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Zillow's Outlook on Home Prices for 100 Key U.S. Markets: California Facing Hardships

Updated: Jul 13

If you've been keeping up with the news over the past couple of years, you know that predicting the future of the housing market, or any economic market, is almost impossible.


Global economies and markets, from European energy to Chinese real estate, have been highly volatile.


Despite these uncertainties, people still try to predict the future, even though we’re not very good at it. Nonetheless, Zillow has released its latest home value forecast through August 2023, highlighting trends in the largest U.S. markets.


Below, you'll find a chart showing the projected home value changes for the 100 largest U.S. markets according to Zillow’s Home Value Index.


As the chart shows, many markets are expected to continue appreciating year-over-year (YoY), while some are beginning to decline. Zillow’s forecast for the entire U.S. is 1.4%, down from the 7.8% forecasted in July.


What has changed since then? The Federal Reserve has continued to raise interest rates and indicated that this will continue as long as inflation remains high. While inflation has slightly decreased from its peak, August’s Consumer Price Index (CPI) report still showed a YoY price growth of 8.3%, which is clearly unsustainable.


According to Zillow, Wooster, Ohio (not in the top 100 markets) will see the largest home value growth at 12.8%, while Fairbanks, Alaska (also not in the top 100) will see the biggest decrease at -7%.


Among the top 100 markets, the highest growth is expected in Knoxville, Tennessee, and Tampa, Florida, both at 5.3%. San Jose and San Francisco, California, are projected to experience the steepest declines at -4% each.


Knoxville’s housing market is up 23% YoY with a median sales price of $319,000. However, demand is declining, with homes sold above list price dropping to 42.4%, 10.5% lower than in August 2021. Despite this, Zillow still predicts that this market will grow more than others.


Why? It's a matter of supply and demand. We still face a significant supply issue, and despite the drop in demand, the limited supply is still a crucial factor. Median Days on Market in Knoxville remain lower than pre-COVID levels at 41 days.


Falling demand doesn’t mean the housing market is crashing

Decreasing demand will naturally lower prices as sellers compete more to sell their homes. But this doesn’t cause a crash on its own and doesn’t indicate a catastrophic crash like in 2008.


Prices dropped by 33% during the Great Recession, but that was due to mass defaults caused by a subprime lending crisis. Today, many homeowners have low fixed interest, 30-year mortgages that are affordable due to stricter regulations from the Consumer Finance Protection Bureau, which was established in 2011.


In other words, declining prices, especially at the current slow rate, have minimal long-term impact. This is a natural aspect of free markets, though the Fed has certainly influenced consumer spending behaviors.


In April, Dave Meyer predicted that a housing correction would involve a 5-10% price decline if it happened. This was before larger interest rate hikes slowed the summer market. As of September 2022, according to Redfin, national median home prices fell from $430,000 in May to $406,000 in August, a 6% decrease.


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Looking at markets like San Francisco, where median home prices peaked at $1.6M in April and have since dropped by 24% to $1.3M, we see significant disparities across U.S. markets. San Francisco and several other Californian markets may face their own mini-housing crises, but it’s uncertain if this will affect other states.


These markets were overinflated beyond what the typical American family could afford. Moving into these cities, unless already in California, was nearly impossible. Many are migrating out of California, with few moving in, creating a much larger demand issue than in other markets, leading to faster price declines than in more affordable places like Pittsburgh, Pennsylvania.


Final Thoughts

Use the data above to decide where to invest your money. Remember, forecasts are not always accurate and are frequently revised, but they can help make reasonable assumptions about market performance over the next few months to a year.


Of course, conduct your own research. Look into population trends, business growth, and other internal market dynamics before choosing an investment location, but use this information as a starting point

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