RealEstateEconomyWatch.com

Home values continue to drop across the nation but at an increasingly slower pace according to new price data released by Zillow.com. The news was an encouraging sign for the housing sector.

The Zillow home value index fell 9.9 percent in July from a year earlier compared to a 10.5 percent drop in June on a year over year basis. The index fell 0.4 percent in July from June. The year over year depreciation in the index has now improved for six consecutive months. Based on Zillow’s index, home values are down 21 percent from their peak in the second quarter of 2006. 

Zillow’s index not surprisingly closely correlates with the Case-Shiller 20-city home price index which fell 15.4 percent in June from a year earlier compared to a 17.1 percent drop in May compared to a year earlier. However, the Case-Shiller index has dropped 31.5 percent from its 2006 peak, compared to a 21 percent drop in Zillow index during the same period.

On a local basis, the Zillow index fell 32 percent in Las Vegas from July of last year, while Phoenix reported a 25 percent drop in home values compared to a year ago. Similarly, Miami and Tampa home prices fell 21 percent and 20 percent from a year ago, respectively.

Although home price depreciation has improved during the past several months, economists worry that an increasing number of foreclosures may deter further improvement. Economists are expecting a meaningful rise in foreclosure filings over the next several years due to planned rate resets on option ARM and interest only mortgage loans. A rise in foreclosures promises to increase the supply of existing homes which, in turn, exerts downward pressure on home prices. In addition, foreclosure properties usually sell at 15 to 25 percent price discounts from non-foreclosure properties also brings home prices down.

Looking forward, a likely resurgence in foreclosures combined with already excessive home inventories in many of the nation’s major metropolitan areas portends unfavorably for a meaningful improvement in home price depreciation in the near term. Most economists expect home prices to begin to stabilize sometime in the middle of 2010.