Market Update: September 2021

September 11, 2021, 5 min read

Welcome to the start of the Fall, and the start of new school year. I am sharing some updates on what's happening in the Seattle housing market. The question on everyone's mind is probably: is there a slowdown? Read on for my take.

A client of mine recently came in second in a bidding war for this 1,740 sqft rambler in Bellevue. Agonizingly close, but ultimately a miss. It was listed at $1,149,000 and sold for $1,430,000 (about $820/sqft). The sold price was $279K (24%) higher than the listing price, and $572K (67%) higher than the sold price about three years ago. The home was tastefully remodeled and located in a good neighborhood, but still, 67% appreciation in short three years is breath-taking. In the last twelve months, prices in the Eastside has increased by 30%.

If you are in the market to buy a home, you are probably wondering when this craziness is going to end. It will. Prices cannot simply go up at the 20% per year indefinitely. Interest rate will increase. Affordability ceiling will be reached. Buyers will balk and walk away from intense bidding wars. Yet the slowdown will be gradual instead of abrupt, due to the simple law of demand and supply. A lot also depends on the specific location; some in-demand neighborhoods, including the core Eastside, will be cooling off much more slowly than elsewhere.

Let's talk demand and supply. The US is currently 6M homes short of a neutral seller/buyer market. This shortage is projected to last for a decade. Let's dive into some reasons why.

Pent-up demand is not subsiding any time soon

• Interest rate continues to be near record low, despite continuing chatter about an imminent hike.
• A large wave of millennials (age 26 to 40) is entering the home buying phase. About 1.3M new families will be formed annually for the next several years.
• Stock market is doing well. The DJIA is up 17% compared to the pre-pandemic high back in February 2020. In the Seattle area, tech workers at Microsoft and FAANG companies have seen the values of their RSUs increase significantly (MSFT rose by 60% since 02/20, for instance). All of these wealth increases are driving up demand for homes, primary and investment alike.
• Due to flexible remote work, many people chose to move to less expensive places, driving up the prices there. Austin's invasions of Californians comes to mind.
• People continue to work from/stuck at home. They realize that they need more space for a comfortable office and a bigger yard for their dogs - dog ownership is increasing as well (did you know that I have an adorable goldendoodle puppy named Bear?).
  

Supply will continue to be tight for years to come

Supply comes from existing homes and new construction. Let's look at the trends.

Not enough existing homes entering the market

• Baby boomers are not downsizing. At just 28% of the population, boomers own 44% of the real estate wealth. As part of the circle of life, emptynesters move to a smaller home or a condo, freeing up their homes for the next generation. Baby boomers, today's emptynesters, are healthier than previous generations and work longer. They prefer to live in the same locations that have provided them with all the amenities and convenience: groceries, restaurants, communities, etc.
• Upgrading buyers won't sell. Many of my clients rent out their current homes instead of putting them on the market. They probably see the same sign: why sell now when prices are still going up and up?
• Foreclosure volume is low. Strong labor and stock markets, coupled with government incentives, have kept the volume of homes undergoing foreclosure low.

Construction: slow-going

• We have been under-building since the great recession (about 300K homes/year). On average, the US builds 2M new homes a year. In 2009, the immediate aftermath of the Great Recession, we built only 500K homes.
• There's a lack of skilled labor, from construction workers to plumbers/electricians. The pendulum swing of the real estate market's collapse in 2009 has been extreme. Experienced workers dropped out of the construction trades, and younger people aren’t replacing them, opting for white-collar jobs instead. Many job applicants can’t pass drug tests, and immigration enforcement is scaring some laborers away.
• The shortage of materials has been severe. Supply chain is disrupted by Covid. Lumber price went from $349 per thousand board feet in 04/2020 to $1,514 in 05/2021.
• Regulations, including environmental protection, infrastructure fees add tens of thousands of dollars to the cost of every home. With zoning restrictions and increasing land costs, builders are forced to build higher end homes to make a profit. In 1982, 40% of the country's newly constructed houses were entry-level homes. Today, the annual share had fallen to around 7%. Around Eastside, new construction homes are typically 3,000sqft or higher and listed at above $2M.
  

So, what are these trends and data points telling us? Price will continue to go up, but perhaps at a slower pace. If you are in the market for a home, it still makes sense to act now instead of waiting. Barring a stock market super crash, only a massive increase in interest rate may shift the market toward buyers' side. But unless you are paying in cash, a high interest rate does not work in your favor either, does it.

Reach out to me if you have further questions. Enjoy the beautiful fall season!

LB