Every Which Way But Loose….??
We’ve been bombarded by divergent economic news events and statistics for the past few years. The forecasts seem just as divergent. There seems to be some consensus that a recession is coming but when? How severe? How long? What can we do about it? There’s no consensus on these answers. We, the general public, have done remarkably well at coping with this chaos and our ability and willingness to ignore this chaotic data only confounds the so-called experts and their forecasts. We were going into or in a recession in early 2022 but to most of us, it didn’t feel that way. The data said some things, life said others.
So how does this impact real estate? Interest rates doubled last year—bringing on more fears of an economic or at least real estate “CRASH”. This much of a rate hike would typically slow down buyers and we’d see the real estate market cooling off dramatically. That’s what the FED said they wanted—“to kill the real estate market”! However, the rise in interest rates created a shortage of homes for sale as some who were considering selling, stopped and sat still. They didn’t want to give up their low interest rate by selling their home, then turn around a buy a different home at likely a still higher price point and much higher interest rates. So what happened? The market didn’t crash. Prices did drop, in some of our area 25%, but in other areas only 10%. Then buyer demand kicked back in and sales came back with multiple offers and prices being bid back up 10-25%+! While these bids may not have reached our peak prices from the early spring of 2022, they still were and are going well above the valley of prices from November/December of 2022. Yes, overall sales volume, quantity of homes selling, is lower but the market is still quite active and the search for more homes to buy is still quite strong.
We’ve seen a pretty steady rise in median home prices in all of our region since the first of this year. Month over month in most areas and price ranges, we’ve seen a steady rise in home prices. But how with interest rates so high? Simply put—demand. We still have plenty of new household formations going on; people with new jobs in our area or in need of new houses and able to afford the homes they want at the interest rates of today. They’re all looking to and planning on refinancing their homes in 1-2 years, when we expect rates to be back into the 5% range, but for now they can and are affording to buy. It’s this willingness to spend, with confidence in their incomes, that is confusing the financial forecasters. Most forecasts expected the threat of higher interest rates would stop the market. Add in the threat of a recession and/or a job loss would surely stop people from spending but—the spending goes on. In housing, in travel, in automobiles, certainly in grocery spending. We’re all spending more and confounding “the experts”. Jerome Powel, FED Chairman, is still threatening to raise interest rates more to slow down the economy. We will see if these come to pass. New jobless claims are up, near peak levels for the past 4 years, but our confidence in the overall American economy, in our abilities to get that next job with a stable or better income is keeping the economy moving ahead.
There are certainly many economic indicators that are not encouraging but so far none of them are really dampening the housing market or the economy. There’s lots of talk about worrying but the overall sentiment appears to be more of an eye for opportunity and caution but a willingness to take on risk. We’re seeing some people diversify out of the stock market into real estate—fearing if there is a real economic collapse, real estate will perform better as we continue to have demand—in particular in our area of the country. People have to live someplace. Certainly the stock market’s rebound or strength is more concentrated in fewer stocks than most would like to see but it’s hard to say the market isn’t performing well. There’s lots of promise and optimism, despite constant watching for signs of trouble.
Fear is never a great motivator nor a good guide. Taking on risk is unique and subjective to each of us. I never recommend buying or selling a home without a broader discussion of your wants, needs and timelines. That said, we saw a huge run up in home values since 2019 and despite the drop in values last fall, it’s hard to say that real estate isn’t a wise decision—in our local region in particular. We have great diversity in economic engines in our region; wonderful natural resources to enjoy; pretty amazing weather—despite our reputation for rain and great services, culture and opportunities. Huge amounts of wealth and innovation are also in our region. These 2 factors alone, will continue to attract others to the Puget Sound area. Combine them with our other attributes and we are a unique and desired location for many and this means strength in the housing market.
