in sunny Florida we have just about had enough of negativity. We are seeing an uptick in the market and look forward to having a fine year. While I may agree with the concept of shadow sellers, there are a ton of "hiding" buyers just waiting to buy that bargain home. As most of the local newspaper are reporting positive elements on the real estate market in Central Florida, buyers will be more confident they are making the right choice. In my estimation if a buyer does not buy this year they will be kicking themselves next year as prices increase. Yes, I said increase!

Good stuff spencer. Wish Zillow was a little better on the values but then again you can never replace a good CMA by a great agent

I have nothing to add to this good article...as Rich Jacobson says it all for me in the first comment.

Two thought processes on the shadow inventory. It comes to reason that as these people are putting their homes on the market many if not most will be trading up or down so the shadow inventory means that there is likely to be increased demand too. It doesn't necessarily mean that prices will decline it just means that they are unlikely to rise. There's a fine line here.

The bigger issue is REO properties that the banks will be releasing on the market in the coming months. For some crazy reason banks are holding s. I've read that they will likely flood the market with many of these properties in the coming months! That's the shadow inventory that I'm worried about!

Zillow has NEVER impressed me as being a reliable source for information on real estate. They are too general and it proves it here again. Zillow is stating that we are not at the bottom of the real estate market. WHERE? Every town is different... and a buyer needs to contact a local realtor to discuss this.. not check with someone in Ohio (for all intends and pursposes) for information on a home in Texas. What a joke Zillow is in my opinion.

valerie osterhoudt

Joanne-

Yup, there are downloadable spreadsheets for every MSA from the left hand side of our real estate market reports page. For instance, here is the link to the San Francisco spreadsheet.

Hey Spencer!

This was very informative, and I think your dead on. The shadow market, I think, is going to hault a recovery, and push it farther back. The recovery is years away, but at least we will have plenty of homes to sell! :)

-Lisa

Spencer, until we run through the inventory of short sales and foreclosures, there will be downward pressure on prices. And as others have said, knowing when we are at the bottom will be seen from a rear view mirror - as in the past. But interesting stats all the same.

Sharon

Interesting post. Considering the report is looking at Zestimates, not sure how accurate it is on a local level. I must agree it is interesting but may not be accurate for my area. An more interesting statistic I would like to see is how many home owners ask questions on Zillow each week about the wildly inaccurate Zestimate their home.

" ... for every Zestimate that's too low, there's another one that's equally too high, so the ZHVI is highly reliable."

Say, what!!!!!!!!!! My Mom used to say, "Two wrongs don't make a right".

Just great we were having a party and you brought the whine, I think this summer will be ok but next winter will be the bottom. And by the way I love zillow. Thanks

Valerie-

We agree - real estate is local; that's why we break out our data by MSA (and ZIP, neighborhood, and city). And we agree that no computer will take the place of a local professional who knows the market. Zillow is a starting point for people to do research. When they get ready to make the final decision, we certainly recommend they consult a local professional.

Mark-

We're very transparent about Zestimate accuracy. You can see the breakdown county by county here. Also, our real estate market reports are based on the Zillow Home Value Index data, which you can learn more about here.

Hi Spencer, Interesting take on the data. Your premise ..."in other words, statistically speaking, for every Zestimate that's too low, there's another one that's equally too high, so the ZHVI is highly reliable." is a little scary. Don't forget the huge amount of pent up buyers out there as an offsetting factor.

Interesting blog post. I've personally noticed more high Zestimates than low ones--in our area. Thanks for all of the thoughts on this issue. I wouldn't call you a party pooper--maybe just a realist!

Interesting comments. I personally agree with you because my Lake Norman NC market area is still saturated with inventory. There are some signs of life....our sales volume is not down AS MUCH as it was last month versus 2008. But, I strongly feel that until our inventory of homes comes down significantly, we can truly only experience pockets of stronger sales and stability. Not matter what the experts are saying all over the country, I know our supply versus demand is the key to our own "bottom".

I saw a spike in activity in March/April but now May has settled out again to be slower than normal.

I don't think we're at the bottom either. We have way too much inventory in our area, across all price levels.

Interesting post. Whose bottom are we talking about exactly? The "National Housing Market's" bottom? The National Housing Market is a joke as all real estate is local in nature, even 'hyper-local' as Chris put it. So basing your local buy/sell strategy on National reports makes little sense to me, other than the fact that the media will pick up ANY negative news and run with it, making you HAVE to deal with it on a local level.

