The next few months’ CoreLogic Case-Shiller Home Price Index reports may present some out-of-trend results, due to the imposition of COVID-19 restrictions a year ago. Data from the Northwest Multiple Listing Service (NWMLS) offer a preview: the median residential price was up by 25.2 percent year over year in April, paradoxically on higher months in inventory. Through March, however, the Case-Shiller index for the Seattle metropolitan statistical area rose by an average 1.07 percent monthly for the preceding year. The March 2021 report shows Seattle residential prices still third fastest-rising in the nation at 18.3 percent year over year, following San Diego at 19.1 percent, and Phoenix at 20.0 percent.  Across the country, prices rose by double digits everywhere except Chicago.
According to the index, peer cities on the West Coast have steadily fallen behind in recent months. Residential prices in these cities rose by monthly averages of 0.8 percent for Los Angeles, 0.79 percent for Portland, Oregon, and 0.72 percent for San Francisco, while rates of growth exceeded one percent for both San Diego and Seattle. Consequently, year-over-year price increases in these three metropolitan areas trail ours in Seattle by 4.8 to 6.1 percent (Charts A and B).
In his written report releasing the results, Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI reiterated his remarks of recent months noting the market’s extraordinary strength to date. “The National Composite’s 13.2 percent gain was last exceeded more than 15 years ago in December 2005, and lies very comfortably in the top decile of historical performance.” He continued to speculate on the nature of the move from urban to suburban homes, a trend that Realogics SIR has observed locally and reported since 2018.
In the mid-2010s, when the regional real estate boom was just hitting its stride, it was comparatively easy to predict the direction of home prices and their speed of ascent. Now that this trend is somewhat long in the tooth, and with the appearance of so many exogenous events and trends, a more systematic approach is now needed to anticipate market turns.
Driving forces: predetermined trends and critical uncertainties
A mix of driving forces—some imminent, others longer term, and yet others already underway—are weighing on inventories and prices in the region. “Pipeline” trends will combine with more speculative elements to shape the future of these home-selling markets.
Table A: Driving forces and uncertainties
Short-term trends and uncertainties
Of the two short-term trends that are already “baked in,” the one for material prices has been underway for a year, while the second concerning interest rates is just getting started. These are both factors with nationwide influence, with lumber prices potentially at least partly explaining the widespread nature of recent home price increases—not confined to Seattle or the West Coast, but playing out in areas of the country where steep price increases are hereto unfamiliar. The recovery from last year’s COVID-related restrictions and the recent passage of SB 5096, the estate capital gains tax, are still causes for speculation.
Skyrocketing material prices and impacts on housing starts
Softwood lumber and panel prices appeared to be returning to trend in November 2020 after escalating away from the norm the preceding June. Yet prices of these essential building materials exploded higher early this year, and since then have reached unheard-of levels.
Demand for Western S-P-F commodities in the U.S. remained strong as can be. Players did note more hesitation from buyers as prices continued to drive them round the bend, but there was more than enough inquiry and takeaway. Early June order files prevailed at sawmills, while improving construction activity across the country ensured no stone went unturned. Harried buyers and secondary suppliers searched for any scrap of inventory available.
As always, customers sought out the quicker shipping wood but came up empty-handed.
Plenty of reports surfaced of buyers paying prices significantly higher than already-historic print levels, just to secure a load.
Regionally, any impact of lumber prices on new construction sales is not yet evident in final home selling prices, nor in housing starts and delivery, where it may be hidden by the post-COVID surge in activity this year. New authorizations for home construction in April show how much construction-related activity was pushed back last year. In the Western states, new single-unit housing authorized but not started were up by 3.4 percent in April 2021 from March, and by 25.0 percent in April 2021 from April 2020. Single-unit housing starts in the West were flat at 0.0 percent from March to April, and up by 81.5 percent year over year due to the restrictions ordered on construction activity. Single-unit home completions were up by 10.7 percent from April to March, and by 48.9 percent from April to April.
