Home Value Appreciation Goes into Overdrive (February 2021 Market Report)
The Zillow Home Value Index (ZHVI) rose 1.1% for the 3rd month in a row, and 9.9% year-over-year, to $272,446.
The Zillow Observed Rent Index (ZORI) rose to $1,708 in February, up 0.4% from January and the second straight month of solid growth, suggesting the national rental market may be out of the doldrums.
For-sale inventory continued to fall, now down 30.3% year over year.
In February, home value growth continued to accelerate, the rental market showed some signs of recovery but is likely to remain challenging for certain hard-hit renters in less-pricey areas, and inventory continued to plumb new lows, according to the February 2021 Zillow Real Estate Market Report.
The typical U.S. home value rose to $272,446 in February, up 9.9% from a year ago the fastest annual growth since April 2006, accelerating from already-quick annual growth of 9.1% in January. Put another way, the typical U.S. home was worth almost $25,000 more in February 2021 than it was in February 2020 ($24,473, to be exact). Monthly home value appreciation remained at 1.1% — the fastest pace on record — for the 3rd straight month (though, before rounding, it accelerated slightly from January, from 1.07% to 1.12%).
Home values were up on the month and the year in all 50 of the largest metro areas tracked by Zillow. Monthly growth in these markets ranged from a low of 0.4% in San Jose to 1.9% appreciation in Phoenix. Phoenix once again took the crown for fastest-appreciating major market, as the typical home was worth 18.3% more this February than in February 2020. San Francisco remains the slowest-growing market, but home values were still up 5.4% there, year-over-year.
In general, all segments of the market are appreciating at similar breakneck speeds, but those first-time buyers or buyers on a budget looking to buy a less-expensive home may experience just a bit more whiplash as home values rise. Homes in the bottom third of the market rose by 9.8% in value year-over-year, in line with the middle segment (9.9%) of the market but slightly faster than the 9.5% annual appreciation at the higher end.
Rental Market Turnaround?
Two months rarely makes a trend, but signs are emerging that a recovery in the rental market may be under way after a year in which rents nationwide stagnated and fell drastically in several large markets. The Zillow Observed Rent Index rose to $1,708 in February, up 0.4% from January and on the heels of a similar 0.5% monthly rise in January. The two big West Coast tech hubs of Seattle and San Francisco had their first monthly increases, of 0.8% and 0.5%, respectively, since the pandemic shuttered tech offices last March. Still, rents were up just 0.5% year over year, well behind the 3.7% annual pace they were growing in February 2020, illustrating the long road ahead to a full pre-pandemic recovery.
Among the 50 largest metro areas, Providence (9.8%), Riverside (9.5%), and Memphis (9.3%) led the way in annual rent growth in February. Some of the fastest annual rent growth among markets tracked by ZORI happened in the sunny inland West: Boise and Spokane, two mid-sized markets with booming home values, were the only ones of any size to log double-digit annual rent growth, at 12.6% and 10.6%, respectively.
Some of the most expensive markets in the country remain the most depressed compared to this time last year: New York (-9.4%), San Francisco (-9.1%), and San Jose (-8.3%) had the largest annual rent declines.
That pattern of rents falling the most in the most expensive places extends to the micro level, as well — in ways that may put added pressure on already-beleaguered renters struggling with disproportionate job losses and affordability challenges as a result of the pandemic. In the New York metro area, for example, rents in wealthier neighborhoods are down 11.6% year over year, but they're actually up 1.8% in the least-expensive areas. And in the typically more-affordable Atlanta metro, like many other less-expensive metros where rent has actually risen since last February, the increases have been biggest in the least-expensive ZIP codes, putting added financial pressures on vulnerable renters.
Where is the Bottom for Inventory?
Active inventory, or the total count of all for-sale home listings nationwide, was down 30.3% year-over-year in February, keeping home value appreciation at a boil as eager buyers found themselves competing over the very limited number of homes available to buy. Typically, inventory starts to climb year-over-year in February — as it did in 2018, 2019, and 2020 — as the market gears up for the traditional spring home shopping season. But this year inventory only fell farther, likely fueling the ongoing mismatch between huge buyer appetites for homes, but slim pickings of homes actually available to buy.
Inventory is up from a year ago in just a small handful of large markets: San Jose and San Francisco, the two most expensive major markets in the country, both had more active inventory this February than in 2020. Listings in San Jose, home to Silicon Valley, were up 27% year over year, and in the larger San Francisco market they were up 25%. The rising supply of homes in San Francisco may have played a role in its relatively soft home value growth; it remains to be seen if rising inventory will act like a cooling fan on home prices in San Jose running as hot as an overclocked gaming computer.
Recent experience may suggest another reason to expect a cooldown in Bay Area housing appreciation: In 2019, the two markets bracketing the San Francisco Bay became the first and only markets to experience significant (2% or larger) annual home value declines since 2016. San Jose bottomed out at a 12% year-over-year decline in August 2019, while San Francisco's trough was a 3% drop in October 2019. That price slump in late summer and autumn came on the heels of a surge in inventory that spring.
Still, despite limited inventory, the number of completed sales can continue to grow as long as new inventory hits the market at levels in line with historic norms. In that case, the overall pool of observed inventory would appear smaller at each point in time because the market is moving so incredibly fast and homes are going under contract just days after hitting the market. By the end of 2020 and into early 2021, the typical home nationwide spent just a bit more than two weeks on the market before going pending, down from roughly a month or more at the same time in prior years.
However, new listings haven't come on the market in the first few months of 2021 at the same pace they were towards the end of 2020, which — if the trend continues — could ultimately impede the growth in sales volume. But it’s early, and a number of one-off factors — severe winter weather across much of the country and ongoing pandemic anxiety and economic uncertainty — could be temporarily keeping some homes off the market that may end up being listed in coming weeks and months. The busy spring shopping season is just around the corner, and inventory trends in coming months will determine how much sales volume can grow.
But even though the market can move forward in this limited inventory environment, buyers would very likely welcome more inventory to choose from. But what might push more inventory onto the market? A recent survey of homeowners conducted by Zillow found that many more would be willing to sell their home and move once a vaccine has been widely distributed. If that comes to pass, we could see meaningfully more inventory hit the market from homeowners who were hunkering down due to the pandemic. And the sharp rise in home values observed in the last year may draw sellers into the market to capitalize on recent gains in equity. Aging Baby Boomers could soon begin vacating their homes in large numbers as they downsize, move to assisted living facilities or move in with their grown children, further adding to inventory. And builders, who have been quickly ramping up activity throughout the past 6-8 months, have millions of permitted homes in the pipeline that will also add to supply.
Looking Ahead
Zillow expects home values to grow 11.4% through February 2022, an acceleration from the current annual pace of 9.9% and an upward revision from prior annual forecasts, driven in part by the recent re-acceleration of ZHVI growth. By the end of 2021, we expect the U.S. ZHVI to be 12.5% higher than it was at the end of 2020.
Annual growth in sales is also expected to continue, though by slightly less than previously forecasted. We expect 1.25 million existing home sales in the first three months of 2021, 17.4% more than in the same period in 2020. Overall in 2021, our forecast calls for 6.61 million existing home sales, up 17.2% from 2020. Our sales forecast is down slightly from prior months, in part because of an ongoing, steady rise in mortgage interest rates and somewhat slower pending home sale and mortgage application activity to start the year relative to the end of 2020.
Even so, the housing market has strong tailwinds and overall market conditions point to a strong housing market in 2020, thanks largely to an improving economy, enduring demographic tailwinds and mortgage rates that remain very low compared to historic norms.
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