This isn’t a great real estate market for everyone, sadly not a great one for those trying to climb onto the economic ladder, but it seems likely we will continue to see stable to improving home values. Steady demand to buy into it will continue, especially when interest rates improve. We have some recession fears to watch, but the most likely scenario if these come to fruition are for improved interest rates and improved demand for housing. Home prices usually improve or stay stable during times of recession. Waiting for the economy to crash and housing prices to drop isn’t likely a good strategy for those looking to get into the housing market. A better plan is to talk with advisors on how to save monies, pay off specific debts and find unique opportunities for you to get into the market. If you’d like advice or specific assistance with your needs, please reach out. I’m happy to help.
Working in Crazy Times
To say these are crazy times is certainly an understatement. Many of us have wondered how crazy things could get since Covid arrived. So many directions to go on this but we’ll stick with the real estate world. Certainly declining inventory of homes for sale has occurred. Buyer demand hitting near all time highs has too. Job growth–for many; wage growth–also for many; government handouts of money–again for many; combined with a desire or need for a different home has just added crazy amounts of fuel to the fire of the already on-fire marketplace. We now add in fears of war, inflation, of stock market corrections–already happening, pushing many investors and people looking for new homes to jump after many or any opportunities in the local marketplace. Our February statistics will be out soon but they will likely show 70+% of home sales being at or above their asking price and I’d bet the median over asking price for most homes will be above20% for much of our region.
Juxtapose those statements with what may be a temporary or not so temporary breath in the market in the last 10 days and it’s very difficult to advise Buyers or Sellers on what is going on in the market. You make an offer 30% over asking price with no contingencies in one week and lose. The next week you win with a full price offer and little to no competition in the same area and price range. Change your location or price range and the sands are still shifting and conditions are completely different. WOW. It is exhausting and infuriating for home buyers, sellers and agents alike. There is no one winning strategy and certainly no logic to what it takes to win in these crazy times.
Here’s what we know. Several layers of uncertainty are impacting the market in different directions at the same time. War in Ukraine obviously has us all worried and wondering where this path goes and how quickly can this turn our world upside down. Stock market worries have some investors jumping back to buy real estate–especially in strong job and job-growth markets, like the greater Seattle area. Inflation has spooked the Fed and their raising of rates is now the expected for the balance of the year. But…other investors are looking for security and US Mortgage Backed Securities are seen as a very safe investment and we’re now seeing drops in interest rates as more investors look toward these for security. It is not abnormal to see interest rates drop when the Fed is raising interest rates at the same time. It might seem counter intuitive but again, not abnormal and these are crazy times.
Local businesses are staring to announce and ask their employees to start coming back to the office and there are millions of square feet of new office building being built in our region, set to open in the next 2-3 years and beyond. This will mean more job growth, new inward migration, more demand and….yes, most likely continued price hikes on home values. I have no expectation of prices spiking like we saw in 2021 for the region as a whole, but Seattle, as an example, has only had a 10% price growth over the last 3 years while the Eastside has had 66.5% growth in that same time frame; Snohomish County is up 57%. Seattle is making up for some of that so far this year, prices likely up 20% so far this year. It’s likely this will moderate through the year for Seattle and the rest of the region, but upward pressure will remain; even in the face of so much uncertainty.
Many ask, are we crazy to be bidding up so high on so many houses? This can’t continue, it has to crash and then what? I answer, these are great questions and reasonable sentiments to hold, however the bigger pictures still show expected price growth of close to 10% for this year and likely moderating closer to a long-term norm of 6%/year growth thereafter. So, if you really want or need to buy a home and you expect you’ll stay in that home for 3-5 to 7+ years, much shorter than the norms these days, then you’ll be missing out on great appreciation on your home if you aren’t in the market now. I think most agents are somewhat hoping for some breath moments in the market, like we’re seeing in the last 10 or so days. We are continuing to see increasing new on market listings, so our reservoir of homes to sell may finally start to raise. Don’t get too optimistic on this raise though. We had near record levels of new on market listings last year–it’s the only way we could have had near record levels of sales, but our reservoir only depleted. There’s optimism for some filling of this reservoir in 2022.
