U.S. Housing Markets That Have Bottomed

The housing market has been at the center of U.S. woes for years, but it is also key to the nation’s economic recovery. Although April’s Case-Shiller home price index offered a cloudy outlookon home prices, real estate website Zillowis forecasting that the end may be near, expecting home values nationwide to bottom during the final three months of 2012.

Applying a statistical approach that uses inputs from individual local markets including unemployment, vacancies, foreclosure rates and more, Zillow provides an estimate of when home values will hit a turning point. According to its model, some cities have already reached the bottom for prices and are on the way up. The following list represents markets that Zillow predicts have bottomed between Q3 2011 and Q1 2012.

While Case-Shiller directly takes into account foreclosure resales, Zillow’s model looks primarily at the seasonally adjusted market for nonforeclosure sales and includes all homes in the area, not just ones for sale or that have been sold. This provides broader insight into how consumers are buying and selling homes in conventional transactions, says Stan Humphries, Zillow’s chief economist. “If you look over a year-over-year basis, both new and existing home sales are showing trends anywhere from 5 to 10 percent above where they were last year,” Humphries told CNBC. “If this continues for the balance of the year, it is likely to offset the imbalance of supply and demand. Overall, the excess of supply has been what has been pushing prices down.”

But what would a true bottom in home prices look like? Humphries expects that a true turn would see prices gradually increase for three to six months following the national bottom, which would include an end to sustained declines on the local level. However, instead of home price appreciation of between 2.5 percent and 5 percent per year experienced before the bust, he expects growth rates to be below this historical norm, settling between 1 percent and 3 percent annually. The big cause for this slower pace of price growth is the high rate of negative equity, which stood at 28.5 percent in in the third quarter of 2011, says Humphries.

Based on the Zillow analysis, 19 of the 30 largest U.S. real estate markets will reach a bottom in 2012 or have already reached a bottom. In the markets that are predicted to have already made the turn, prices are expected to appreciate by 0.3 percent to 6.5 percent by March 2013, depending on the city. However, the biggest threats to a sustained recovery are systemic concerns, which are most strongly tied to domestic employment growth and the state of the global economy.

So, which metro areas have already reached a bottom in home prices, according to Zillow? Click ahead to find out.

By Paul Toscano
Posted 9 May 2012

Projected bottom in home values: Q1 2012
Projected 1-year home value growth: +0.9%
Peak in home values: May 2006
Fall from peak: -38%

“Los Angeles typifies that prognosis of a long, flat bottom, with an increase just under 1 percent in growth,” says Humphries, who points out that the city is no stranger to housing recessions. One thing motivating buyers is that home affordability is on the rise — the city’s rental index is up 4 percent this year, while home values over the same period are down 5.4 percent. What helps Los Angeles the most is that it hasn't seen an overcorrection to the same extent as other cities, sowing the seeds for further price stabilization.

For Los Angeles, as well as the rest of the country, the biggest risk to a turnaround remains unemployment. If job growth begins to peter out or there are more signs pointing to a weaker overall economy, many buyers may choose to sit out another year, putting off the potential recovery, says Humphries.

Projected bottom in home values: Q4 2011
Projected 1-year home value growth: 0.2%
Peak in home values: October 2007
Fall from peak: -15.4%

Although Dallas-Fort Worth is expected to experience relatively flat growth in home values through spring 2013, the area also saw a relatively mild housing recession, with prices only down about 15.4 percent from the October 2007 peak. Currently, home values in Dallas are at 2004 levels. The region has been buoyed by high oil prices, which could serve to further insulate Dallas and other Texas cities from external shocks.

Projected bottom in home values: Q3 2011
Projected 1-year home value growth: +6.5%
Peak in home values: March 2006
Fall from peak: -54.2%

Out of all of the metro areas analyzed by Zillow, Phoenix is expected to experience the most significant rise in home values through March 2013. “Phoenix is doing so well it makes you scratch your head,” says Humphries. “What we expected for most markets was an L-shaped recovery, and Phoenix is defying that trend.” One of the major driving forces behind this push is the investor dynamics of the city. Because of the large number of foreclosures Phoenix, has attracted second-home buyers, retirees and international buyers, as well as those looking for investment properties.

Projected bottom in home values: Q4 2011
Projected 1-year home value growth: +0.9%
Peak in home values: May 2006
Fall from peak: -10.7%

Denver was also fortunate to have a relatively mild housing recession, and a big reason for that was the city saw less of a housing run-up, says Humphries, who points out that Denver hasn’t seen a lot of the over-exuberance seen in most of the coastal areas. Prices in Denver have been up overall year-over-year and are expected to continue this trend into 2013. Although Denver values are still at 2002 levels, they are only 10.7 percent lower than the peak in 2006, so gains that may feel small in other U.S. cities are significant for Colorado’s largest metro area.

