The Future of the Seattle Housing Market: As Gray and Dreary as a Late March Day

I’d love to think otherwise — indeed my business benefits from market activity, just like the business of every other real estate broker.  But my wishes are irrelevant — its the data that tells the story.  And right now, that story is looking like a real tear-jerker. 

First, my favorite article of the month makes a simple and compelling point: House values will stabilize when they return to their historical relationship to inflation.   The fact of the matter is that, historically, house values have increased at the same rate as inflation.  With the recent bubble, values dramatically deviated upward from this pattern. Notwithstanding the housing “crash,” there remains a significant difference between values and inflation, a diference much greater than the historical norm.  The chart to the right illustrates the point.

Accordingly, for housing prices to return to the historical norm, values must drop substantialy further, or inflation needs to catch up.  Since inflation is essentially nonexistent these days (1-2%), housing prices simply must fall further.  Of course, this presupposes that asset values always return to the historical norm.  There is always the chance that we have a “new normal” on our hands, where house values remain significantly above inflation.  But betting against the historical norm is usually not a winning bet.

And of course, that’s not the only reference to house values in the news these days.  Today’s paper had more bad news both nationally and locally: “Home Prices Continue to Fall in Major U.S. Cities.”  As noted in the article by somebody who is paid to know, “The bottom line is, we just have a boatload of loans sitting in foreclosure or close, and we have to work through those loans before we can find a bottom.” And our area is not immune from the “foreclosure crisis” that continues to exert downward pressure on prices.

So as much as I’d like to believe otherwise, its hard to deny the bleak landscape. It is still probably a good time to buy a new home given the historically low interest rates, rates that will not last forever.  And once you factor in the lower interest rate, “overpaying” for a house today — where it subsequent drops in value — does not necessarily mean you will lose money in the long term, particularly if this is your residence and you get the tax benefits of home ownership. But I’d be very wary of anybody who assures you that we have “bottomed” and values will only go up from here.  The fact of the matter is, its rainy and cold outside…..

Posted by Marc

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