Buyers, take heed. The market conditions are improving with choices but our reservoir is still so low that when the right home choice(s) show up for you, you do have to be ready to act and still be bold with your offer. We are by no means entering market conditions that will have sellers making any significant concessions. Getting the home you want, in the location you want, at a price you can afford–that is a win and I don’t see that definition changing in any dramatic sense for the balance of this year. So, as crazy as things are, it seems they’re pretty well the same and norm of the last few years. Let’s hope the war in Ukraine can be resolved soon, so we can all breath a little easier and that layer of uncertainty can dissipate.
Buyers and Sellers, please recognize that you really do need an experienced agent to help you determine what the best potential strategies are and help present you, your home or your offer to the market. There are too many variables for those outside the market to understand. Seek advice and guidance on how to define and find your win in these crazy times.
Photo by Nick Fewings on Unsplash
Why a Housing Bubble Isn’t Our Problem
I’ve mentioned in earlier posts that I think the fears of a housing bubble are misguided or more accurately not well founded. The number of people owning their homes outright, no mortgage debt at all, is still quite high, in the 25-30% range. The number of people with 50+% equity in their homes is also in this same nearly 30% range. The underwriting standards for loans today is much more strict than back before the Great Recession, so borrowers, as any recent home buyer knows, must supply a significant amount of documentation to get their loans approved. This offers confidence to the lenders and stability to our housing markets. Short of a catastrophic national or global event—Covid wasn’t enough, as we have all seen, –it’s very unlikely we have a housing bubble issue.
That said we have other housing issues that are deserve attention. Namely supply and affordability. Supply shortages are well known and the horror stories myself, my clients and other agents and buyers are seeing are quite frustrating. We bare our souls, our dignity and empty our bank accounts and oops, sorry not quite enough to win against some other home buyer. Who are these home buyers?
It’s true we do have more outside investors jumping back into our marketplace but the reality is most of these other buyers were already here or have come here for a new job. Yes, the region as a whole has seen an increase in people leaving the Puget Sound area and the state, but the reality is we have many new people coming in. We also have a huge population of Millennials living here, looking for their first or move up home. Millennials are a larger segment of our population than Baby Boomers and they are all looking to get out of apartments and small condominiums and into traditional homes. The Gen Z population, about the size of Baby Boomers, are also breaking into the marketplace and this will continue to put pressure on our supply side.
Combining this continued pressure from existing residents in our area with the ability to work from home, part or full time, is also helping spread this demand around the Sound. That too may not be going away in any near-term scenario. Now add what is expected to be another 50-60K new employees to the region in the next 2-4 years and you can see why I don’t see any way for us to be facing a housing bubble. A lot of apartments are being built in anticipation of this new surge but they’ll be homebuyers very soon as well.
While we’re on the topic of misplaced or unfounded real estate rumors, here’s another big misconception. That there are no houses for sale. Yes, most of the region is at .4 or less month’s supply of homes but the other reality is that our new listings taken–homes coming on the market every day, week and month are also near record levels. The Eastside’s new listings so far this year are only up 3.8% compared to 2019 levels which were very similar to 2018 levels. Seattle, however, is up 46% over 2019 levels which were slightly higher than 2018 levels. King County’s new listings were up 89% over 2019 levels, again 2018 about 4% lower than 2019’s new listings and Snohomish County has 81% more inventory this year than 2019 which was slightly lower than 2018’s inventory levels.
What you see when you look at the bigger picture and more data is we actually have had an extremely full inventory so far this year. I didn’t compare to 2020 as the Covid interruption skews the data to even greater disparities. Seeing this new level of inventory gives you a better sense of the true demand for housing in our area. So while the overall inventory levels are down, they are down mostly due to demand vs. supply. Let’s look at one other data point for maybe a deeper understanding of the market conditions.
Homes priced from $1M-$2.5M show the second issue for our area–affordability. I know I’ve cautioned you in the past, don’t just look at the home price–look at the monthly payment. Low interest rates and your current home’s equity combined make what seems like unaffordable home prices be within the reach of many in our region. That said, it’s still beyond the reach for many. On the Eastside the number of closed sales so far this year in this $1M-2.5M range is up 55% from 2019. Seattle is up 100%; King County up 89% and Snohomish County is up 60%.
