What to Make of Seattle’s Market Cooldown
It’s been a time of some uncertainty in the Seattle real estate market, as buyers and sellers have felt wary of declining home prices, longer market times, and growing inventory. As a Seattle Times article from early September noted, “home prices are continuing to fall across an unseasonably cool Seattle real estate market, with homes that would have been snapped up in an instant just several months ago now sitting unsold.” August represented the third straight month of median home price declines in King County, with the countywide cost of a single-family home, at $669,000, down nearly $60,000 compared to May 2018.
As the Times reports, the increase in listings isn’t because of a vast increase in the number of homes being listed on the market, but rather because they are sitting unsold as buyers are presented with more options and have—for the first time in a long time—the opportunity to take their time when deciding to make an offer. As Zillow reports, Seattle is now twelfth in home price growth of the 35 largest metro areas, with Seattle now taking the second spot on the S&P/Case-Shiller Home Price index, behind Las Vegas.
The change in the residential real estate market was an abrupt one and began in mid-May as we moved from the most frenetic white-hot seller’s market in the United States over the last several years to a more conventional marketplace. Prior to May, buyers were racing to make offers on limited inventory as quickly as possible and often making many compromises on their purchases with non-refundable deposits, waiving inspections, etc. At that time, buyers’ primary objective was to get a foothold in the Seattle real estate market while interest rates were low and before prices further increased so they could begin building equity.
Now, buyers have more options to choose from than they’ve had in the last three years, and are no longer rushed by offer due dates to spend more than list price, which they believe is at a high-point in the market — unless it’s below market value. Currently, sellers are being more precise with their list prices and buyers are making below list price offers days after a listing comes onto the market.
Historically, the western Washington residential real estate market slows mid-May and picks back up a bit after July 4th, slowing again in August and regaining speed after Labor Day before dipping through November and the holiday season. Slowing home price growth and a surge in inventory this May, however, may be attributed to the following factors, which are unique to the 2018 sales season and contributed to the excessive slowdown that began May 2018:
The Head Tax
The Head Tax was announced on May 10th and caused much uncertainty within the Seattle market. At the time, I was representing a buyer on Mercer Island. They were looking at a property that was listed May 9th with an offer due date of May 16th. I assisted them with home and sewer inspections that cost approximately $700 in preparation to make a competitive offer on the home. After the head tax announcement and immediate uproar from local businesses, they decided not to make an offer on the home due to the potentially adverse implications of the tax within the business community and general uncertainty.
I was also working with an out-of-state investor group at the time to locate investment properties, and they likewise decided to put all plans on hold in response to the head tax announcement, because they perceived it as anti-business and felt it would result in higher cap rates and lower values.
On June 12th, the Seattle City Council repealed their decision because the majority of Seattleites were incensed and against the tax. Thankfully, investment confidence in Seattle is quickly being restored, which is evidenced by Google’s continued expansion and other business investments. Washington state was even ranked the second best state for doing business in for 2018 according to a CNBC report released in late July.
Seattle has been one of the fastest-growing cities in the United States, with the population increasing by 114,412—or 18.7%—since 2010. Given lack of available inventory, it wasn’t a huge surprise that home prices were appreciating quickly, at over 13% from April to May 2018, while the nation’s average hovered around 5%. At the time, home prices were underpriced relative to what people could afford, and in effect, exponentially increased over the last several years to reach a level slightly above what people felt a home was worth or could afford. Buyers simply will not pay more than they feel they should; you cannot fool the market.
On June 14th, the Federal Reserve had increased the federal funds rate for the fourth time in 2018, which translates to higher borrowing costs (i.e. higher mortgage interest rates) to cool a vibrant and growing U.S. economy. Further increases to mortgage rates will have an even stronger leveling-off effect to home prices and reduce the quantity of buyers.
Beginning in January 2018 to March 2018, a $700,000 home payment with 20% down would have been $3,123 per month, which is a loan of $560,000 at a 4% interest rate and assumes property taxes were approximately $385 a month and home insurance about $65 a month. Today, a $700,000 home purchase carries a rate of 5% with the same down payment. Moreover, in March the Supreme Court school funding order known as the McCleary decision ordered Washington state to provide additional school funding and, in effect, property taxes in King County increased from 17% to 23%. Therefore, the same $700,000 home payment today would be approximately $3,533, which is a monthly increase of over $400 (approximately $4,800 annually). Purchasing power is being reduced by increases in mortgage interest rates and increased property taxes.
As a result, we have the largest supply of homes in the last three years and I understand the Federal Reserve intends to raise rates three to four times over the next twelve months to cool the hot economy. The Seattle real estate market fundamentals prior to May are no longer applicable. Buyers have choices and are taking their time looking for the best option to purchase with the fewest compromises, and they will not be rushed.
Real World Example
It’s very difficult to compare apples to apples when analyzing residential real estate. Therefore, I will use condominiums in the same building with similar floor plans and views within a floor of each other. The following condos are situated within the highly desirable Queen Anne High School Building.
· Unit 532 | 1 bedroom, 1 bath, 1 parking | 911 square feet: Listed for $650,000 on April 25th and went under contract after 6 days on May 1st. Closed on May 30th for $650,000.
· Unit 412 | 1 bedroom, 1 bath, 1 parking | 893 square feet: Listed for $635,000 on July 18th and went under contract on September 17th after 59 days on the market and sold for $620,000.
I believe this a national phenomenon, which is caused by rising mortgage interest rates. See this article, Home sales in California have Fallen for 4 months Straight.
Buying or Selling
A 60% increase in mortgage interest rates, from about 3.625% to 5.25%, during the past 12 months has affected the ability of many buyers to qualify for mortgages available to them prior to such rate increases. Note mortgage interest rates reached the highest point in over 7 years on September 20, 2018. Such interest rate increases have reduced demand, which is reflected in the decline in sales prices discussed above.
Pricing and marketing are some of the key components to Selling your home for top dollar. It’s still a Sellers’ market—a conventional Seller’s market.
It’s still an excellent time to Buy. Prices will decline (not “crash”) some, but flatten out. In the long-term, I believe home prices will continue an upward trend in the greater Seattle metro area. Keep in mind the following:
o Mortgage interest rates are still historically low (ref: FreddieMac)
I would be happy to help you Sell or Purchase Real Estate. Feel free to contact me.