Contrary to the trend for lumber prices, the median price of newly constructed residential homes continued a multi-year trend of losing ground against the median prices of residential resales (Chart C). Comparing the bedroom counts of new construction to resold residential homes, the shrinking difference in the annual median prices seems correlated with progressively fewer bedrooms in the newly-built houses (Charts D and E). This could be attributable to builders adjusting their product lines to home buyer demand, as the bedroom count shares of resold homes have remained comparatively stable. This coincides with the overlap in demand for smaller dwelling units among first-time Millennial buyers and downsizing Boomers. (See “Boomer downsizing and estate divisions/liquidations” below.) It might also be attributable to space constraints imposed by the increasing scarcity of infill lots within the urban boundary.
Rising interest rates
Although they expect overall housing market activity will remain robust,” Freddie Mac sees that
higher mortgage interest rates could dampen demand and cool off the single-family housing market. We forecast that mortgage rates will continue to rise through the end of next year. We estimate the 30-year fixed mortgage rate will average 3.4 percent in the fourth quarter of 2021, rising to 3.8 percent in the fourth quarter of 2022.
Mortgage rates are still historically low, and remain far from the point where mortgage payments become excessively burdensome (Chart F). Yet the rate increase serves notice to would-be home buyers who do require financing that to delay further may reduce the principal available for their purchase.
The weaker dollar that is reflected in rising consumer inflation (see the discussion at Chart I below) is also a signal that mortgage rates must rise, with households being impacted by both. So, whether by higher mortgage rates as forecast by Freddie Mac, or by tighter lending standards, banks are expected to reduce loan originations through the end of next year (Chart G).
The first of the more speculative near-term impacts to be felt this year comprises the varied effects of demand that was pushed back by COVID-related restrictions in 2020. The aforementioned rebound in housing starts and authorizations is one of those effects. A second amounts to demand for homes that was delayed by home buyers who for whatever reasons were hesitant to proceed with purchases last year. We regard this “post-COVID bounce” as speculative because we cannot easily estimate its size; Seattle MSA residential selling transactions in March, May, and June had declined in the preceding two years. Yet data from the NWMLS show the number and volume of transactions already having increased from March through May, 2021.
Capital gains tax hedging
Investors who wish to hedge against the new state capital gains tax (CGT) enacted this year as SB 5096 may prefer not to wait for a court decision on the act’s constitutionality. We wrote in our report on the February 2021 Case-Shiller release published in April, “If the CGT is upheld, we anticipate that stockholders, fiduciaries, and trustees will explore a variety of … strategies to mitigate their exposure going forward.” Among the possible measures to be taken is a reallocation from taxable assets to real estate. Dean Jones, CEO and Co-Owner of Realogics Sotheby’s International Realty, specifically observed: “The state capital gains tax is likely to drive investors to close their positions at peak stock prices in favor of real estate, especially for principal residences.”
It should be noted that according to the Federal Reserve, only 14 percent of American households own stocks directly. The rest own stock indirectly, many as mutual fund shares in an IRA or other qualified retirement plan not subject to capital gains tax until withdrawals are taken. So, this is not an outcome likely to move the market in any direction, but rather an option that some potential sellers will find to their advantage.
If allowed by the courts, the tax will continue to weigh on inbound relocations (discussed further below), especially if a sustaining court decision opens the door to income taxes in Washington State. To date, all attempts to introduce a state income tax have been stricken down as unconstitutional.
Long term trends and uncertainties
The trends discussed above are imminent, and in several cases, we can already see their effects on selling prices and volumes. The next two trends, one predetermined and one speculative, will take longer to appear and to work through; but their effects are likely to be more widespread.
Boomer downsizing and estate divisions/liquidations
Sales by Boomers, or their executors, are sure to rise over the next decade. Time will tell whether these sales will be enough to relieve the aforementioned inventory constraints in western Washington State. The more gradually these liquidations occur, the more orderly will be the intergenerational transfer of these assets to Millennials and Zoomers. If inflation, stock market disruptions, interest rate spikes, or other external disruptions accelerate liquidations, these could magnify the uncertainty of home price trajectories.
