Oh Hey Seattle Market, Are you Back?
It’s always changing, evolving, and following trends here in Seattle, and Real Estate is no exception. We are riding a wave that ebbs and flows. It’s so exciting to watch what will happen next. This past fall I saw an incredible shift that had my sellers correcting and had no buyers to speak of. This past month, I’ve had the busiest January of my career. Why you ask? Here are some thoughts.
A common theme for real estate in general, which is consitent with what is happening already 2019, is that there are distinct forces at work, exerting force on the market: Supply, demand, and affordability. Although these are always at play, the increased pressure from all three were intense in 2018 and will continue throughout 2019 on a national level. Let’s look at what makes up each of these areas:
Supply – There are only three ways we get new inventory – existing resale homes, new homes, and foreclosures. The number of years we are staying in our homes has reached an all-time high of 10 years which is one of the main contributors to the inventory shortage (plugging up the resale pipeline). However, another contributor – and this is a big one – is the continued lack of new construction. We also don’t have many foreclosures to add to our inventory levels. Therefore, all three inventory supply sources are dripping instead of flowing.
Demand – Our economy is humming along. Unemployment is at almost historic lows, GDP is up, Consumer Confidence is up, and Millennials are ready to buy (those who can afford to). Therefore, demand has been high and will continue to be so. If it wasn’t for the severe affordability issue we are experiencing in many Metro markets, Millennials would be buying up a storm.
Affordability – High demand for housing is causing prices to soar out of a comfortable price range for buyers. In addition, the cost for builders to build (land, labor, materials, and regulatory demands) are all rising at a pace that makes new construction less affordable. Interest rates are also on the rise. All of these factors affect affordability and home sales.
These three factors are in a push-pull relationship which was very evident this past year when home prices peaked in May. The market then quickly reacted with an adjustment in inventory. There was an initial surge of new listings concurrent with a moment in which buyers had had enough and affordability reached a tipping point. That surge caused buyers to step back and assess the situation instead of moving forward which caused another moment in which sellers were ready to sell but buyers were no longer willing to pay the inflated prices. Buyers figured out quickly that the market had hit its peak and they did not want to buy at the peak of the market. This led to even more inventory coming on the market with demand pausing as supply surged. Now that surge is receding – sellers who couldn’t get the price they wanted are taking their properties off the market and savvy buyers are working with sellers, allowing both parties to make their next move.
What can we expect in 2019?:
1. Housing Inventory – I believe the inventory surge that we will begin the year with will be absorbed as sellers get realistic about their price or take their homes off the market. We will then see the spring and summer return to a more reduced inventory market. I expect buyers to also hop back into the market, trying to capitalize on interest rates that are expected to rise throughout 2019. Overall, I expect inventory levels to rise 5-7% in the mid-price range and 8-13% on the high end.
2. Housing Starts/New Construction – Our builders have not been able to keep up with the demand for new construction. Historically, we have needed 1.5 million units each year. That has recently increased to 1.62 million units. However, we are only on target to build 1.25 million units this year and next which means we are continuing to add to our deficit. Local issues in many areas such as zoning and water rights are also capping new construction opportunity. The cost of building supplies, labor, land, and regulation are causing problems for our builders and I expect this problem to worsen in 2019.
3. Home Price Growth – Nationally the October year-over-year median sales price grew 3.8% to $255,400 according to the National Association of REALTORS®. This was the 80th consecutive month of year-over-year gains. Since I expect the pace of our market to downshift after the spring (with more balanced inventory than last year), I predict that national median sales prices will continue to grow but at a smaller pace – more like 2.8%-3.5% by year-end.
4. Interest Rates – The Federal Reserve has been trying to return the country to neutral for interest rates. In November, the Fed indicated that rates were close to neutral, so although I don’t foresee many more adjustments in 2019, I do expect that rates can rise as high as 5.5% by year-end. Rates had been as high as 4.94% this year for a 30-year fixed rate mortgage, but the rate slid back and as of 12/13/18 it was at 4.63%.
There are several what I call “wild card” issues in 2019 which could affect the above in a way that cannot be foreseen. Issues such as immigration reform, political uncertainty, the national debt, global issues such as Brexit, possible trade wars, and even the true impact of the tax reform changes can cause shifts in the real estate market that are unpredictable. That being said, I am excited for what 2019 has in store!