So, when we look at this new data point we see that yes, overall inventory is up but in most areas the real inventory is in the $1M-2.5M range. The homes under $1M are still coming on but a healthy percentage of the inventory increase is in these upper price ranges of homes. Many like to say this isn’t fair; that housing should be a right; that prices should be controlled or regulated but there are no examples of any housing market interference or price controls that have shown to work in any market. Not in rent and certainly not in ownership. As you see in any world class city, our region has now evolved to that level, there are areas that many people can not afford to live. It’s simply a reality to accept not fight. I’d love to live on the beaches of Carmel or Monterey but it’s not going to happen. I can ask and demand my fair share and equity of access but it still won’t happen.
Our region went on a crash diet of no or almost no new construction being built for 7+ years. New regulations for new construction now add almost 25% to a new home’s costs. The time to develop land to build can be 4+ years, so we are behind the curve on getting new homes built to increase our supply and undoubtedly these new homes will not fit in the current day’s “affordable” price range for homes. Builders are paying 2018-2019 home prices to buy a home and tear it down to build new homes. These certainly can’t be in the affordable price range. The reality is much of our area won’t be affordable for some.
Prices can’t continue to escalate–that’s also a reality. Rise, indeed, but at today’s pace, no; we can’t maintain this amount of price escalation. Wages will tap out the price range but that is still likely above our current price points. Does that mean a bubble is coming? No. Only that there is and will be a ceiling coming. We still have a tremendous wealth transfer approaching as well. Baby Boomers can’t live forever and we will be selling our homes, or our estates will, in the next 8-10 years and for the decade thereafter. This creates homes to sell while also not creating a buyer for a new home. It also will mean the passing of wealth to younger family members. This increase of sellers who also won’t be buying a home will help bring some balance to our market and won’t come by regulation or outside interference. We’re in a cyclical market and currently that is all going up. I don’t see the downside being steep or significant; just coming our way but quite a few years out from now. In the meantime, ask for guidance from an active agent who can help you find the right opportunities for your needs. Don’t fear a bubble, a collapse or a home’s sale price. Take advantage of the very low interest rates to find a home you can enjoy and afford for the next 5-7+ years. The numbers show the homes are out there. They may sell in a week but they are coming up and on the market for you to capture. Be patient. Summer can be a very good time to be a buyer in our region. With post-Covid vacation plans in place, some buyers will be taking themselves off the market for some of our summer time.
Photo by Armand Khoury on Unsplash
Q3 2020 Gardner Report for Western Washington
I am fortunate to work for Windermere Real Estate and one of the benefits I derive is access to a local economist, Matthew Gardner, who monitors various economic details and trends for insights and perspectives on our real estate market. Here’s his latest analysis of the Western Washington market place. It seems we have recovered many of the job losses since Covid struck our region, but not sure the new jobs are for the same people and certainly not for the same jobs that were lost since March. Still, the employment picture is improving and the real estate market continues to thrive–being one of the strongest economic engines in our area and across much of the country. Most expectations are for home sales and values to continue strong into 2021 with low levels of homes for sale, low interest rates and high buyer demand. A trend for 2020 has been for buyers to either look for second homes or to move out to less urban and business-centric areas. Market times in many of these suburban to rural areas are dropping while home prices are rising sharply. We’ll se if this trend continues as we hopefully gain more control over the Corona virus impacts to our country and region.
Take a look at the report:
Which Way Is Up For Real Estate?
This trek of isolating in our homes marches on. Hopefully some of our sunny days have helped to break the monotony and stress of isolation and lifted your spirits as we stay home to stay safe.
