At last month’s publication of the August Case Shiller Home Price Index results for Seattle, we noted an outsized monthly increase in the index results. Due most likely to pent-up demand following the Governor’s COVID-19 restrictions earlier in the spring and summer, the index showed Puget Sound residential home prices leaping by more than one percent from July. The September Case Shiller results, usually indicating still slower-rising residential prices than in August, this year showed that selling prices had extended even these highly unusual gains.[1] Strong price growth kept Seattle second in the nation for an eighth consecutive month on the index, trailing only lower-priced Phoenix in year-over-year percentage gains. Third-place San Diego posted the largest monthly percentage increase among West Coast gateway cities, at 1.81 percent from August to September.
In monthly growth from August, Seattle actually placed fourth among her West Coast peer metros. By this measure, Portland and Los Angeles nearly tied for second place after San Diego, with 1.33 percent and 1.32 percent index growth, respectively. Yet Seattle led in year-over-year increases, to +10.1 percent from +8.5 percent; with +7.6 percent from +6.2 percent in Portland; to +7.7 percent from +6.8 percent in Los Angeles; to +6.0 percent from +4.2 percent in San Francisco; and to +9.5 percent from +7.6 percent in San Diego (Charts A and B).
Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices, glowingly characterized the nation’s residential price growth:
Housing prices were notably—I am tempted to say ‘very’—strong in September. The National Composite Index gained 7.0 percent relative to its level a year ago, well ahead of August’s 5.8 percent increase. The 10- and 20-City Composites (up 6.2 percent and 6.6 percent, respectively) also rose at an accelerating pace in September. The strength of the housing market was consistent nationally—all 19 cities for which we have September data rose, and all 19 gained more in the 12 months ended in September than they had done in the 12 months ended in August.[2]
Seattle’s inventory squeeze continues to produce seasonally atypical price moves
Our reporting last month observed the “vigorous selling” over the summer months that further constricted inventories—already low before COVID-19, and further tightened as a result. The region has been a seller’s market since 2011, and the duration of inventory has spent the 2020 year to date well below a single month (Chart C). Set against the monthly Case-Shiller Index changes, it can be seen that compared with a buyer’s market, incremental adjustments to inventory in this market have produced more volatile prices. September’s price index change was even further outside the historical norm that the August result (Chart D).
We compared this historical trend to those of San Diego and San Francisco (Charts E and F, respectively). Although the Case Shiller monthly changes were of nearly a percent point or higher in all three cities, changes in previous years were different. We did not find the same historical pattern of generally unchanged or negative results for those California cities that we did for Seattle. RSIR will be watching to see whether this fall’s results are unique to this otherwise exceptional year, or portends a more persistent change in Seattle’s seasonal residential prices.
Downtown Seattle: a distinct market with contrasting dynamics
While the Case-Shiller index comprises neither condominium prices nor those of new construction homes of any kind, these other kinds of homes do draw demand throughout King County. Condominium units fully comprise the Belltown and Downtown Seattle markets. These markets have been among the hardest hit by the one-two punch of COVID-19 restrictions and local political unrest. While the immediate effect of these events has been a run-up in inventory for sale, RSIR market observers view this as a buying opportunity for investors and homebuyers with foresight.
“I like looking at the 12-year historical context,” said Dean Jones, President and CEO of Realogics Sotheby’s International Realty (RSIR). “It paints a clear picture in what is different with the COVID-19 ‘recession,’ or correction if we can call it one, vs. the ‘Great Recession.’ Unlike during that last major downturn, we are not in a housing crisis, but a health crisis that has led to impacts in housing: first a massive pullback (in both housing and the stock market), followed by a quick recovery to close 2020 at a new historical peak in both real estate and equities.”
A lot of people and a lot of money are out there trying to find a home, regardless of the pandemic. Rather than the credit crunch we saw just over a decade ago, when lenders clamped down and tightened mortgages, today we find ourselves with record-low interest rates and buyers that have been incubated within rentals. To qualify as buyers, many can avail themselves of restricted stock units at companies like Amazon. That company is first among others setting new benchmark values amid COVID-era consumption trends as we work and shop from home.”
Jones correctly surmised that “record [Black Friday] sales will post to online retailers, while social distancing requirements will likely serve up a polar opposite result at brick-and-mortar stores.” This prediction was confirmed, as “consumers spent an estimated $9 billion on U.S. retail websites on Black Friday, according to Adobe Analytics, which tracks online shopping.[1]
Jones continued, “My other reality check is to remind our consumers that markets do not behave uniformly, nor do product types or price points.”
The S&P/Case-Shiller report speaks only to the resale of existing single-family homes in the tri-county area, and specifically excludes condominiums and new construction. So while it is certainly a seller’s market in virtually every exurban locale in Western Washington, it’s a different story in downtown Seattle. This is especially the case among new construction high-rises. In combination, the construction delays during COVID, deferrals of marketing campaigns during social unrest, and Governor shutdowns of open houses now have developers sprinting to catch up by offering unprecedented incentives.
Stacia Smith, RSIR’s Chief Sales Officer and Designated Broker, agrees:
The accumulation of inventory downtown represents a huge change, but also a great opportunity. There is a flight from downtown to either the Eastside or out of the area, yet there is still incoming demand from other national markets, namely California. We are still a bargain to them, and they are likely less concerned with our Seattle politics, which compare favorably with those of San Francisco and LA. You also still have the Millennials wanting to live in downtown Seattle where it’s more vibrant and livelier than competing areas. I consider downtown Seattle right now to be an investor paradise, and feel it will continue like this for several more months to come.
Another consideration for urban prospects in today’s buyer’s market, the cost of delivering new supply continues to climb. Jones and Smith agree that it will take prices that average $1,200-$1,400 per square foot to pencil new condominium towers in the coming cycle, which will further render the existing inventory as very reasonable by comparison. Developers of the current supply nearing completion were able to secure guaranteed maximum prices from their contractors several years ago, which allow them to offer sharper prices and incentives than new developers facing steeper building costs today.
For more details on the September 2020 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.
[1] 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 Soared to 7% in September,” S&P Dow Jones, New York, 24 November 2020.
[2] Ibid.
[3] Associated Press, “Black Friday Traffic at U.S. Stores Down 52% Even as Online Retail Sales Hit Record High,” MarketWatch, 29 November 2020.