For the last couple years at about this time, I have made my predictions about what I think the local housing market would do in the coming year. Now keep in mind, I don’t have a crystal ball and I don’t claim to be perfect, but I have more than 20 years of experience as a real estate broker and mortgage broker and I have studied housing statistics in this market over the last 40 years. I have noticed a fairly predictable cycle in the Puget Sound real estate market that has enabled me to be relatively accurate in predicting (i.e., guessing) what is going to happen one or two years down the road.
For example, in late 2005, I wrote that the housing market was “peaking,” meaning that it would soon begin cooling off. That was at a time when the news was full of stories about how hot the housing market was and how fast home prices were rising. Few, if any, people at that time were thinking that the party would soon come to an end. In December of 2006, I wrote that the booming housing market had finally slowed down as I had previously predicted, and I said that there would probably be little, if any, home price appreciation this year (2007) because the number of homes on the market would increase and turn a “seller’s market” into a “buyer’s market.” Again, that prediction proved to be correct.
How am I able to do this? Because I am very familiar with what I call the “stair step pattern” of the Puget Sound housing market. If you look at home prices over the past 40 years, there is a very predictable cycle: Home prices increase rapidly for two or three years, followed by a slight “correction” (price drop) following the peak of the market, which is then followed by a few years of a flat housing market (no appreciation). So if you looked at home prices on a graph, you would see a pattern that looks like a staircase: Up, flat, up, flat, and so on.
So what do I think will happen next year?
I think we are now in the correction phase and the beginning of a few years of a flat real estate market, with little or no appreciation. Home prices may drop an average of 10 to 20 percent during the correction, but keep in mind I am talking about dropping from the very peak of the housing prices during the boom. For example, if you bought a house in 2005 and saw it increase in value by 20 percent during 2006 and then prices dropped 20 percent during 2007-2008, you have not really “lost money” on your house. You’re just back to the price you paid for it in 2005. The only people who are likely to lose money in the correction phase are the people who bought at the absolute top of the market and have to sell in the next year or two. If you can hold on for 7 to 10 years, you should be fine no matter how much you paid for your home, because by then we will have experienced another “up” cycle in the staircase pattern. Also, keep in mind that the higher priced homes are the most volatile. They tend to go up the fastest when the market is hot, and come down the fastest when the market gets cold. There is always a market for low-priced starter homes, so they tend to hold their value fairly well, even in a weak housing market.
I think the number of homes for sale will continue to increase next year, especially during the prime home selling months in the Spring. The increased inventory of homes on the market will continue to exert downward pressure on home prices. It is basic economics, the law of supply and demand. The reason home prices increased so rapidly during the recent housing boom is because there were more buyers in the market than homes for sale, causing bidding wars with multiple offers on desirable properties. The demand exceeded the supply of homes for sale, and prices went up.
Now, we have the opposite situation. The supply of homes for sale exceeds the demand from buyers and sellers are having to reduce their asking prices in order to sell their homes.
While I think home prices will come down from their peak, I do NOT think that we will experience a housing “crash” with prices dropping 50 percent or more, as we often see in the “boom and bust” housing markets like California, Arizona and Florida. Why? Because that is the historical trend. Our home prices never go up as fast as those super heated housing markets, but we also don’t come down as fast as those markets. Foreclosures in the Puget Sound region traditionally average far less than other states such as California and Texas. And even though the foreclosure rate is up significantly this year, we are still far below the national average. Part of the reason for this is because we have one of the lowest home ownership percentages in the country, probably due to the high price of homes in the area which prices many people out of the market.
I don’t buy into the “gloom and doom” housing bubble scenarios being promoted by some of the people at blogs such as seattlebubble.com, which has been predicting the imminent collapse of the local real estate market for some time now. While I give them credit for pointing out that many people in the Seattle media were overly optimistic about the Puget Sound real estate market during the boom, I think many of the people who post comments at seattlebubble.com tend to be overly pessimistic in predicting a major housing bust.
So, if you are thinking about buying a home, I think that next Spring may be an excellent time to pick up a good deal. And if you can’t afford to buy next year, don’t worry about being priced out of the market because I think home prices will remain flat for the next few years.
If you are thinking about selling your home, be aware that the market has changed. You will have to price your home lower than the competition if you want it to sell in a few weeks rather than a few months. Also, if possible, try to hit the market early next year, such as in February, rather than waiting until March and April when a glut of new listings will hit the market and increase the competition for buyers.
Keep in mind, that even though your house may sell for less money now than at the peak of the housing market last year, you will also be paying less for the house you buy, so it all evens out. Just remember that this is becoming a BUYER’S market, so price your home as low as you can afford to go in order to get a quick sale.
Those are my predictions for the 2008 Puget Sound real estate market. I hope you find them interesting and useful.
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