A divided housing market: Zillow says these 294 markets to see home price gains while these 102 markets tick lower

Last year’s mortgage rate shock was so abrupt that researchers at Zillow had no choice but to repeatedly issue sharp downward revisions for their 12-month home price outlook. In March 2022, Zillow had been expecting home prices to rise 17.8% over the next 12 months. By December 2022, however, that was slashed all the way down to a forecasted decline of 1.1%.

Fast-forward to April 2023, and not only have mortgage rates stabilized around 6.5% this spring, but the housing correction has also lost steam. That explains why Zillow stopped issuing downward forecast revisions, and is actually starting to raise its outlook.

Heading forward, Zillow economists expect U.S. home values as tracked by the Zillow Home Value Index (ZHVI) to rise 1.7% between March 2023 and March 2024.

However, that’s its national outlook. If the bifurcated housing market correction—which has been sharp out West and mild in the East—has reinforced anything it’s that real estate is indeed local.

Among the 400 largest housing markets tracked by Zillow, the company expects 294 markets to see positive home price growth between March 2023 and March 2024, while it expects four markets to remain flat and home prices to fall over the next 12 months in 102 markets.

Just one month ago, Zillow expected 238 markets to rise between February 2023 and February 2024, while it expected 156 markets to decline during that same span.

Let’s take a closer look at Zillow’s latest forecast.

Between March 2023 and March 2024, Zillow expects some of the biggest home price upticks to occur in markets like Knoxville (+4.5% forecasted home price growth), Savannah (+4.5%), Winston-Salem, N.C. (+4.4%), Johnson City, Tenn. (+4.2%), and Wilmington, N.C. (+4.1%). Simply put: Zillow's forecast model expects a great deal of strength in the U.S. Southeast.

"Many markets may have already seen prices bottom out, and those price declines may be helping entice more buyers this spring," wrote Jeff Tucker, senior economist at Zillow, in a recent report. "The very low inventory is likely a major reason that home prices [in some markets] have begun to rise again."

However, Zillow economists do expect home price declines to occur between March 2023 and March 2024 in markets like San Francisco (-2.6% forecasted decline), Boulder (-1.6%), Denver (-1.3%), Reno (-1.3%), and Las Vegas (-1%).

Relative to economists at Moody's Analytics (which expects national home prices to fall 4.2% in 2023) and Fannie Mae (which expects national home prices to fall 1.2% in 2023), Zillow's team is on the optimistic side.

Among the 400 largest regional housing markets tracked by Zillow, 182 remain below their 2022 peak price, while 218 markets, as of March 2023, are back to (or above) their 2022 peak price.

Among the down markets, the majority are located in the Western half of the country.

The reason is pretty straightforward: Western housing markets are hyper rate-sensitive.

As Fortune has previously reported, not only does the West have a high concentration of rate-sensitive tech employers, but it also has overheated home prices that are vulnerable to mortgage rate spikes. If Western buyers were already stretching themselves then (see here) while mortgage rates were low, it only makes sense that they would finally push back once mortgage rates spiked. Cue falling home prices.