The real estate market was put on the essential business/services list just a few days after we were told we weren’t an essential business. That said, social distancing and personal safety, along with restrictions on movers, photographers, contractors, inspectors and home stagers all slowed the market activity level dramatically. We’ve since seen a release of these various jobs to open back up, but we’ve still seen a market slow down. Despite the recent publication of March sales and pricing data, all showing a continued strong market, we did see a pullback in new pending sales, homes sold but not yet closed. I expect we’ll see lower figures for closings and pending sales as we get into May and see the April figures.
Real estate has never seen such a giant swing in momentum in such a short period of time as we’ve experienced in the last 4 months. We had a sluggish early fall, with increasing market times and slower than normal sales but a steep decline in homes for sale that went on into March. December saw a big jump in sales activity and a corresponding jump in home prices. The lack of inventory and high demand made for quite a frenzy of multiple offers and new price highs. January and February continued very strong, even into early March which showed 55-58% of homes selling above their asking prices and average market times of 15 days or less for much of our region.
Then Covid 19 came to roost in our area and across the country and the World. We saw stock markets plunge and housing freeze. Quite a change in a 3-4 month period. The stock market plunge created panic in the Federal Reserve Bank, and they started buying Mortgage Backed Securities which created more troubles in the mortgage market and nearly collapsed the Secondary Mortgage market. This pushed interest rates up from the 3.375% range to over 5% and many lenders pulled out of the market altogether.
Calm is restoring in the mortgage market due to The Fed changing their behavior and time passing to allow lenders to get their books and balance sheets back in synch. We’re also seeing some rebound in the stock market as we see improving optimism related to the Covid 19 virus. So, what about the real estate market? With so many job losses and business closures, where will home prices go in the coming months? I wish I knew.
Economists and predictions vary widely, mostly due to any lack of true certainty over the Virus influence and impact. Most of us are hoping to be released from our homes by early May and then see some jobs and earning power restored. Unemployment is understandably high, but hopes are that we can see this decline over the next few months when the economy is open. Unemployment won’t drop back to its 3-4% range, but hopefully back below 10% yet this year. Hope is all any of us have right now.
The recent sales data do show a broad range of home values selling and generally across the whole Puget Sound region, so I’m optimistic that we’ll see a generally strong rebound in home sales. Not likely the frenzy of this late winter and early spring, but still a lively market. We’ve had 1,999 closed sales in the last 20 days in King and Snohomish Counties. We’ve also had 1,347 Pending sales and 364 Pending inspection sales in the last 20 days. That’s a bit over 1700 sales in 20 days of limited mobility; fairly active against a backdrop of 4,164 homes for sale in these 2 counties.
Real Estate, shelter, is an essential human need, along with food and safety/security. It offers us both shelter and hopefully some improved sense of safety and security. This means there is always “a” market. Every market has some holes within it; specific property types, locations or price points that are not as active as others. That will be the case in this recovery too. What I’m focusing on is the strength of many of our larger employers, their employee counts, spending patterns and the overall physical health of our region. This will help us have a more balanced market and housing opportunities for all.
Our social distancing seems to be paying off, even if taking longer that we wanted. I hope we can see a steady improvement in our physical recovery, no delayed or unexpected spikes in incidence or severity rates, so that businesses can re-open, re-hire and start finding our balance again. We will need more of us to participate in the physical and economic recovery to keep housing stable and a driving force in our economy.
No one knows with any certainty when or what the ultimate recovery pattern will be but I think most of us will be happy if we can see home values maintain close to their peak values attained this winter and our continued recovery in the stock market and our business climate. I have no fear of the market stalling out; we just have too much demand. We may well see a very lively initial bounce as families try to find their new homes this summer, so they’re settled in for the coming school year. My hope is that we have seen more of a deferral in market activity than a loss in market interest, ability or demand.
Some potential home sellers won’t be coming on the market due to their personal economic circumstances but anyone wanting or needing to sell should still find an ample supply of buyers looking for their new home in your neighborhood, hopefully inside your front door. Let me know if you’d like to talk about your particular market, concerns and circumstances. I’m always glad to talk with you.
Stay safe, home and healthy. Hopefully we’ll all be celebrating our release on Cinco de Mayo!
Photo by Jakob Owens on Unsplash