What is a bottom exactly? If it's the point where prices are going back up, the only way we're going to know that is reviewing it in history. If it's the point where the drops are slowing and the sell pace is picking up...well, a lot of areas are already there.

I think Kate's answer to the 'shadow market' is dead-on. Most of these sellers will be moving up or down, so yes, it's a hit to the market on the inventory side, but it's also a plus to the buyer pool side.

Finally, I have to ask, what exactly is meant by a "recovery" anyway? I ask because if the idea of recovery is getting back to the boom year prices, then we're probably about 20 years or more away from it (in general). Just some food for thought

Considering Zillow has been grossly off-the-mark with the majority of the true home values, in the areas I service and specialize in, I don't trust the Zillow platform very much.

Thank you all for the terrific comments. Here's the video of me discussing this on CNBC this morning.

I completely agree that all real estate is local, and that discussing national real estate trends is not as helpful as local trends. However, the media likes to look at national trends, for understandable reasons.

Spencer, I want to add that not only are a lot of sellers waiting to place their homes on the market but the lenders also have a bunch a property that they are sitting on as well. I think foreclosure activity is going to increase as the year goes on.

My micro market of Poinciana Fl is one of the worse in the country but right now inventory is dropping and sale are at an all time high. Values though are still declining. Strange times that we are in.

And here's the Fox Business segment from this morning, which focuses more on negative equity.

Spencer, I agree....the second phase of the ARM adjustment has not hit as well.....

Bettina

Spencer, I agree....the second phase of the ARM adjustment has not hit as well.....

Bettina

This report is very interesting. San Diego had some strong buying activity in early March and it carried through into April. What I have to wonder is, if the reports we hear about the number of yet unannounced Notices of Default after the moratorium, and they proceed to foreclosure, won't this even further exacerbate the price declines that haven't as you say, worsened, all the while potentially increasing the number of sales. It is not just first time home buyers in the market pool of Buyers here. It is investors with a lot of cash buying many of these for the positive return on investment as the rental market remains strong. The sub prime crisis that had started the free fall is not what will be leading this further decline in property values as I think the Short Sales and REO's will continue to have a dramatic effect.

There is no doubt that there is more inventory to come on the market. We still have the 2005 ARM's to adjust and then the fall out from the owners who qualified for a loan modification but still won't be able to make the payments after a few months.

I personally don't put any weight into much of anything Zillow says. They are too off in our area to make any meaningful impact on our markets. I would agree we're not out of the woods yet but Zillow is the last opinion I'd quote to determine which way the wind is blowing.

Spencer. I lean toward the argument that the bottom has yet to arrive...although we are close.

But your argument of "shadow inventory" could be matched by the amount of buyers that are sitting in their very own "shadows" waiting to feel what they think is the bottom. My point is because we are yet to see the bottom, we are yet to see the urgency and the true amount of buyers that will show face when they are truly scared they will miss the opportunity.

Thanks for the post.

Spence... I have put out several reports suggesting we are 6 -18 months form the bottom. That is a conservative number...an up market for 14 years would suggest to me a downward value for 5 +/- years I think 2010-2011 for recovery.

Why , yes there is a shadow market. There always will be, just like any other market. Impatience in upward movement creates stagnation and downward trends in value. The slack is picked up by speculators. I give you oil as a similar market.

But oil will rise in price,( as we have beeen told) , and so will real property. We won't know the bottom until after it has happened. If a party pooper is to be noted...It can't be truly substanciated accurately until after the fact. That being, your analysis has baby teeth, not biscuspids.

The timing of your premise, that it will come later than sooner is speculative.

Everybody doesn't need to sell. Some need to sell. Many want to sell. but the market will take care of this.

So I'll place my opinion, Underwater will float sooner than your model. Bounce occurs when the cost to produce a house is more than the market price. As we continue to procreat at present levels, demand will stabilize the market. Fear, will never stabilize.

Spencer, the slower rate of decline without hitting the bottom in housing sounds eerily familiar to the way the job market is going. Still getting worse but not as bad as fast.

Spencer, IMO until the foreclosure's and short sales are NOT the most selling in MI we will still decline. At the bottom here? No, but we are busy now, just at lower price points. I should know our data in a few days.

I am curious how you got to this number, "1 in 5 American homeowners (20.4 million homes) are now underwater on their mortgage"?

The estimates that I have seen are about half this number. If the 20 million number is accurate, that is a significant problem.

