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Thursday, January 11, 2007

Prices Unleavened in 2007?

So what's in store for the Seattle housing market in 2007? Everyone's got an opinion, and yours truly is no exception. But before I get into my guesses, let's review the predictions of local "experts" that have been trumpeted in the media in the last few weeks.

From a December 22nd P-I article:

"I think very easily by spring this could be an extremely strong real estate market," said Bill Riss, chief executive of Coldwell Banker Bain, in Seattle. He said he was planning on home prices going up an average of about 10 percent in the coming year and about the same number of homes to be sold next year as in 2006.

Analysts say strong job growth will continue to drive demand in the area.

"Really, the driver of the housing costs is demand, which is fueled by jobs," said Randy Bannecker, a consultant housing specialist for the Seattle-King County Association of Realtors. He predicted year-over-year price increases would be 6 percent to 10 percent in 2007.

[WCRER Director Glenn] Crellin predicted slight declines in activity in 2007 and year-over-year price increases that would be down around 3 percent to 5 percent by the end of next year.

Matthew Gardner, a local land-use economist, predicted activity would slow from recent highs and price increases would settle to 7 percent to 9 percent in Seattle and 5 percent to 7 percent in rural areas farther from jobs.
Don't forget Ms. Rhodes' preferred vision, discussed here earlier.
What will 2007 bring? Here's what Seattle real-estate experts are saying.
[Seattle real-estate economist Matthew Gardner] expects closer-in areas to appreciate about 10 percent over the coming year; farther out, 7 percent appreciation will be more the norm for single-family homes and for condominiums.
And of course I have to mention the outlier in the bunch, from Saturday's P-I:
Michael Simonsen, chief executive of Altos Research, in Palo Alto, Calif., has noticed cooling in the Seattle home market.
Simonsen predicted that Seattle would start seeing slight year-over-year price declines this spring or summer, although he said the city had a strong economy, and its housing market would fare better than outlying areas.
So the general consensus among the media's preferred "experts" seems to be a fairly optimistic +7—10% to the median price in 2007, thanks to "jobs." Granted, median price doesn't give us a very complete market picture, but it's the best metric we've got.

As far as the jobs argument goes, I believe it is a false hope to think that as long as the sheer number of jobs is increasing, housing prices will also increase. It is true that a large drop in employment will usually lead to a housing downturn, but housing can decline despite a strong job market. For evidence of this, see Rich Toscano's investigation of San Diego's housing market in the 1990s. Of course I'm sure that the local housing bulls would retort that San Diego didn't have Boeing and Microsoft.

Before I tell you what I think is in store for 2007, let's take a look at what I guessed back in April about the remainder of 2006:
In most parts of King County appreciation slows to a crawl through the end of the year. The closer to Seattle you get, the more stagnant the appreciation. Near the end of summer and into fall, inventory begins to build slightly. Realtors and newspapers proudly proclaim a "soft landing."
"Appreciation slows to a crawl" was clearly incorrect. Appreciation did indeed slow to 12% YOY county-wide and 10% in Seattle (pdf, page 2), but that's hardly "to a crawl." I think prices were held a bit higher than I expected thanks to the unexpected drop in mortgage interest rates. My call on inventory was spot on, with active listings up 20-30% YOY the last three months of the year, and as evidenced by the newspaper quotes above, the press is definitely still pretty optimistic about the market.

Here's my 2007 prediction from April:
Inventory stacks up at an increasing pace, prices are level in some areas, slightly declining in others. By the end of the year, prices in some areas are approaching 2004 levels. Realtors still in denial.
With inventory already increasing over 20% YOY, it will be hard to increase the pace, but certainly possible. I expect to see active listings at least 15% over 2006 levels for the first half of the year. During the same time, I expect sales will decline at least 5-10% from 2006, dropping back to levels last seen in 2002 or 2003.

As far as the median price goes, I doubt that it will be "approaching 2004 levels." That would be a roughly 25% drop from today's price, which is highly unlikely save for some sort of scenario that includes a major natural disaster. More realistically, I guess that the King County "residential" median price at the end of this year will be between five percent down ($418,000) and three percent up ($453,200).

I expect we'll see more toward the low end if interest rates begin to edge upward again, lending standards are actually tightened a bit, and the local economy moderates. If interest rates hold steady or drop, new even-more "creative" financing is brought to market, and the economy goes gangbusters, we'll probably end up at the high end.

Maybe the "experts" are right and prices will go up another ten percent this year. Maybe I am underestimating the willingness of Seattle homebuyers to jump into greater and greater debt for an unchanging product. No doubt they've already demonstrated themselves to be far more willing than I ever would have guessed. However, as the real estate party winds down around the country, I have yet to hear any good, well-thought-out reasons ("Microsoft and Boeing" doesn't count) that we will escape the slow landslide.

Whatever happens, most of the action will probably take place March through May, so we'll most likely have a pretty good idea by June where we'll be in December.

So what are your predictions (and the reasons behind them) for 2007?

(Aubrey Cohen, Seattle P-I, 12.22.2006)
(Elizabeth Rhodes, Seattle Times, 12.30.2006)
(Aubrey Cohen, Seattle P-I, 01.06.2007)


Ari said...

I was a Seattle resident 1999-2004, now living in Phoenix. Since moving away I haven't closely followed the housing market there save for the occasional lurk on Seattle Bubble.
During a visit there this week, I couldn't believe what I was seeing in my friend's south Seattle neighborhood. At the time I lived in the NW, houses around his would sell in hours for 10-15% above asking price, very little was on the market, etc.
This week I counted 10 houses for sale within 5 blocks of their home - 3 had "price reduced" signs. Maybe their part of Seattle is atypical - but yikes! Is this going on in other parts of the metro area? If so - it looks like Sea. homeowners might be in trouble (as are many in Phoenix) if they have to sell any time in 2007.

deeplennon said...

