Is a recession coming?

The bubble is going to pop, or so every news site, pundit and friend with an opinion tells us. How do we make sense out of all these perspectives?  Will the stock market and the housing market be different? There’s nothing that baits our clicks like a headline that promises some part of our well being and security might be taken away.  Whether it’s the next super virus or  the looming threat that our homes will drop in value and we’ll be underwater on our mortgages, these doomsday headlines reel us in while they sell ad space, or subscriptions, or affiliate marketing.  Regardless, it’s on all of our minds, and social media intensifies our perspectives, and I think that it’s important that we separate rhetoric from reality. Still, predictions are just that.  No one can know what lies ahead until it actually happens.  While it may be in our interest to paint a positive picture, this is why we feel positive about Seattle’s real estate market.

Not all recessions are the same

I think all those who lived through the 2007/2008 recession have a bitter taste. We remember how unexpected it was, and how devastating, but a lot has changed since then. While stock market data affects people around the country in basically the same way, real estate data for the entire country cannot be applied evenly to every city.  Seattle in particular has always been like a market “microwaved”, hot in some areas, and very cold in other areas. When people hear “recession”, they think crash.  But it can also be very mild.  We hear things like “inverted yield curve”, which can certainly keep us from feeling confident about stock investments, but whether the market is good or bad, people still need (and want) homes.  All of our recessions have been, and will be different.
Here’s things we might see besides price drops in the next recession
  • More seller concessions like repairs or help with closing costs
  • Variable commissions based on new rules around agent commissions
  • Longer time on market
  • More properties coming back on market due to failed financing as regulations tighten in an effort to create stability
  • More contingent deals

Seattle is unique for a number of reasons

  1. Strong job market.  This is the most important factor, and the one that holds the most weight with our housing market.
  2. Zoning regulations are restrictive, and account for about 25% of the cost of any build.  This slow the influx of new development.
  3. Tradespeople are exceedingly hard to find.  Big infrastructure projects in the region have pulled away most of the good trade workers, and flipping, building, renovating, adding ADUs, etc is much slower than the demand.
  4. We have no where to go but up.  With water and mountains all around, and a very constricted transit corridor, we’re struggling to find enough homes for everyone, and this is keeping prices strong.

Will prices drop?

Walk up to any home owner, right now, and offer them 95% of their ZEstimate or Redfin Estimate, and they’re going to tell you flat out: “no”.  AVM’s, or Automated Value Estimates, which known by industry professionals to be inaccurate (and more-so the higher the price-range of the home), still carry a great deal of weight with buyers, as does what they paid for the home.

Now that interest rates are in the “3s”, it’s going to take significant motivation for people to want to sell their homes. This keeps inventory low. The sellers still feel they are better off waiting it out.

Interest rates from 1996-2019 [source]

What’s changed since 2008?

Crashes require a great influx of homes for sale, and people willing (or required) to sell them off quickly.

  • The laws have changed on REOs (the final stage of a foreclosure, where a bank owns a home).  They no longer need to sell them right away
  • Many states have adopted mandatory loan modifications for anyone who is unable to pay their mortgage. See California’s Homeowners Bill of Rights
  • Banks can no longer communicate directly with appraisers to “clue” them in on what the home should appraise at.
  • Flippers, wholesalers and iBuyers are creating an artificial market bottom for us.  Perhaps a response to a myriad of “flipper” tv shows, the cash flush and ultra-credit worth are buying and renovating homes, and waiting things out until they get their price.
  • We no longer have those super risky “instruments” like “choose your own payment ” loans, balloon payment ARMs, no-document loans, or 125% loan-to-value loans like we had back in 2008.
  • Buyers now see their “HUDs” or closing statements 48 hours before close, which does a great deal to curtail predatory lending practices.
  • People spend more time thinking about home ownership and weighing their options, much more than the 2000-2008 period.   Our collective experience with the last recession has made every step of the process a bit more risk-averse.
  • 1/3 of mortgages in 2006 were no-doc or sub-prime.

What’s different for buyers?

Buyers are picky, always have been, always will be, however the threat of a recession encourages them to hang tight and bide their time. However, the desire and preference to own a home has not dropped. 90% of renters want to own.  Marrying later, having children later, and high home prices have skewed the statistics for this, leading people to home ownership later in life.

In November 2018, Interest rates hit an average 30-year mortgage high of 4.94%. In March rates had come down almost 1%. Right now they are in the 3.75% range. That increases buyer’s buying power considerably.

From the developer’s side, margins are getting tighter in property management / multi-family ownership.  This means that rental increases are part of a long term business plan, and renters are seeing more annual increases.  People get tired of rent increases and tired of moving.  All the benefits of homeownership remain, no matter what the price.

Job Market: Washington state’s Employment Security Department forecasts that more than 77,000 jobs will be added in 2019, and even more people than that will move here (around 88k). They need homes, simple as that.

When it is cheaper to buy than to rent, the first time home buyer market jumps. First-time buyers purchase, allowing those sellers to upgrade homes and create a domino effect, often up to 7 times over. Current rental rates are $1.95-$2.13 per square foot per month in most Seattle neighborhoods, keeping it just slightly more expensive than buying. While there are a lot of new-construction apartments out there, recent studies show that home ownership and shared financial goals are two of the top drivers

The great boomer sell-off

It was predicted at one time that there would be a great deal of sell off in the senior housing realm.  However reverse mortgages, a trend of staying in our homes longer, and passive income potential like AirBNB have changed these trends.  Low supply always stabilizes pricing.

It’s also our observation that most of the new construction available is loaded with stairs, built vertically, and not at all senior-friendly, so we’re seeing people staying longer.

In conclusion

Recessions are a natural part of the life cycle of economies.  We will have one, but it’s effect on the home market might be much more slight, and perhaps our worst fears are exaggerated by the circumstances of the past.

There are no indications we are in a bubble. Rather, we simply have a very strong sellers’ market underway. Will it last? History says no. Supply and demand are always doing a balancing act. Short supply causes prices to rise. As prices rise, demand tends to falter allowing for a rebalancing of supply.

In short, our outlook is that there is a good opportunity right now to take advantage of good supply and slightly softer prices to get in a home before the next wave of demand.

We’d love to meet you for a coffee, a tea, or a fancy cocktail. You can use our contact page or text us at (206) 458-1311.

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