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local edition or ig i nat ion ANALYTICS Home Value Appreciation to Slow in 2014 Zillow economist predicts prices will decelerate in the new year. S e c on da r y M a r k e t a na ly t ic s se r v ic i ng washington // The recent fast-paced home price appreciation across the country led some markets to the brink of a bubble, but deceleration over the summer months has Zillow analysts breathing a sigh of relief as the bubble threat deflates. Home value appreciation has declined steadily for three months, according to Zillow, and half of the nation's 20 largest metros experienced negative appreciation in September. "Far from being a negative sign, we're relieved to see more noticeable signs of cooling in the market," said Stan Humphries, chief economist for Zillow. "If home values continued to rise as they have, relatively unchecked, we would almost certainly be headed into another bubble cycle, and nobody wants that," Humphries said. At 1.2 percent, home value appreciation in the third quarter was about half that of the second quarter, according to the U.S. Zillow Home Value Index. Year-over-year, home values appreciated 6.4 percent, according to Zillow. Zillow's Home Value Index is now $163,000. While some markets continue to struggle, a few California markets— despite having escaped the worst of the housing crisis—have experienced fast-paced price gains over the past year. Rising prices threatened affordability in these markets as income growth lagged behind. In California, San Diego, Los Angeles, and San Francisco—all having posted monthly price gains around 3 percent a few months ago—experienced price depreciation at the end of the third quarter. Zillow detected monthly declines of -1.2 percent in San Diego, -1.1 percent in Los Angeles, and -0.1 percent in San Francisco. 54 | The M Report "This is more proof that the market recovery is entering a new phase, transitioning away from the bounce off the bottom we've been experiencing and finding a more sustainable level," Humphries said. "This moderation should help consumers feel more at ease in their decisions to buy and sell and will help keep the market balanced," he added. While half of the 30 largest metros experienced price declines california // Investors remain a crucial factor in the U.S. housing market. Both large institutional over the month, none experienced price declines over the year in September, according to Zillow. Zillow expects annual home price appreciation to continue to ease over the next year, reaching about 3.8 percent by September of next year. The three metros with the greatest annual home price appreciation in September were Sacramento (34.1 percent); Las Vegas (33.3 percent); and Riverside, California (31.8 percent). Rents rose 1.3 percent in the third quarter and 2 percent over the year in September, according to Zillow. and smaller "mom and pop" investors have been very active purchasing homes at a steep discount, primarily in housing-bust markets that have seen dramatic decreases in prices over the past several years. RealtyTrac recently released its September Residential and Foreclosure Sales Report, reporting that nearly half of the home sales in September were all-cash transactions, signaling significant investor presence. This proportion is up significantly from 40 percent in August and 30 percent in September 2012. While all-cash purchases and institutional investors usually go commentary: Investors Still Flooding Market Both large and small investors are still critical to housing recovery. By Dr. Peter Muoio hand-in-hand, RealtyTrac reports that institutional investors (defined by the firm as purchasing 10 or more properties in the last 12 months) accounted for 14 percent of sales in September, the highest percentage since the company's data tracking began in January 2011. While RealtyTrac's definition of institutional investors certainly captures the larger institutions purchasing houses in bulk, we consider the all-cash share of purchases a better gauge for nonoccupier home purchase activity, since smaller investors that purchase one home at a time, repair and remodel it, offer it for re-sale, and then repeat the process will generally not fall into the 10-plus purchases per year category but often purchase all-cash. Investors have started to pull back in higher-priced markets such as New York, San Francisco, and Seattle and are also sensitive to price increases that alter their return prospects. As the pricing landscape shifts, investors shift toward markets where home prices are still below $200,000, in places like Jacksonville, Atlanta, and St. Louis. RealtyTrac reports Atlanta saw the highest percentage of institutional investor purchases at 29 percent, with Las Vegas coming in second at 27 percent. Along the same lines, both Atlanta and Las Vegas were among the top large metro areas with the highest percentage of all-cash sales, with both markets coming in at 62 percent. Miami saw the highest proportion of all-cash sales at 69 percent as both domestic and international investors continue to pour into the tropical destination where median home prices have just crossed the $200,000 mark. While RealtyTrac claims that nearly half of September's home sales were investor purchases, the National Association of Realtors reports that proportion to be somewhat smaller, at 33 percent. Either way, these figures are extremely elevated and so far do not seem to be slowing. This has important implications for the housing recovery. As mortgage rates rise along with