Nationwide, the table is already set for an excess of supply over demand that will cut deeply into downsizing Boomers’ retirement plans. Student debt and delayed family formation have caused Millennials to delay their home purchases in comparison with preceding generations. When they do buy, Millennials are still seeking smaller living spaces. This has caused their preferences to overlap with those of Boomers, many of whom are already into their 70s and ready to downsize. As these two cohorts are competing for the same housing stock, demand for one- and two-bedroom homes has increased across the country, with prices adjusting accordingly. Boomers’ larger homes have therefore seen slower price growth and longer selling durations. “Within neighborhoods, price growth of one-bedrooms has outpaced that of five-bedrooms by almost two percentage points per year,” so that the Boomers’ return on sale of their homes may not keep up with their downsizing targets.
Currently, Americans over the age of 55 hold almost 60 percent of total housing wealth, with 60-75 percent of their assets held in real estate (Davis and Van Nieuwerburgh, 2015). Asset-wise, the middle class is almost completely dependent on housing, with retirement portfolios a distant second. Since many Americans in the middle class will retire within the next few years, they stand to exert demographic pressure on their neighborhoods. This pressure might significantly affect the $16.5 trillion in real estate wealth held in these households, precisely when they will need those assets most.
Boomers with downsizing plans who are unable to adjust their expectations for price, quality, or location may hedge against this outcome by simply aging in place. Household savings, inflation, and direct payments from the government will all bear on these decisions, which in turn effect homeownership tenure (discussed below). For those homeowners with heirs, this will postpone some sales until the estate is divided or liquidated by executors.
Consumer inflation, and risks posed by direct payments
In May, the U.S. Bureau of Labor Statistics reported,
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.8 percent in April on a seasonally adjusted basis after rising 0.6 percent in March …. Over the last 12 months, the all items index increased 4.2 percent before seasonal adjustment. This is the largest 12-month increase since a 4.9-percent increase for the period ending September 2008.
In a shift that weighs heavily on commuters, the motor fuels index saw an unadjusted increase of 48.9 percent, the largest in more than eleven years (previously +49.5 percent in January 2010). Regionally, the CPI for Seattle rose by 3.4 percent from April 2020, and by 1.1 percent from February 2021.
In March, President Joe Biden authorized the American Rescue Plan Act of 2021, which provided $1.9 trillion in COVID relief. On 29 May, his administration proposed a six trillion dollar budget, including the President’s $1.8 trillion American Families Plan. That proposal will have to pass a sharply divided U.S. Senate and is unlikely to emerge intact.
Direct payments to citizens, whether in such forms as the Biden administration’s American Rescue Plan, or universal basic income (UBI) if enacted, or unemployment insurance proceeds, all have the effect of raising inflation without qualifying the recipients for home financing as regular earned income does. (We can acknowledge the multiplier effects of these payments while admitting that they expand the money supply without adding productive value.) The resulting consumer inflation has the perverse effect of raising household expenditures that compete with the household budgetary shares available for rent or mortgage payments.
Ongoing trends and uncertainties
The final three trends influencing regional home selling markets are already underway. Any questions related to their influence concern their continuation in, or reversal from, their present direction. The third of these, outflow from urban areas accelerated by increasing employer acceptance of working from home (WFH), may necessitate a rethink of the development patterns that have become conventional within the U.S.
Tenure of homeownership
A decade of lengthening tenure of homeownership appears to be nearing an end on the West Coast. Tenure in California slowed to a crawl in 2020, and slightly reversed in Seattle and Portland. Homeownership tenure is key to building equity in a home, as the costs of selling are substantial.
In regions of the country where home prices have been slower to rise, infrequent moves allow time to accumulate equity, so that the homeowners can buy up to a larger or more comfortable dwelling, or into a preferred neighborhood. On the West Coast, the rapid escalation of prices in recent years has allowed homeowners to move more frequently; nevertheless, homeownership tenure has expanded since 2010. This phase now appears to be closing, most likely due to downsizing Boomers—the generation with the longest tenures in the market. Inflation is a countervailing force to protract tenures, as it reduces the value of equity in a home.
