The Mortgage Guru

Q: Ten years ago this last week, we purchased our rambler for $190,000. The new assessment shows a value at $293.000. A mailer from a real estate salesman lists ten houses sold in our area. The cheapest house sold for $246,000 and the most expensive sold for $410,000. Tom Kelly only alluded to these extremes in values in his recent article in the Real Estate section of the paper a couple weeks ago. I can only guess that the high cost of homes is due in large part to intense pressures from real estate agents to inflate the purchase prices for housing. If this were true, then something has to break this increasing trend. I am asking you to consider an inclusive article about other factors that would inform me and the public about future sky-high increases in housing costs. Were we to sell our rambler, could we realistically receive the newer value for our home, and what consequences would we face? Surely, there must be an unknown set of reasons for what is happening. How well can you predict the future for the housing market?

Note to my blog readers: This article deals specifically with my home real estate market in the greater Seattle, Washington area. However, you may find it interesting reading and compare it to the housing market in your your home town.

A: To answer your last question first, I don’t think I can accurately predict the future better than anyone else. However, I have done extensive research on the Puget Sound area real estate market going back over the last few decades and I’ve noticed some trends that tend to repeat over and over.

Some real estate markets are “boom and bust” markets, which mean they get extremely hot and housing prices skyrocket, then the market gets very slow and housing prices plummet.
An example would be Houston in the 1980’s which had a dramatic real estate boom as oil prices increased, followed by a severe housing “crash” when oil prices dropped. More recently, “Money” magazine just ran an article about the current real estate boom around the country and it listed San Diego as one of the hottest housing markets in the country. It gave examples of people buying homes for $1 million and selling a few months later for $1.3 million. The appreciation rate is just insane. As I read the article, I was wondered if I was the only person who remembered what happened to San Diego real estate in the 1990’s, when home value DROPPED 50 percent in just a couple of years. That’s a classic “boom and bust” housing market.
San Diego is currently booming, but if history is any indicator, a bust may be somewhere around the corner. I would be very leery of getting caught up in the “irrational exuberance” of a housing market like that.

By contrast, the Puget Sound region has never been a “boom and bust” housing market. In the post World War Two era, we’ve never had a period when housing prices dropped 50 percent, as they did in San Diego during the last decade. Even during the infamous Boeing bust of 1970 when a highway billboard said, “Will the last person leaving Seattle please turn out the lights” overall housing prices dropped only 6 percent. And by the mid-1970’s, home prices were back up to their pre-bust highs. As I discussed in last week’s column, there was a short-lived housing bubble in 1990 where home prices went up and down about 20 percent over a 6-month period, but that was also a historical anomaly.

Traditionally, real estate values in the Puget Sound region follow a “stair step” pattern: The housing market gets hot for 2-3 years and home prices jump up, then the market flattens out for a few years until the next step up. We never see a dramatic drop in home values as often happens in the “boom and bust” housing markets.

Now don’t get me wrong. I am NOT saying that you will always make money owning real estate in this area. As I pointed out last week, if you buy a home and plan to make a quick killing with appreciation alone you could be the one getting killed — because if you buy a home during an upswing in home values and then have to sell in one of the flat periods, you will probably lose money due to selling expenses. However, I am comfortable saying that if you plan to hold your home long term (10 year or more) real estate is a very safe investment

The reason housing prices are increasing so rapidly right now is because there is a severe imbalance between the number of home sellers and prospective buyers. There are currently far more buyers than homes on the market. But that ratio will eventually change, and when it does, the housing market will flatten out again.

Personally, I think we are getting very close to the peak of the housing market. No disrespect to my colleagues in the news media, but they are usually the last ones to catch onto the trends in the real estate market because they don’t work in it every day like those of us in the business. By the time you start seeing stories in the newspaper and the local TV newscasts about how everybody is getting rich in real estate, the end is near. That’s because homeowners see those stories and think, “We should sell now while the market is hot!” That puts more homes on the market until the housing supply balance eventually swings back into the buyers’ favor and the boom comes to an end. It is basic economics: supply vs. demand. I have already seen this happen in my neighborhood. More homes have come in the market in the last few weeks than at any time this year. These homes are still selling very fast, and for incredibly high prices, but if this trend continues, eventually the number of homes on the market will reach a point where buyers will no longer be forced to bid against each other and the price appreciation rate will flatten out.