The March numbers in particular will be very very interesting as three of the last four years that's where appreciation made it's single biggest one month jump.

As such, if appreciation is simply level (or close to it) from February to March this year you'll see a huge effect on the YOY appreciation numbers which could create a sizeable media shockwave.

Or.. just another banner March and the song remains the same.

matthew said...

I think we will see a tremendous run up in inventory this springtime... Price stickiness and seller's reluctance to drop prices will only make matters worse.... We won't see median declines YOY until late spring - possibly late summer. But when they come, the air will be let out SLOWLY and we will see declines YOY for at least 3 years.

Kimsie said...

I'm already seeing a whole crowd of my old friends (listings) coming back on the market as new listings after the holidays. I agree that the inventory will go up substantially.

One listing is owned by a realtor. I have seen her relist the home 4 times, each time with a tiny price reduction. With this last reduction she has lowered the price by a total of 5% from her original price. Each time she changes the main listing picture to make it look like a new listing. This time she really poured it on in the description, talking about the "fabulous kitchen", etc. I have been in that home, and the kitchen is one of the smallest kitchens I have ever seen in a SFH.

Uncertain Buyer said...

We are hearing this in Vancouver, Canada.

The industry seems to think that we are special and immune to a housing decline. Even though the average household now needs 70% of their income to own an average priced home.

Uncertain Buyer said...

P.S. We are seeing a large increase in inventory and some minor price drops.

CRichard said...

I don’t think that it will be difficult to get jaw-dropping increases in inventory during the early part of 2007 (easily more than +15%). Last year, inventory was at historically low levels through March. Also, given the large and sudden drop in inventory at the end of 2006 (which was not due to sales), I suspect that there is a large pool of eager sellers waiting to re-list once the Seahawks are no longer playing.

I am not going to guess what the effect will be on prices, but in most cities last year, the high inventory early on, combined with low affordability, put a damper on hopes of a spring bounce pretty quickly.

CRichard said...

By the way, I think that trying to predict price change in 2007 is quite pointless for several reasons:

1) Credit tightening is much more likely to happen this year than it was last year. The effects of credit tightening on the buyer pool and/or affordability could be qualitatively different depending on whether it arises from the new lending guidance or from a true credit crunch. If either happens, “it WILL be a new paradigm” and price changes will not follow expectations.

2) While similar slowing patterns are occurring here as they were in other bubble cities a year ago, price changes could easily take a different course. On the one hand, affordability has yet to reached CA, AZ, or FL –like levels, and speculator activity is—on the surface—not as apparent as in those locations. On the other hand, those places were supported by still-favorable economic conditions (loose lending, non-recession, low interest rates), the absence of which could seriously undercut sales this year.

3) The median price is going to behave erratically as the mix of housing sold changes in a slow down, so NWMLS data will be mostly meaningless anyways.

biliruben said...

I'll take a wild stab at a very specific prediction. This is a fool's game, but as long as I have little skin in it...

My prediction is that we see an initial slight increases in price in March and April, flattening in mid-summer as we start to fall into a national recession, then a huge up-tick in inventory, and a decline in prices YOY, inflation adjusted by July. We see our first nominal YOY decline by September.

I'll even throw out some actual for SFH (res):

Inventory, median King County price, month:

5423, 440K, Dec (actual)
6100, 450K, Jan (est)
6800, 445K, Feb
7500, 455K, Mar
8200, 455K, Apr
9100, 450K, May
9200, 440K, Jun
9300, 435K, Jul
9900, 430K, Aug
10500, 410K, Sep
10500, 395K, Oct
9000, 390K, Nov
8500, 390K, Dec

I probably will be way off, but I thought I'd take a shot!

matthew said...


Why don't you factor those three things into a prediction? It's really not THAT hard, nor is it pointless, the point is to have a little fun.

deepcgi said...

Jobs are part of the equation but hardly the main variable. Demand has been fueled more by investment potential than employment. What the article should say is, "if mean prices aren't up 10 percent this year, the average McDonald's assistant manager is going to need to make 85 grand a year."

CRichard said...

My prediction is that no matter what happens to the market or the economy, 2007 will be a good time to buy and a good time to sell!

CRichard said...

Making predictions about housing inflation is not fun for me. At the beginning of last year I was able to keep my house-lusting wife at bay with confident predictions of Seattle price declines in 2006. I had pleasant year.

All the macro factors were in place for a decline last year. I learned the hard way that it is not possible to overestimate all the varied and multiple ways that businesses and individuals will poison their long term financial health to keep the party going as long as possible in the short term.

Fun Predictions:
1) If the past cool-aid starts to cause pain, then the prices of individual houses will drop while the median stays the same.

2) If FB's and Mortgage Co's can handle more cool-aid then, we will see a muted repeat of 2006.

3) No matter what happens, the top of the market will come later this year, immediately after I cave in and purchace my own jug of cool-aid.

Lisa said...

Bear in mind that price changes are usually reported as the median. In a slowing market, if the higher end fares better, the median will increase, even if individual homes are selling for less than they would have last year.

So even if the median ticks up or stays flat, it doesn't mean the housing market is in for the fabled "soft landing."

biliruben said...

The higher end is faring worse, and usually does.

The median is fine. Better than the average. I am skeptical about the numbers that go into it, however.

The reasons I think the median is still holding up, and will for another 6 months:

- Building in closing costs into the final price.
- Not taking into account incentives
- Quality homes selling okay still, where-as the crappy flips that should be 300k but who's asking is 500K just sit there. Result is no low-end selling at all.