Table B: Homeownership tenure
Declining inbound relocations
Compared with other out-of-state origins, home buyers continue to arrive in our state in the largest numbers from California, Oregon, and Texas. The first and third of these are very large states with strong information technology, energy, and aerospace industries, which are symbiotic with Washington’s economy. So, there will continue to be anecdotal support for new arrivals from these states.
However, that does not mean that the stream of buyers from these states is continually swelling, or even steady. On the contrary, inbound license transfers from all three states have declined for well over two years (Chart J). The 12-month moving sum of inbound drivers’ license transfers from California peaked in April 2011. It has been persistently lower since October 2018. In March 2021, it was down by 28.6 percent, after eight months of greater-than-30-percent declines (Charts K and L).
Drivers’ license transfers are admittedly an imperfect proxy for relocation to the state, and especially the city. This metric discounts new residents who do not drive, as well as non-driving members of a household. It perhaps more reliably predicts markets of origin for new residential buyers in the suburbs and exurbs than it does new urban condominium buyers or apartment tenants. Nevertheless, these transfers do offer insight into streams of new residents most likely to buy homes.
The COVID-induced work-from-home (WFH) trend and outflow to suburbs/exurbs
While a post-COVID bounce appears evident, with short-term home buyer demand returning to trend, a longer-term shift was already evident locally years before the onset of the COVID-19 outbreak. That outflow from urban neighborhoods to suburban and exurban towns highly resembles the nationwide trend more recently described by S&P Dow Jones in their Case-Shiller Index reports of the past seven months. In some cities, this trend may arguably have begun with COVID-19; but in western Washington State, the work-from-home impulse prompted by the COVID-related restrictions may only have made it more noticeable.
It may also prove to be more durable. A May 2021 survey sponsored by Bloomberg News found that among 1,000 U.S. adults, 39 percent of all respondents, and 49 percent of Millennial and Gen Z respondents “would consider quitting if their employers weren’t flexible about remote work.” According to the National Association of Realtors (NAR), the 85 percent share of buyers who in April 2021 had “purchased a property in a suburban, small town, rural, or resort area” was unchanged from a year before. Furthermore, “sixty percent of REALTORS® reported they had potential buyers looking for work-from-home features such as an extra room, a finished basement, or a bigger home.”
Table C: Months in residential and condominium inventory in exurban counties (Skagit, San Juan, Island, Jefferson, Mason, and Grays Harbor)
Exurban counties beyond the Seattle MSA, and excluding the more densely populated Kitsap, Thurston, and Whatcom Counties, have seen their home inventories squeezed for the past four years by commuters from those more populous counties. Yet the increasing outflow with effect from June 2020 was enough to push inventories in these remote regions even lower, at rates of contraction exceeding those in the Seattle MSA outside the city. (The vertical axis in Chart D above is logarithmic, to show the steep inventory contraction of exurban homes priced above one million dollars.)
Complementing the WFH trend, the suburban/exurban migration is also influenced by the same changes in the urban political landscape that are driving progressive tax measures like the capital gains tax; and by the imminent Boomer downsizing discussed above. For seniors with family members in the region, the quality of life available at suburban assisted living centers and retirement havens in the exurbs will likely induce some outflow to these communities.
Regardless of whether it continues, this suburban/exurban shift is expected to have little influence on home prices in the Seattle MSA as indicated by the Case-Shiller results. That is due to the extraordinary variety of densities—urban, suburban, and exurban—within the metropolitan statistical area. In the Seattle MSA, “demand for homes can shift away from the city of Seattle without its residents exiting the metropolitan area.”