This is what I wrote to one of the brokers in Rhode Island who wanted to move some inventory. I never heard from him again. :)

Rhode Island is continuing to go down, and WILL go down until it hits:

Bubble Mania Ground Zero* Price Levels (circa year 2000)

I advised my clients to refrain from buying in 2007 and most of 2008, unless there were deals you just could not pass up. I had no clue what the market would do. I did put my 401K money in the money market in August 2008.

Now I am advising my investing clients to scoop up at 1998-2002 price levels. You just can't time the market. You bring the timing to you by buying at the right valuations and enjoy the cash flow while the market corrects itself.

* When bankers started smoking what they should not have been smoking at workplace.

Agree with you -- will be interesting as the market keeps unraveling.

It's scary if we are NOT at the bottom. I just did an analysis of our area and think we still have a way to go before we can say we are coning out of this.

Jonathon & Benjamin

Spencer,

Great information. Can anyone tell me why we didn't get the $15,000 incentive for all home buyers, instead of this $8,000 for first time buyers?

Many Blessings,

Jim

PS. Thought you'd enjoy seeing my grandsons, Jonathon and Benjamin instead of my mug.

Mark, you asked about the methodology on my negative equity statistic. Basically we look at the Zestimate for almost every home in America right now and we compare that with the amount of the originating mortgage(s) at the time of purchase. We assume that no new debt was put on the house, and that no principal was paid down -- both of these are pretty standard assumptions for companies that calculate this sort of thing. We arrive at ~ 1 in 5 homeowners with negative equity (including those without a mortgage -- it's even worse for those with a mortgage, obviously) or about 20 million homes.

Jim, you asked why the $15K tax credit didn't make its way into the final stimulus bill. Simple politics. It actually really surprised pundits because it looked like it was in until late in the negotiations. I expected it to be in there at the end, but it didn't happen. I haven't seen a good recounting of why it didn't get through. Maybe we should ask NAR! ;)

Let me try to clarify my perspective on the current housing situation. I was trying to make three points in my media interviews today.

First, Zillow's data (and my opinion) is that home prices have further to fall in almost every major city, and certainly at the national aggregate level. Home values will decline from today's levels because of new foreclosures and short sales, as well as an inventory glut from homes already on the market. New job losses will also contribute. Additionally, there are still a lot of ARM resets coming (I don't recall the specific number) which will create a whole new group of distressed sellers, unable to cover their mortgage obligations and unable to refi because of negative equity.

Second, Zillow's data shows a significant amount of homeowners have negative equity -- about 20 million homes, or about 1 in 5. Six months ago it was 1 in 7 homeowners that had negative equity. As you know, negative equity is a serious issue for a homeowner because they can't refi with negative equity, and they can't draw down from a HELOC which means they can't fuel personal consumption off of their equity. Third, there is a massive amount of "shadow inventory" waiting in the wings, which will come online as new listings when the housing market starts to turn. Conservatively, there are about 20 million homeowners who are basically waiting to list their home. About 1/3 of homeowners say they're at least "somewhat likely" to list their home in the next 12 months if they see "an improvement in the housing market". Using that 1/3 number would get us in the 30 million range, so I'm being conservative when I say about 20 million. As you probably know, there are about 4 million homes for sale now. The reason this "shadow inventory" matters a lot for all of us is that it will stall a recovery, because new listings will come on the market to sop up any new demand that comes. As a result, we'll see an "L-shaped" recovery, rather than a "V-shaped" recovery.

OK, so now that I've thoroughly depressed all of you....

First, what advice would I give to owners? Refi if you can, and don't sell if you don't have to.

To renters and first-time-homebuyers? Buy! Even though this probably isn't the bottom of the market, if you're going to stay in your home for a few years it doesn't matter that much. And timing the bottom precisely is impossible anyway. So take advantage of the huge amount of inventory, the low prices, the attractive financing, and the government subsidy of your first time home purchase.

To sellers: if you want to sell your home, price it correctly (which is probably lower than you'd like).

And finally, to real estate agents: Homeowners, buyers and sellers are terrified in the current environment. They need your help more than ever -- you're like a doctor to them in the midst of a health care epidemic. Educate, console, counsel, and you'll be invaluable to your clients. And of course, most of all, remember to market yourselves online because that's where your clients are.

Spencer: Zillow and Craigslist will change the face of buy-side real estate as we know it. You guys give way dang much information to the buyers. Scary indeed. No wonder Realtors "love" Zillow so much. :) I am not too sure about Zillow Mortgage Marketplace, but hey who am I to say what is good for a company with overheads.

