Our Greater Seattle Real Estate market has slowed and slowed dramatically. Why? Where are we headed? What should we do? How does it compare with prior market shifts?
There is an interesting blend of causes that have led us to this point, below is the second of a three-part series. Part I talked through our regional market history and the lessons learned. Part II below 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 mentality today:
We have the lingering fear from 2007/2008. We have an adversarial political climate, much of our news comes via soundbite, information overload, and some online news sources. Many online sources are steered toward your biases and potentially your fears. We have so much information that it is hard to process it all. People looking for guides when buying or selling a home are realizing that most Real Estate agents weren’t in the business during any of the downturns. Some of the agents are operating out of fear as well. Bad news sometimes appears to snowball, but there are key differences between our 2018 adjustment and the crisis we saw in 2007/2008.
What happened to cause the 2018 devaluation?
In my opinion, a few things happened. There was an underlying concern that the King County market was rising faster than the national average. We had and continue to have one of the strongest tech economies in the country, we were a Top 3 Real Estate market by most indicators for the better part of six years. Thus there was an underlying concern and fear that our ride was going to end. You didn’t hear much talk of a bubble, but certainly of an adjustment.
Amazon announced it would create a HQ2, the market didn’t flinch. Logically it would take years to build and staff, but still many in the industry expected that news to send a powerful ripple through the market, it did not. It may have had an underlying effect, but the first real bow wave came when the Seattle City Council proposed the “Head tax.” The ensuing back and forth rhetoric between some of the biggest companies in the region and the City Council caused an immediate and noticeable slowdown, especially with buyers employed by Amazon. It was reflected in our market statistics – sales slowing, prices no longer escalating.
While our market slowed due to local news, much of California slowed in part because of changes in Federal Tax laws and the impact those were having on states with high home values and state income tax. The national news combined these two somewhat independent issues under the heading of “Major markets are slowing” or “Top markets slowdown.” We now get our information as soundbite, headlines, and tweets, so although many of these articles highlighted the reasons many didn’t delve that deeply. These types of news feeds caused hesitation, doubt, and resulted in further slowing. That ripple would have been bigger in the Northwest had British Columbia not changed how international investments would be handled. Their changes drove many Chinese investors south of the border into our market.
Our Northwest market has diversified to include a significant number of H-1B Visa holders, as well as a number of overseas investors. So as the national conversation turned toward the tariff debate, the wall, the Muslim ban, and the Visas not being renewed many of the area buyers froze. These buyers were already reeling from the Head Tax fight (which went away) and concerned over the looming Amazon HQ2 were now fearful for their futures in the US. Trying to ignore all political arguments, I think we can all agree that you don’t buy a home if you don’t feel stability. The result was a dramatic pull back in international buyers writing offers. As they pulled back the market slowed, which made our market less appealing to the international investor.
We no longer looked like the sure thing and we began a spiral, rather than a slight adjustment.
The result was a rapid transition of the market. We went from historic and unsustainably low inventory, with absorption rates of 165% in April in King County (100 homes list, 165 sell), to September being at 42% absorption. Historically 42% absorption is considered a strong seller’s market, but when you come off of 165% it didn’t feel that way, not to the buyers, sellers, or their agents. It’s like coming off the freeway then having to drive 20mph through a school zone. Twenty miles per hour may seem rocket fast if you compare it to walking somewhere, but if you’ve just been going 70 mph then it seems painfully slow. It is worth noting that three months of inventory – 33% absorption is considered by most a balanced market (I see this number as a carry-over from when Realtors had to use printed books, or had only one photo to view – in a tech age I think 33% would be a slow market). Regardless in almost all eras, 42% absorption would seem like a healthy market skewed to the seller, but in this market it feels like the buyers have the upper hand (although that is changing).
Now seven months into this cycle, we’ve seen the absorption rate stabilize. We no longer appear to be spiraling downward. Home values have taken a hit. Depending on your neighborhood and price point, your home is now worth somewhere between 6% and 15% less than it was in April of 2018. That sounds terrible, but it is worth remembering that we were outpacing the rest of the country, and that from January to April of 2018 our home values had gone up 6-10%. So most lost their 2018 gains and a somewhat small bite into the 2017 gains. The Seattle Times stated recently that the Seattle market was down 11%, but keep in mind that doesn’t necessarily highlight what a single home would sell for, but rather an average of all homes, so if fewer high end homes are selling that would skew the average. The reduction in values are very dependent on location, price point, style, and condition.
Where does that leave us today?
What is good or bad news is all a matter of perspective. When the market slowed, I ran into a Realtor friend that works almost exclusively with buyers, he said to me; “Isn’t this market great, I can actually find a home, negotiate, and help my buyers without getting raked over the coals.” The reality is if you are looking to buy and sell then you’ll balance your own transaction out regardless of the market. Either way a balanced market is a healthy market and sustainable, since we appear to be just about there, it should be a good 2019. But there is some good insight below to think about, the first three are indicators of market stability, the last two could draw the market down or slow it down again.
First: By most accounts our economy is still booming, yes there are some bumps in the road, but so far nothing to imply the wheels are coming off in a dramatic fashion (which is a key difference from 2007/2008).
Second: This doesn’t appear to be a national crisis. It appears to be limited to those areas that appreciated the fastest; those areas with the highest home prices, and those on the Pacific Rim the hardest. Some stable markets have similar international buyer demographics to ours. One theory is they are stable because their prices are lower. The logic is if you want a home for your family but have concerns about future employment you might be willing to take a risk on a home that is three times your income ($300k, available in their market) that you wouldn’t be willing to take on one that is nearly 10 times your income (million dollars plus, our market).
Third: The loan programs that helped cause the implosion of 2007/2008 are out there, but not heavily in use. The typical equity position the King County market is far superior to what it was in 2007/2008. The last six years has seen great appreciation, but also many of the buyers have had 50% or more down, few were below 20% down in most the eastside and higher-end Seattle markets. There simply is a far more stable financial base.
Fourth: There has been talk about interest rates being raised in December, however that appears to have cooled off. Even if it does happen, it sounds like it would be a relatively small increase then be stable for a while.
Fifth: This is where the news isn’t good for sellers. There were double the number of homes pulled off the market toward the tail end of 2018 than in 2017. Many of the 1500+ cancelled listings on the eastside will likely come back into the fold at some point in 2019. In addition, many people scared by the market this year will decide to list earlier than they otherwise would have in 2019. Sellers know they missed the top of the market, and many don’t want to risk riding the market down further. We have a supply and demand curve how many homes come online will have a direct effect on market time, and pricing.
The mentality at the today:
We have the lingering fear from 2007/2008. Our news now comes via soundbite, not only do we have information overload but many of our online news sources are steered toward your biases and potentially your fears. There is so much information that it is hard to process it all. But where are we headed? What can we expect in 2019 and beyond? More on those questions in Part III.
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.