Every week, often daily, I’m asked, “Paul, can you believe how much ……, home prices are rising, over asking price bids are climbing too, quantity of people came thru an open house, submitted offers on a home……. On and on it goes. The simple and short answer is “No, I cant believe it.” I can rationalize it, but in many cases I can’t support the rises. They are just too crazy to believe. But is it real and can “it” continue—it appears so.
Pricing is always a matter of supply and demand and we are in a time of exceptional demand. Rents are continuing to rise and we are seeing 1,000+ people a week moving in to the central Puget Sound area of Seattle and the Eastside. With interest rates still in the excellent range of just over 4%, it’s easy to see why people want to buy vs. rent. People who have been renting want to buy. People who lost their homes in the recession want to buy. Seniors aren’t leaving the area like they did 10 & 20 years ago when they retired, so they want to sell and buy. Millennials are buying and all kinds of “lateral” buyers want to sell and buy–changing locations, shortening commutes, increasing or decreasing their home sizes in their current areas, etc. These are all huge buyer groups and they all want to buy. We aren’t even talking about the investor buyers, who, as most agents and active buyers in the market see, are out shopping and buying in huge quantities.
So when will we find homes for all these people? It is doubtful to be any time soon. Builders are building as fast as they can but often not in areas where more buyers want to be. Those that are willing to accept longer commutes can find options but in the overall, still at very low overall availability. Prices on new construction homes in the major urban areas can be found but not commonly under the $1M mark. We are rapidly pricing many buyers out of the market and this may lead to some exodus or reduction in the quantity of people moving here. Still with our region being home to Amazon, Microsoft, Google, Boeing, Costco, Expedia and a myriad of technology, medical research and Bio-tech companies, it’s not realistic to think this inward flow will be stalling out too soon.
This means that home prices should continue to rise over the next several years. Will there be a top? Undoubtedly. When and where is only a guess for anyone. Some analysts point to expected business cycle patterns to say 2018 will see a slow down but that’s a relative term, slow down. With our region now topping the highest home value appreciation for 6 straight months, what will a slow down really mean? Rents are among the highest in the world, and still rising at some of the fastest paces; so what does a slow down really mean.
What I see is a major shift in the Seattle area home values that isn’t a bubble, but a giant ballooning expansion. Yes, the expansion will decline at some point; yes we could have some home values be somewhat in a bubble, but the general economic factors for these home values to stay up are much more likely than we’ve ever had in this region. Geo-political events can affect us; certainly; but this gigantic increase in our population seems likely to keep our housing in high demand for the foreseeable future, even if ripples appear that create some breaks in the speed.
What does this mean for you? If you are a home owner, your home has never been worth more than it is today. It will likely continue to rise in value over the coming years. If you are thinking about selling, you are in the strongest possible negotiation position. If selling and leaving the area is in your “near future” plans, you may want to expedite those plans to capture this market. Yes, your home is likely worth more next year, but you may not want to tempt a ripple in the market that may cause a short term stop to your prized position.
If you are a buyer, be diligent and vigilant. Find ways to get any extra monies you can so you can be in the strongest possible position for a buyer in this market. Don’t be timid about stretching on a house–paying $465K for a house listed at $435K may seem nuts but with home prices rising 10, 15, 20% in many cases over the last year and expected to be around 10% this year, getting the home you want, at a price you can afford should be “the” critical factor, not what price you paid vs. what the seller might have been asking. Obviously there are limits but a good agent can help you establish those. The point is your frame of reference and focus needs to be on your ability to find and buy what you want. The rising values will soon reward you for your boldness.
There are a lot of worries and speculation being voiced about home values in our area being at bubble levels and worries about when and what will cause the bubble to burst. The graph below may help allay some of those fears as it shows the monthly payments for homes over the past 27 years and how those relate to affordability and home value appreciation.
The graph shows the average house payment in our area and home sales activity over this period. What it illustrates is that while our home values have risen, as have overall sales, the decline interest rates has helped to keep our increasing home values and payments affordable. The payment peaks correspond to market value peaks and similarly to declines, whether from the 1990 decline, the Dot.com decline in 2000 or the run up and subsequent fallout from the "Great Recession" of '07-'09. This also shows that our home sales are back at full recovery in quantity and for many homeowners, at or above prior peak values. Yet our payments are well below peak values. This bodes well for continued strength in housing values.
Historically we see that our payments tend to run just below the appreciation trend line with the few rises preceding our market struggles. We had a much larger peak in the '07 run up, and certainly a much bigger fall. At the far left of the graph you can see that we've just begun to peak above the trend line again; so what does this mean? In the past we've seen 1-3 year durations to these peaks in payment values. However, we are currently in a stable to declining interest rate market and a bit more of a struggle for world economies. Might this affordability prolong our ability to remain above the trend line?
For the core Seattle and Eastside communities the answer is likely yes. Many of the large local employers are continuing to have strong employment and certainly we have more workers coming into our market from other regions of the country and the world. With a more broad-based wage increase and stable to low interest rates, it's likely we have another 2 years of value rises but as many of us might remember from our high school math classes, the theory of Regression to the Mean, will likely catch back up to us and we'll see a combination of rising interest rates and declining values at some point in our relatively near future.
While it's difficult to predict when, it is usually better to be selling into these peaks rather than at or just past them. That said, if there is no reason for you to be moving in the near future, then relax and don't worry about this. However, if you are wanting to sell in the not too distant future, then you may want to make plans to do so sooner, so you can capture the peak value of your home. If you're buying or would buy after you sell, it's still good to know our near record low interest rates are in your favor and will help you make that next home purchase the most affordable we'll likely see in any near term timeframe. Since you will likely be staying put in that new home for 5-7 years, then any intermediate downturn isn't really affecting you. You weren't planning to sell and move, so ride it out, like most of us did during the last downturn and we'll see rebounding values on the other side, just further down the road.
So does this mean we're going into or are at a bubble in the market? Not in any traditional sense as our home values are based more on job, wage and population growth; our local economy is one of the strongest in the country and the very low interest rates are keeping home affordability more in check than in previous run-up periods. Can values drop? Most assuredly. Are we likely to see something like 2007-2009? Not very likely, barring catastrophic world events. Our home mortgages and home equity positions have all strengthened and this will dramatically reduce any bump in defaults, foreclosures and dramatic drops in home values. So relax, capture your gains or step up to that next home with more confidence in your future.