Home values continued to decline in the fourth quarter of 2007, leaving one in three new homeowners with negative equity, according to a report of national home values released today by Zillow.

In the fourth quarter, home values fell 3.5 percent from the previous quarter to a national indicator of $224,890, and declined 3 percent from the same period a year earlier.

Condos posted the largest year-over-year declines, down 7.4 percent to $229,017, followed by single-family homes, down 5.5 percent to $230,908. Condos also saw quarterly declines of 4 percent, while single-family homes saw quarterly declines of 4.4 percent.

The report is based on the median “Zestimate” valuation, and measures the value of all homes in an area, not just those that have sold during the quarter. “Zestimates” are Zillow’s coined term for home valuations the company has compiled via county records and other information sources. The company uses an algorithm to aid in calculating the Zestimate number that appears with the home on Zillow.

Zillow has received much criticism over the accuracy of Zestimates, and the company says it has worked to improve the margin of error on these values since launching two years ago.

Zillow’s home-value report agrees with what others have shown: that home values indeed are decreasing at the national level, with a select group of markets still showing annual price increases.

According to a government index that excludes transactions involving homes with mortgages above the $417,000 conforming loan limit, home prices fell in 21 states during the third quarter, leading to the first quarterly decline in average U.S. home prices in 13 years (see Inman News story.)

That report, from the Office of Federal Housing Enterprise Oversight (OFHEO), showed year-over-year price declines in an increasing number of markets during the third quarter — 89, compared with 67 in the second quarter of 2007, according to an analysis by PMI Mortgage Insurance Co. (The third quarter is the most recent price data available in the OFHEO index.)

The continued decline in home values means many U.S. homeowners saw equity slip away while more homeowners were pushed into negative-equity situations, meaning they owe more on their mortgage than the home is currently worth.

Zillow says that those at most risk of being underwater on their mortgage are those who bought in the last two years when most markets peaked. Of those who bought in 2006, 39 percent now have negative home equity as do 30 percent of those who purchased in 2007. By comparison, only 3 percent of those who purchased five years ago, in 2003, and less than 1 percent of all homes in the U.S., regardless of when they were purchased, have negative equity.

The rates of negative equity are typically higher in markets that have had significant value declines and relatively low median down payments. Parts of California, Florida, Nevada and Arizona, where the median down payments were zero to 5 percent during the last two years and year-over-year value drops in the fourth quarter were in the double digits, have negative-equity rates two to three times the national median, according to the report.

“With consecutive declines over the past five quarters, we haven’t seen the housing market bottom yet, and it may very well get worse before things get better,” said Dr. Stan Humphries, Zillow vice president of data and analytics. “Even many markets that have been largely insulated from recent declines, like some in the Pacific Northwest, reported notable value declines in the fourth quarter.”

While most homeowners still have positive equity in their homes, the amount of equity in most areas deteriorated in the fourth quarter, the report found.

“It’s important to remember that value declines and negative-equity situations are largely unrealized effects for most homeowners unless they are in a situation where they must sell or withdraw equity immediately,” Humphries added.

“The decline in values, combined with the recent rate cuts by the Fed should make entering the market more attractive to would-be buyers, but we may not see any effects until the spring when the home shopping season usually kicks off,” he said.

A full comparison of home values in the 125 metro areas representing 43 million homes can be found at Zillow’s Web site.

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