The 2018/2019 Market Report

Realogics Sotheby’s International Realty’s acclaimed Research Editor and Data Analyst, William Hillis, has assembled a year-over-year review of eight key counties and 31 regional markets around the Puget Sound. In addition to in-depth market analysis, the report includes a 2018 retrospective covering a range of topics such as downtown changes and interest rate uncertainty, analysis of the S&P CoreLogic Case-Shiller Home Price Index, a look ahead at 2019, and more. I have compiled a selection of key highlights including this year’s forecast below, to spark a conversation so we may outline the implication for homes in your city.

King County

The number of residential selling transactions gradually started to decline in the third quarter of 2017, and accelerated in the third and fourth quarters of 2018. The year ended with 11.2 percent fewer home sales than in 2017.

For a second consecutive year, both in number and proportion of overall sales, fewer King County condominium units were sold in 2018 (6,885 units, compared with 7,898 in 2017).

After steadily shorter market times since 2015, median cumulative days on market in the fourth quarter of 2018 shot to 26 days—a 16-day year-over-year increase—breaking through the 24-day market time last seen in the fourth quarter of 2014.

Of King County cities with more than 500 residential sales in 2018, those with the highest average (not median) selling prices were, in order of average price: Bellevue, Kirkland, Sammamish, Redmond, and Woodinville.

The 2018 median residential price was $680,000 and the compound annual growth rate from 2014 through 2018 was 11.5 percent.

2018 Retrospective

Interest rate uncertainty and Federal Reserve independence

In early January 2019, following a year when U.S. President Donald Trump was browbeating the Federal Reserve (using language some interpreted as threatening the independence of the nation’s central bank), Fed Chairman Jerome Powell declared that the Fed is “waiting and watching,” suspending a planned series of interest rate increases in view of a softening economy. The result buoyed markets in hopes of forestalling an economic downturn that would weigh heavily on home prices in Seattle and throughout the country.

Home prices continue to rise despite doubts

As recounted in this year’s Case-Shiller analysis, Seattle finally dropped out of the top three leading cities in the country for residential home price increases; and the Seattle Times spent the second half of the year portraying the slackening rate of advance as an outright drop in home values. However, median residential prices actually ended the year three percent higher in King, Pierce, and Snohomish counties combined. Although price gains were smallest among the most desirable Eastside markets, median selling prices remained higher year over year in these towns, in the city of Seattle, and throughout most of Puget Sound.

2019 Look Ahead

Affordability and rising interest rates

Interest rates have remained historically low throughout the 21st century. They would need to rise sharply in order to meaningfully impact housing affordability. Indeed, the federal income tax deductibility of mortgage interest has been a key factor in affordability by driving home price appreciation. Articles going back decades from across the political spectrum have decried the deduction’s effects, which have tended to benefit homeowners and developers a good deal more than entry-level homeowners. In October 2017, the National Taxypayer’s Union Foundation reported findings of the Tax Policy Center that

80 percent of the benefits of the MID flow to homeowners with a household income over $125,000. Most lower-income Americans claim the standard deduction rather than itemizing…At the same time, all Americans who wish to buy a home are harmed by the effects of the deduction. Home prices are inflated, but only some Americans receive a tax deduction to help defray those increased costs.

Some advocates within the real estate industry have zealously defended the mortgage interest deduction as necessary to sustain home prices. Yet although the deduction was to be reduced under the Trump tax reform that took effect in 2018, home prices did not immediately appear to be impacted by the measures taken.

Historically, the interest rate on a 30-year fixed-rate mortgage bottomed at 3.31 percent in the week of November 21st, 2012, 31 years after peaking in the week of October 9th, 1981 at 18.63 percent. Even today, rates remain more than 75 percent lower than their 1981 pinnacle, while since that time, U.S. median household incomes nationwide have increased by 222 percent.

However, home price increases have measurably exceeded increases in household income. The median home price in November 2012 was 252 percent higher than the price at the October 1981 interest rate peak. Moreover, across the country, home prices have continued to rise, and in Seattle have even accelerated the pace of their advance since interest rates bottomed in November 2012. It might be said that American families have been dollar-cost averaging their home investments since the 1980s. Rather than compute a target price based on a multiple of their annual income, effectively upon a mortgage-financed purchase, they have set monthly payment targets in direct proportion to their monthly income.

Therefore, even while interest rates sank, the amount that most homeowners plowed into the family home was never diminished. This is what drove prices higher: the incentive provided to homeowners by the U.S. tax code to maximize the tax-deductible interest they pay.

Now that the 2017 tax reform has settled the matter, further action on the mortgage interest deduction is unlikely in the near term. As the tax reform debate proceeded in 2017, none of the local voices who tend to speak out on housing affordability and upzoning had much to say about the MID—on the contrary, the Seattle Times had published editorial in 2015 urging that the deduction be preserved.

Looking ahead, as mortgage interest rates cannot go much lower even if the Federal Reserve elects not to raise them, condominium developers are designing for affordability, offering more efficiently-scaled homes and removing parking and storage from the base features. These are now treated more like an option than a necessity.

A balancing market

A prime consideration that in recent years has driven so many investment dollars into apartment construction has been the Washington State Condominium Act, which imposes heavy liability for construction defects on builders. A bill before the Legislature this year, the Condo Liability Reform bill (SB 5334), offers a chance to reduce the risk to builders by redefining warrantable defects and by limiting the personal liability borne by condo association board members. Combined with the oversupply of apartments, enactment of the bill could shift more development funds into condominium projects. The bill passed the Washington State Senate on February 25th, 2019.

In King County generally, home selling prices were still higher than in 2017; and although active inventory exceeded 2012 level from September through November, December saw some moderation. Downtown Seattle saw 468 resale closings in 2018, with a median home price of $675,000 and 39 days on market. That compares to slightly higher resales in 2017 (513), with a median home price of $625,000 and 21 days on market. Downtown Seattle is a thin market and more difficult to discern, yet it seems more sellers are feeling optimistic unloading investment properties due to rental competition, and others are buying into new towers. As the new product comes around (units) are opened for occupancy, the last-generation products will hit resales.

For additional market insights, read the digital edition below or contact me for your complimentary print copy.