The short-term effects of material prices will combine with low inventory to ensure high and rising home prices through the end of this year. Rising interest rates are still too low to counterbalance this result, but in combination with inflation, will become progressively more of an obstacle to continued price growth. Any change in direction is likely to be seen next year at the earliest, with mortgage lenders having reduced originations as forecast.
Some high-end home buyers will convert stocks to real estate to avoid the capital gains tax, but their numbers will be too small to influence the market generally. Inbound relocations of residential buyers from leading states will continue to fade in comparison with intra-regional migration from the city to suburbs and exurbs. The work-from-home trend will continue to provide a once-in-a-lifetime opportunity for older owners of large homes in suburban and exurban towns to cash out and downsize. They will join Millennial home buyers in bidding for newly constructed condominium units and the shrinking inventory of smaller homes that remain on the market, including homes in the city as well as farther out. This will cause upward pressure on the prices of these homes through the end of this year, and possibly longer.
For more details on the March 2021 Case-Shiller Index results, download the S&P Dow Jones Case-Shiller summary report. For details on the market implications of our reports for homes in your neighborhood, contact a local RSIR broker.
 Published by S&P Dow Jones, the Case Shiller Index surveys resales of residential homes in the Seattle MSA. The index notably does not account for condominium sales. “S&P CoreLogic Case-Shiller Index Shows Annual Home Price Gains Climbed to 13.2% in March,” S&P Dow Jones, New York, 25 May 2021.
 U.S. Census Bureau and the U.S. Department of Housing and Urban Development, Monthly New Residential Construction, April 2021, Release Number: Cb21‐78, 18 May 2021. Unlike Case-Shiller, which is published two months after its relevant data are recorded, U.S. Census housing market survey data are published in the following month.
 Data obtained from, but not compiled by, the Northwest Multiple Listing Service. Due to data limitations, the share of the median price contributed by the valued of land has not been segregated in this chart.
 Economic & Housing Research group, “Quarterly Forecast: As the Economy Recovers, the Housing Market Remains Healthy While Mortgage Rates Move Up,” Federal Home Loan Mortgage Corporation (FHLMC), April 2021.
 William Hillis, “Seattle Slips To Third Nationwide Despite Strengthening Home Price Growth,” RSIR blog, 29 April 2021.
 Teresa Ghilarducci, “Most Americans Don’t Have A Real Stake In The Stock Market,” Forbes, 31 August 2020.
 Marijn A. Bolhuis and Judd N.L. Cramer, The Millennial Boom, the Baby Bust, and the Housing Market, University of Toronto, preliminary draft paper, 22 March 2020.
 Ibid., Baby Boomers and the Housing Market on the Cusp of COVID-19, VOX, CEPR Policy Portal, 2 April 2020.
 The amount of time a homeowner keeps a house as a home or other asset before re-selling it.
 Lily Katz, “1 in 4 U.S. Homeowners Have Lived in Their Home for Over 20 Years—The Highest Share on Record,” Redfin News, 21 January 2021.
 Data for Charts J, K, and L were obtained from the Washington State Department of Licensing’s website.
 Anders Melin and Misyrlena Egkolfopoulou, “Employees Are Quitting Instead of Giving Up Working From Home,” Bloomberg News, 1 June 2021.
April 2021, National Association of REALTORS®, April 2021. Challenging the thesis of a geographical shift in residential demand away from urban areas, an IMF working paper published in September 2020 offers an alternative view: “that the (nationwide) U-shaped housing demand across income distribution is unlikely to be driven by rich households buying houses in low-income zip codes; instead, it may indeed reflect the relaxed liquidity constraints for low income households and the fear-of-missing-out for high-income households, both of which are associated with Fed’s unprecedented easing.” The author of that report allowed “that the increase in housing demand in urban areas (induced by, e.g., low mortgage rates and a preference shift from renting to owning houses) is so large that even after considering this fleeing effect, the urban housing demand and price have still increased substantially.” Yunhui Zhao, “US Housing Market During COVID-19: Aggregate and Distributional Evidence,” IMF Working Paper, WP/20/212, International Monetary Fund, September 2020.