By the way, I did not realize that you guys created a graph for what I have been teaching my clients for months now. LOL!

Your chart is going to provide me with a third-party validation. Well, actually my clients will think that I ripped it off of Zillow. But that is fine by me. Whatever works. ;)

Lee, More data and graphs than you'd ever want can be found here. Click on the little graph icons next to each city name.

MAY

Spencer. Thanks. No wonder sell-side Realtors "love" you guys so much. Hey, put me in the Zillow fan club. ;)

I enjoy watching National and Regional treads but real estate is local. Even differs by zip code.

I'm by no means calling a bottom in our market and will not until the data confirms the bottom. By then we will be on the way up and those waiting for the bottom will have missed it.

We are seeing bottoming signs. If they continue we will have a bottom in the next three month. If they fail, it will be longer. No one knows where the exact bottom will be or when. Those who don't have risk tolerence should not buy now.

Those who catch the bottom (mostly by accident) will feel like geniuses.

Mark Watterson wrote:

"I enjoy watching National and Regional treads but real estate is local. Even differs by zip code."

Real estate differs within a ZIP code....

This post has certainly allowed for a great discussion. I just don't see the benefit of national housing news when we all understand that real estate is local.

I would much rather see a post about Spencer's last link.

I couldn't agree with you more. Thanks for the great post today and getting it out there. Reality is tough isn't it! We've got a long way to go yet.....

Patricia Aulson/Portsmouth NH Real Estate

I think there certainly is a place for national trend monitoring... but I don't think enough is said about how the national trend doesn't actually apply to any specific place...

And when are you guys going to put your error data ON Zestimates instead of making it cryptic and a click or three away?

Lane, you wrote "And when are you guys going to put your error data ON Zestimates instead of making it cryptic and a click or three away?" Well if we knew the error rate on a specific Zestimate, we'd just adjust the Zestimate so the error was zero!!

We only know the error rate on a Zestimate once the home sells, and we do show that on the home details page. For example, here's a home in my neighborhood which just sold for $1.475M. The current Zestimate is $1,466,500 (as of 5/6 -- remember, we do Zestimates 3x per week). Click on the "Zestimate & Charts" section on the left side of the page and it will take you here.Notice that the previous sales of the home are shown on the graph so you can see what the Zestimate accuracy (the line in the graph) was at the time of each sale. In this home's case, it looks like the Zestimate was very accurate at the time of the 2/27/09 sale but our Zestimate was way too high at the time of the 2005 sale.

Spencer, thanks for the explanation.

Currently, I use Zestimate for trends and historical data only, so that works very well for me. In my book, I have used a few snap-shots from Zillow of the properties I have been involved in, in the past.

A hope that they fall into the "Fair Use" provision of copyright. :)

MAY

This is lifted straight from Zillow's accuracy. For the Atlanta MSA, you are within 5% once out fo 4 times... So, are you telling people that the just gave them a $400,000 valuation, and they have a 25% chance of the house being worth $380k to $420k? And a 10% chance of it being worth either $$360k to $380k or $420k to $440k? Or that there is a 10.5% chance of it being worth either $320k to $360k or $440k to $480k? Or a 34% chance that it is worth less than $320k or more than $480k?

Maybe you will let them know that about half of the time your $400,000 valuation is worth $446,400 or $353,600... since the median error is 11.6%

The thing is that the Zestimate could rise or fall by a significant percentage and still be within the range of error..

Atlanta-Sandy Springs-Marietta, GA MSA

99%

25%

45%

66%

11.6%

MAY

Spencer...It is always better to be open about the results. I am sure that you would be okay being "wrong" if it meant a bettereconomy for everyone. But your integrity should be #1 on the list. :)

MAY

Spencer, thanks for the data. I appreciate the various dialogues and commentaries, just as much as your blog. Hot topic, and some great feedback, opinions. I love AR. Elaine in Lincoln, CA

MAY

Real Estate is local. Some national trend data from Zillow persuaded my seller to up the price on a lot.

I love Zillow really but I hate it when the consumer thinks they are an expert after one or two sessions. I will give it a couple of weeks before the seller and I will have to have a more reasonable conversation.

JUN

And here I was sure we were on the way back up but still feeling the "whiplash" effects. How depressing indeed. I was feeling lucky that I had managed to survive this far. I am not confident that I will survive much longer, especially if we have not yet hit the bottom knowing we will continue to feel the effects long after we start bouncing back.