History Repeats Itself; Good News For The Long-Term Investor

By Alan Pope |
This article first appeared in Realogics Sotheby’s International Realty’s 2023 Forecast Report. To get your digital or print copy of this comprehensive look at the Pacific Northwest’s ever-changing residential real estate landscape click here
Alan Pope | Real Estate Appraiser and Consultant | Pope Azeltine, Inc.

Inflation above 8%, volatility in the stock market, the rising cost of borrowing money, public discord, employment concerns, and international conflict are a few of the major influences that drove the housing industry’s transition from a market heavily favoring sellers to one more ideal for buyers.

As a real estate appraiser and consultant for over 47 years, I have actively analyzed the characteristics that create the ebbs and flows of the housing market. During my years in the industry, the Seattle metropolitan area experienced five major corrections and several smaller transitions. In the 1960s through 1990s, employment fluctuations at Boeing drove the housing industry. A typical 10-year period saw a slow market during the first two to three years of a decade, stability over the next two to four years then strong demand and an appreciating market to finish the cycle.

In the 1990s the growth of the high-tech and bio-tech industries in the Puget Sound region created changes in every aspect of local housing. Once a blue-collar community of modestly priced subdivision homes, the Seattle metropolitan area experienced inbound migration and demand for a highly paid, well-educated workforce, and for the next 20-plus years, these influences have continued to become a major factor in the demand and pricing for residential real estate including changes in the architectural style, home square footage, and cost.

The 2000 dot-com bubble and the 2007 subprime lending and collapse of the banking industry created two of the major transitions from an appreciating market to one in decline. Fourteen years following this last major correction, the housing industry is experiencing another slowdown. This economic shift is driven by the Fed’s desire to control inflation by raising interest rates. The interest rate for a typical mortgage has more than doubled since the beginning of 2022.

This has effectively priced many buyers out of the market. Those that are still shopping are cautious as they see and feel the changing climate, with many taking a conservative approach to buying decisions. They realize that the demand of multiple buyers seeking to purchase the same home through bidding wars is no longer a factor, time is now on their side.

In the above graphs, inventory (the number of available homes) is compared to the pending sales. In the Puget Sound (top), there was more inventory than pending sales until the beginning of 2020. This heavily favored sellers and created many multiple-offer situations as there weren’t enough homes for sale to meet the demands of buyers. This lasted until about June 2022, when inventory once again began to outpace net pending sales. In King County (bottom), net pending sales have more often outpaced inventory over the years, but we can see similar trends to the Puget Sound region, especially in mid-2022, when inventory again began to exceed the net pending sales.

Throughout most of this economic growth cycle, prospective buyers were able to benefit from rising stock prices and use the value of their portfolios as a tool to finance real estate. As the stock market declined, this also impacted the economic wealth and purchasing power of prospective buyers.

Inflation is placing pressure on the everyday pocketbook as prices for goods and services continue to rise. Many prospective buyers are seeing household costs increase dramatically while personal incomes remain stagnant or fall short of the trend.

Many cycles are short-lived and those that last under three months have a nominal effect, such as 9/11, minor stock market corrections, and COVID-19. Yes, COVID-19 has had a long-term impact on how we live but its effect on the housing market lasted from March to June 2020. The fear of the pandemic and state government restrictions on showing houses slowed demand for three months. However, changing lifestyle circumstances and real estate brokers’ ability to quickly pivot to virtual showings eclipsed health concerns. Many prospective buyers transitioned to working from home and needed more space and less access to the office. This created more demand in rural and destination locations and/or homes that included recreational activities on-site for life-work balance. Between the summer of 2020 and the spring of 2022 property values were appreciatingat an unprecedented rate. The King County Assessor raised the assessment values for 2022 by more or less than 30% in many suburban neighborhoods.

An appreciating or declining trend in each market segment will vary depending on location, price point, and site and home characteristics. A home close with characteristics prerequisite to meeting a broad need will experience greater demand than a rural home further distant from employment and offer characteristics that have limited appeal. An appraisal or consulting service within a market area requires an independent study to have a thorough understanding of market conditions, appreciation, or decline.

In 1992 I gave a speech on residential value trends studying real estate publications and the NWMLS. I found that there is a direct relationship between the supply of inventory and the number of pending sales occurring each month. Dividing the pending offers that occurred over the month by the number of listings at the end of the month calculates the absorption rate. It measures the strength of the market, the higher the absorption rate the stronger the demand for housing.

Historic trends illustrate that the local housing industry experiences an annual cycle each year. A slower market occurs during the winter/holiday season, demand increases through the spring, stabilizes during the summer, a slight uptick after “back to school” then the traditional holiday period.

When I gave the speech three decades ago, the housing market in past years was experiencing a stable trend and absorption rates were measured for King County at some 25% to 30% of the available inventory each month. In the summer of 2020 through May 2022 the absorption rate was calculated at over 65% each month and reached a high of over 250% in the first quarter of 2022 indicating that there were at least 2.5 prospective buyers per listing. Due to the short supply of inventory, sellers were receiving multiple offers, buyers making cash offers above the asking price, waiving contingencies, and paying prices that exceeded normal buyer behavior.

With rising interest rates in the spring of 2022, the housing industry began its transition from a sellers’ to a buyers’ market with many areas experiencing a softening in demand, sellers reducing their asking prices, and buyers acquiring real estate below prices paid in the spring months. Over the past six months, absorption rates have declined from some 250% to just under 50%. While there appears to be a softening in the market there remains a limited supply of inventory and reasonably stable demand.

From the peak of the market in the spring of 2022 to the trough in the final quarter of 2022, the market has seen a decline in property values from some 1% to 3% monthly, depending on location, property characteristics, the cost of borrowing money, and supply and demand. For 2023, I anticipate the market will see an uptick in activity due to the limited supply of inventory.

I believe that the market experienced the trough in the latter part of 2022, and in 2023 the first two quarters should receive positive demand and the potential for increasing property values. The justification for this transition is based on the limited supply of inventory, strong demand for housing, and interest rates that have declined from their high of over 7%.

When priced competitively, sellers are seeing multiple buyers and many placing the value of the real estate above the asking price. The first two quarters of the year are typically the most active. This appears to be the case for the future of 2023, when in January, we experienced a trend of multiple offers where many buyers are paying at, or in excess of, the list price to achieve homeownership.

What do the trends of the past tell us and how do they relate to the future? The housing market is resilient. With every down cycle of up to three years, there are, more or less, seven years of stability and growth. For those who have a short-term horizon in home ownership, acquiring a residential property may not be the best investment at this time. Historically, home ownership has always been a solid wealth-building option. I do not see that changing, particularly for those who plan to own their homes for at least five to seven years which will likely experience appreciation over time.

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