Projected bottom in home values: Q1 2012
Projected 1-year home value growth: 0.9%
Peak in home values: June 2007
Fall from peak: -19.6%

Although Philadelphia’s home values are off nearly 20% from their all-time peak in June 2007, Zillow estimates that the area’s housing market reached a bottom during the first quarter of 2012. The projections indicate that the city will recover faster than the nation as a whole even though home values in the area and the rest of the country peaked at the same time.

Philadelphia’s rental values have been rising significantly, 15.6 percent year-over-year, compared with a 4.3 percent drop in home values over the period. This trend suggests that affordability is moving in the direction of home ownership in the city.

Projected bottom in home values: Q4 2011
Projected 1-year home value growth: +5.6%
Peak in home values: May 2006
Fall from peak: -54%

“The Miami market has overcorrected,” says Humphries. “Affordability of homes almost creates a self-sustaining demand of its own, where homes are so affordable and rents are rising.” However, Miami remains one of the hardest-hit housing markets in the country, with prices off 54 percent from their peak in May 2006. Prices in Miami are down to 2002 levels. While the market has potentially hit bottom, it will certainly require years to fully recover.

Projected bottom in home values: Q1 2012
Projected 1-year home value growth: +0.3%
Peak in home values: September 2005
Fall from peak: -20%

Boston was one of the first U.S. cities to enter the housing recession in mid-2005, but if trends continue, the market looks to be on the way up. Currently, home prices are at 2002 levels while rents have been gradually rising over the past year. “You normally expect the first markets to enter a recession to be the first ones to come out, which seems to be the situation in Boston,” said Humphries.

Projected bottom in home values: Q1 2012
Projected 1-year home value growth: +1.6%
Peak in home values: May 2006
Fall from peak: -55.6%

Southern California has been one of the country’s epicenters for foreclosures and collapsing home values over the past several years, down 55.6 percent, according Zillow. Although home values in the area may be rising gradually over the next 12 months, even this projected upward trajectory would see home prices down overall between 2011 and 2013. For most current homeowners, however, this gradual increase would offer little relief to the painful drop in values experienced since the beginning of the housing bust.

Projected bottom in home values: Q1 2012
Projected 1-year home value growth:
Peak in home values: October 2005
Fall from peak: -37.1%

Along with the rest of Southern California, San Diego was hit hard by the recession, with home prices in the city falling 37.1 percent from the 2005 peak. However, in the past year foreclosures in the city have been dropping, as have foreclosure resales, while year-over-year rent is up nearly 4 percent, signaling a stabilization and a rise in affordability. With home values in the city on par with their 2002 levels, San Diego values are projected by Zillow to increase by 1.7 percent through March 2013.

Projected bottom in home values: Q4 2011
Projected 1-year home value growth: +2.5%
Peak in home values: June 2006
Fall from peak: -52.1%

Like Miami, Tampa is beginning to buck the trend experienced by the rest of the state, expecting a rise in home values of 2.5 percent in the next year after potentially hitting bottom at the end of 2011. Tampa is also showing divergent movement between rental and home prices over the past year: While rental prices are up 3.9 percent, home values have dropped 4.2 percent over the past 12 months. In Tampa, this relative increase in affordability for homebuyers may have the potential to bring supply and demand of housing back into equilibrium.

Projected bottom in home values: Q4 2011
Projected 1-year home value growth: +0.5%
Peak in home values: March 2007
Fall from peak: -21.4%

During the recession, the effect on the St. Louis real estate market has been mild, down about 21 percent from its peak, according to Zillow. Over the past year, St. Louis home values have dropped 4.8 percent, while over the next 12 months prices are expected to rise by 0.5 percent. Although this may offer little relief for underwater homeowners, a slow, gradual recovery is what most cities can expect moving into the housing rebound, says Humphries.

Projected bottom in home values: Q3 2011
Projected 1-year home value growth: +0.8%
Peak in home values: May 2006
Fall from peak: -55.9%

Orlando was hit particularly hard by the housing bust, with home values cut in half since their 2006 peak, including an overall decline of 3.6 percent in 2011. However, by the end of 2011, the city’s home values were on the rebound, according to Zillow. Like many cities on this list, the biggest risk to a recovery in Orlando is systemic: A weak economy and a rise in the unemployment rate could turn the projected positive trends for Florida’s cities around, says Humphries.