Q: I have been seeing stories in the news about the housing bubble around the country, with some areas having price drops now that the big boom is over. Do you think that will happen here in the Seattle area too?
A: Predicting the future is always very risky, so please understand that I don’t have an infallible crystal ball.
Last year at this time, I went out on a limb and said that I felt that the local housing market was peaking. I thought that home prices would max out during the Spring home buying season and then level off. Home prices actually continued to increase through late summer, but the housing market has definitely cooled off in the last three months, as I had expected.
This week, the Northwest Multiple Listing Service released home sale stats for November and you can see that a trend is emerging. There were 35 percent more homes for sale last month than there were in November 2005. At the same time, there were 11 percent fewer homes sold in November compared to November 2005.
What does that mean? Inventory is up and sales are down. Real estate is a classic “supply and demand” market, so if the supply of homes for sales increases and demand remains fairly constant, that will cause home prices to stagnate and possibly even drop.
This has been the typical pattern in the Puget Sound real estate market over the last 40 years. We usually have a sharp increase in home prices for a couple of years, followed by a few years of flat prices.
So I suspect that next Spring when most sellers put their homes on the market, we will see a big increase in the inventory of homes of sale. And unless there is a large pool of prospective buyers out there, we will probably see the home market swing toward a “Buyer’s Market” where there are more homes for sale than buyers. That’s good news for home buyers who have been frustrated by skyrocketing home prices over the past few years, but not such good news for homeowners who need to sell soon.
As I said above, prices will likely flatten out and possibly decline slightly, but traditionally we don’t have the kind of home price “crash” that happens in boom and bust housing markets such as San Diego, Las Vegas and Phoenix.
There is another factor that could lead to a large increase in the inventory of homes for sale in the next couple of years and that is the number of investors that jumped into the market during the housing boom. It has been reported that one out of every four homes purchased during the past few years was sold to an investor. Those are nationwide statistics, so I don’t know what the percentage is here in the Puget Sound region, but it’s safe to say that many people got caught up the in the “house flipping” phenomenon. Investors found that they could buy a house and fix it up, or even leave it “as is,” and then sell it six to 12 months later for a huge profit.
Well, those days are over. And many investors are holding onto houses that are costing them hundreds of dollars per month because they could not be rented for enough money to cover the monthly mortgage payments. Investors were willing to eat those monthly losses because they expected to make a profit of $50,000 to $100,000 in less than a year. Once those investors see that the runaway home appreciation train has come to a screeching halt they will start to bail out of those money-losing houses. That will cause a spike in the number of homes for sale, which will in turn cause home prices to decline, which will prompt more investors to put their houses on the market, and so on.
At this point, I have no idea what impact the “flipper” investors will have on the overall housing market, but it could be quite significant over the next couple of years if my prediction of a flat housing market holds. Only time will tell.
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