If you have been following the local news you are probably aware that our torrid hot real estate market is shifting. What should we make of this? Is this 2008 to 2012 all over again? The good news is no.Historically, our real estate market fluctuates with 5-to-7-year up-cycles and then takes a 6-to-12-month breather where prices may drop 5-to-10-percent before heading back up for another 5-to-7-year-up-cycle. This shift can happen quickly and that is exactly what happened this time. Back in December, clients were asking me how long the crazy market would last and my response was that I saw no indication of an end, yet a few short months later, it happened. This is a macro-trend and it is important to know that each neighborhood has its own micro-trend dynamics and degree of change.
The Downtown/Belltown condominium market seemed to start its adjustment in the first few months of 2018. This area also had the greatest change in all Seattle neighborhoods, with inventory tripling while sales slowed. It is difficult to pinpoint the catalyst for the shift and what will trigger an upward turn. One factor for buyers, however, is the stabilization of the rental market. There is a surplus of rental inventory today, whereas in recent years buyers have been motivated to purchase because of skyrocketing rents. With stabilizing—and in some cases dropping—rents, the urgency for tenants to jump into a super-heated housing market has waned.
Why is this different than 2008 to 2012 you may ask? Much of the market run-up in the 2000s was due to unsound mortgage practices and predatory loans in addition to some economic institutional malfeasance. That correction was anything but normal and was fueled by the near collapse of large financial institutions. Investors who were making boatloads of money buying and reselling homes in many parts of the country like Las Vegas, Phoenix, and Florida were purchasing homes with little down payment and when the market turned and the economy was in a near depression they walked away from their properties and loans causing a massive problem with home foreclosures. Many homeowners had toxic adjustable rate mortgages that they could no longer afford. In the end, it was a perfect storm for an epic collapse of the real estate market. In 2008 the economy in Seattle was strong and it should be noted that although the region was significantly affected, our market was less affected than most and came out of it sooner and stronger than most other regions.
In contrast to 2008 to 2012, we are 6 years into our up-market and right on schedule for a normal correction. The local economy is very strong with tech companies moving here, doing well and hiring employees into lucrative jobs. There are no mortgage alarm sirens going off as homeowners actually have to show that they can repay loans. Homebuilders cannot build enough homes for the demand so the long-range future is bright for home values to appreciate.
I have had many discussions with buyers and homeowners that are concerned, particularly as our last and strongest recollection of a market downturn was the financial crisis from 2008 to 2012. Buyers are thinking they do not want to purchase now only to see their investment depreciate. And some sellers that had painful experiences last time around do not want to have that happen again and are deciding now is the time to put their homes on the market. It may seem difficult to trust, but there is little indication that we are in for a catastrophic decline.
So, what are the possibilities in this market? I see a huge opportunity for buyers. Buyers have been brutalized trying to purchase homes in the last 6 years competing with other buyers and most often paying above list price by as much as 25%. Buyers currently sitting on the fence and waiting for the bottom of the market may miss a big opportunity; today, homes can be purchased for list price and even sometimes less. Buyers also have more leverage, with the opportunity to include beneficial contingencies—such as an inspection contingency—in their offers, which have disappeared from contracts in recent years.
My recommendation to buyers is to strongly consider purchasing now, especially if your plans are to own for 5 years or more. There is risk to waiting for the bottom of the market because the only way to know where that bottom is, is to be past it and looking backward. By the time you are sure the market has bottomed out, you may find yourself right back in a competitive environment, bidding against other buyers and paying escalated prices for homes. The other risk is that interest rates rise, which most mortgage experts believe will happen before the end of the year; this will significantly eat into your buying power.
My recommendation to sellers is to make decisions for reasons that have to do with your life circumstances. If you are relocating and need to move, go ahead. If your only reason to move is to avoid a market collapse, I would hold tight and not sell your home.
In short, this shift appears to be a normal recurring pattern. The Puget Sound region is a great place to be and people will continue to relocate here. The long term prospects for our housing market are absolutely positive.
-Written by Barry Bergner