Annual U.S. home value growth slowed for the 21st consecutive month in January, but you have to squint to spot the difference this time around. When paired with inventory that is hovering near record lows, the nearly two-year slowdown in the housing market may be coming to an end right as home shopping season kicks off.

U.S. home values grew 3.8% year-over-year to $245,193, less than one-hundredth of a percentage point slower than the previous month, according to the January Zillow® Real Estate Market Report. Annual home value appreciation has slowed in each month since April 2018, but this is the smallest drop from one month to the next during that period. 

And while the number of homes listed for sale increased from record lows a month earlier, inventory is down 8% annually -- the biggest annual drop since March 2018. There were 1,500,262 homes on the market in January, up 4,295 from the previous month but down 130,310 year-over-year.

This persistently low inventory is a key reason why home value growth is expected to speed up once again. The economy has remained strong, mortgage rates are low and buyers will be competing for a limited number of homes this home shopping season. 

"As the economic storm clouds on the horizon in early 2019 cleared up, we saw buyers return in droves, taking advantage of ultra-low mortgage rates," said Zillow economist Jeff Tucker. "Our first look at 2020 data suggests that we could see the most competitive home shopping season in years, as buyers are already competing over near-record-low numbers of homes for sale. That is likely to mean more multiple-offer situations, and that buyers will have a harder time finding the perfect fit for their families. The good news for buyers is that low mortgage rates are helping to make home ownership more affordable, and home builders are responding to the hot housing market by starting construction on more homes than at any time since 2007."

Home values are growing faster than they were a month ago in about half of large markets (17 of the top 35). The hottest large markets are Phoenix (up 6.7%), Columbus (6.2%), Charlotte (5.4%) and Cincinnati (5%). Home values fell year-over-year in San Jose for the 12th consecutive month. But its Bay Area neighbor, San Francisco, saw home values grow 1% year-over-year, breaking a streak of declines that dated back to May 2019. 

Inventory fell in all but three top-35 metros -- San Antonio (+7.7%), Detroit (+6.4%) and Chicago (+0.3%). Inventory was hit the hardest in Seattle (-27.6%), Phoenix (-24.5%) and San Diego (-23.1%). 

Rent growth remained stable. The typical rent is now $1,602, up 2.3% year over year and just $1 more than last month. Rents are growing faster than a year ago in 28 of the 35 largest U.S. metros, led by Phoenix (+7.9% annually) -- also the fastest-growing for-sale market -- Pittsburgh (+7%), Cincinnati (+5.7%) and Las Vegas (+5.7%). 

Mortgage rates listed by third-party lenders on Zillow rose to a peak of 3.77% on January 31 after starting the month at 3.70%. Rates reached their monthly low on January 24 at 3.51%. Zillow's real-time mortgage rates are based on thousands of custom mortgage quotes submitted daily to anonymous borrowers on the Zillow Mortgages site by third-party lenders and reflect recent changes in the market.