Fear Impacts the Pacific Northwest Real Estate Market: Part I

Our Greater Seattle Real Estate market has slowed and slowed dramatically. Why? Where are we headed? What should you do? How does it compare with prior market shifts?

There is an interesting blend of causes that have led us to this market. Below is the first of a three-part series where I aim to answer questions with market history, statistics, insight from other markets across the country, and a few opinions. Part I below focuses on our regional market history and how we might use the lessons learned from past markets to anticipate the market going forward. Part II is what led us to the current adjustment, and Part III will focus on what to do if you have a home you are looking to sell and what to consider if buying.

The Northwest Market History:

Many know the story about the Real Estate agents putting the billboard by Boeing in the 70’s – “Will the last person leaving Seattle – turn out the lights” (it was chronicled in the Seattle Times article February 2, 2009). That was one of the toughest times in our area’s history. During that time, Seattle was largely a “one horse town” and that horse, Boeing, was struggling. Fast forward over the next few decades and the area had seen steady growth, diversification, and until recently was on a somewhat predictable 10-year Real Estate market cycle.

That 10-year market cycle was in essence a 3-4 year run up with great appreciation, 4 years of somewhat flat appreciation, and 2-3 years with a slight reduction in value or a flat market. The cycle seemed consistent, stable, and even somewhat predictable.

Within each year there was also a seasonal cycle – active springs with escalating prices, calmer summers with pricing leveling off, and slower winters usually with a slight dip in pricing. The average home owner in the area occupied their home for 7 years, it is now among the longest in the country at slightly over 9 years. Anticipated appreciation was typically between 3-6%/year normalized over the 10-year cycle. A common rule of thumb was don’t buy unless you plan to stay in the home at least 5 years. We seemed to have a metronome-inspired market, certainly not the roller coaster of the last 15 years.

In the 80’s, Robert G. Allen wrote; Nothing Down, a book about leveraging to buy Real Estate and make greater profit. Many shifted to looking at Real Estate as a great stable leverageable investment, some as a sure thing. By the late 90’s, with our population in a dramatic growth period and with home appreciation seemingly going through the roof, consumer confidence was sky high. Yahoo! and other tech stocks skyrocketed. However, reality hit home with the DotCom Crash, the impact was immediate. Many “instant” millionaires had put offers on homes but hadn’t pulled their money out of their stock portfolio. The tech stocks values plummeted leaving these would-be buyers without the funds to close: sellers sued buyers and the high-end market took a big hit. A ripple eventually worked its way through all price points. As tough as it felt the transaction count remained fairly stable, and the timing seemed to somewhat align with our 10-year cycle.

Fast forward to September 11, 2001 with the terrorist attacks on the Pentagon, Twin Towers, and Flight 93, the nation froze. We were in shock, the Real Estate market stopped overnight. I called a Canadian client and told her to pull her Seattle home off the market and we’d see what it looked like in the late spring. It seemed no one was looking for homes, no one cared about Real Estate, we were all glued too CNN. I called and told her we needed to get on the market immediately. Two weeks into 2002, 15 of the 16 homes around her’s had offers on them. It was like someone had flipped a switch, the nation woke up and said we’re going to live the life we want. It was the start of a long stretch of amazing appreciation that saw bidding wars become commonplace. Local businesses big and small were booming, we were an area diversified, no longer a one-horse town. We were riding high, but it was a ride many knew couldn’t last, many we were predicting an adjustment, few predicted the crash. We didn’t realize the behind the scenes mess that was buoying the market.

It has been well documented how the leveraging of America, greed, poor oversight, and a general lack of common sense caused the 2007/2008 crash. People were able to buy not just one home but multiple homes even when, by any reasonable eye test, they shouldn’t have qualified. The Northwest lagged behind the impacted areas of the country by about six months, and it should have, our job market and economy was among the strongest in the nation. We also had far less of the low and no doc loans that truly caused the crisis. It is worth noting that as we crashed, Vancouver, Canada less than three hours to our north continued to have record setting appreciation.

The national news coverage impacted the local psyche. There are lessons in consumer confidence being based on perception, in the herding mentality, and how outside influences can affect a market. The impact of the 2007/2008 crash was felt far beyond the Real Estate and banking sectors, it hit our overall national economy. Real Estate transactions were down nearly 50%, which resulted in less furniture and mattress sales, less contractor work, less lumber sold, fewer tools, trucks, cars, etc. As more people tightened their purse strings, more were put out of work and it seemed to self-perpetuate. Areas of the country saw 60% or more of their value disappear. The result left many hard-working middle-class Americans in financial ruin. It truly highlighted how a national perception could affect individual markets, and eventually even the world economy. The fear this crash instilled is part of what I believe is driving some of today’s market and perception.

What did we learn from all these cycles?

In the 70’s, we learned that we needed a diversified regional business environment. Luckily some of that grew in our backyards and companies like Microsoft, Starbucks, and Costco were formed. Now we have Amazon and some would argue we’re once again dominated by one company (more on that later).

DotCom Crash: We learned that overconfidence can get you into trouble. That it is called a market because it has cycles. We learned that you should consider having a diversified portfolio, it’s not always a good idea to have your money in one sector.

September 11th: I think we learned that Americans are resilient. As a nation, we stepped up and pushed through such a tough time after a time of shock and mourning.

2007/2008: We learned that people buying beyond their means are willing to walk away. We learned that a down Real Estate market sends a ripple through all supporting industries and eventually the overall economy. We learned that a reduced transaction count has a bigger economic impact than a reduction in sales price. We learned there is a place for government oversight if done right. We also learned that national, and even international, news can cause a reaction in markets beyond those that should have been logically affected. We also learned that similar to September 11th, at some point the American psyche kicks in and we just put our boots on and got going again.

The biggest lesson from 2007/2008 may have been fear. Some fear is probably healthy as it should help contribute toward balanced decision making, but 2007/2008 was different. As the worst financial crisis since the Great Depression it had a brutal impact on many people’s lives. Although it was a likely a once in generation impact it changed the mindset for many people forever, it added a level of skittishness to any market adjustments. If you don’t think that is possible, look at how many depression era survivors store years supplies of food. That is an action that may not seem sensible or reasonable, but they went hungry, and their psyche rewired to feel they needed that reserve as a safety net. That same psyche comes into play here in that an adjustment is suddenly considered far worse than it may actually be.

We will delve into that more in Part II where we talk about this market cycle, and what caused it and where we see it heading.  But keep in mind each one of these downward cycles was followed shortly thereafter by a fairly significant and rapid upswing.

About the Author

Cory Brandt is consistently among the top 3 for RE/MAX agents in Washington State, with 18 years of experience and over 700 transactions. He runs the Cory Brandt Group, a high-tech, high-touch residential Real Estate business in King County. His professional team focuses on exemplary service, honest and ethical guidance, and the use of technology to maximize their clients return. Cory is a frequent presenter and speaker on Real Estate trends, with presentations to agents and companies around the world.

Leave a Reply

Your email address will not be published. Required fields are marked *