By: Dan Colson
I often hear people’s worries that we are in another bubble. Prices have risen significantly in the last several years. There is an underlying fear that we are on the brink of another housing recession. While there are never any guarantee’s when it comes to the economy, I would like to share some of the differences between today’s market and that of the market pre-recession.
Supply and Demand
Anyone who has taken a basic course in economics (and many who haven’t) know that the basic drivers of price are supply and demand. In September 2007 there were 7.1 months of inventory on the Greater Eastside (for reference a balanced market is 6 months of inventory), with over 4600 active listings. Out of that, there were only 655 pending sales during that month. To break that into a percentage, about 14% of the active listings went pending.
Now when we compare that to September 2016, we really see the difference. We are currently only sitting on 1.1 months of inventory, we had 1,352 active listings and 1,214 pending sales. That is an astronomical 90% of listings that went pending.
From a supply and demand standpoint, the current increase in prices is warranted and will continue to be so. Until enough homes are built to begin to balance the market, current prices will remain steady or even continue to increase.
There are several factors at play from a financial perspective that are driving prices on the Eastside. First, in the years leading up to the recession, mortgages were extremely easy to come by. My mortgage partner likes to joke that back then “If you could breathe, you could get a mortgage.” Thankfully, we learned that the mortgage industry needed stricter regulation and in the subsequent years that is exactly what has happened. Today, there are more stringent requirements and much more due diligence done by the underwriters to ensure that the mortgages being written are sound.
There is also a significant amount of foreign investment happening in the region. Many of these buyer’s are bringing cash to the table and not relying on mortgages to finance their purchase. In a multiple offer situation (which has been prevalent with the lack of supply) a cash buyer reigns supreme. In order for a buyer depending on a mortgage to compete, they must offer an increased price or more favorable terms.
Seattle has a booming economy! Between Microsoft, Starbucks, Amazon, and Boeing, we have some of the nation’s most influential companies based here in the Pacific Northwest. Job growth has been steady in the region for some time now and wages are increasing to a level that competes with the likes of some of the nation’s largest cities. This is great for us, and great for sustained growth in the years to come. Downtown Seattle currently has more cranes constructing skyscrapers than any other city in the nation. That, in itself, is quite impressive.
When we truly examine the various factors that are contributing to today’s current rise in home prices in the region, we begin to really see the picture of what is causing it. It is not propped up by bad loans with adjustable rates that won’t be affordable when interest rates increase, like what happened in 2007-8. Instead, prices have risen due to a general lack of supply in the region, an increased interest in real estate investment, and a booming economy. And for that, we should be thankful.