“The sky is falling! The sky is falling!” The phrase from the tale of Chicken Little is familiar to most of us— the chicken who panics easily. Sometimes we can find ourselves in the same frame of mind; especially when change is proceeded by what we have grown accustomed to, or what we consider normal.
But what is normal? The dictionary describes normal as: ‘Conforming to a standard; usual, typical, or expected.’ Change must be introduced for a new normal to be adopted.
Often times, a new normal is just what we need; although we may not know it yet.
The term Normalizing means, ‘To bring or return to a normal condition or state.’ This is exactly what the Seattle market is doing, and we welcome this change with open arms. Recently coined as ‘The Nations Hottest Real Estate Market’, Seattle has had aggressive appreciation, especially over the last two years. However, such a steep appreciation rate is not sustainable for the long term viability of the marketplace.
One of the biggest reasons for Seattle’s success is supply vs. demand. There aren’t enough homes for all the people who want to be here. The Seattle Times research tells us that in March 2018, King County had around 2,000 homes for sale, while “during the average month of March over the last two decades, the region had more than 7,800 homes for sale — nearly four times as many.”
The demand is greater than the supply of inventory. Additionally, the number of new construction homes continues to be below the long-term average. Builders continue to struggle with land, labor, and material costs, and this is an issue that is not likely to be solved anytime soon.
After several years of above-average economic and home price growth, 2018 signaled the start of a slowdown in the residential real estate market. If there was one word in the local real estate sector that has been overused, it would be softening. “The market is softening! The market is softening!”
“Yes it’s true, and much needed, because healthy markets normalize.”
As of the start of 2019, Seattle’s population is approximately 3.9M, with a strong workforce totaling 2.0M. The labor market grew by 78,300 jobs in 2018, up by 3.9%. The median household income saw a boost as well, at $81,996, 4.3% higher than last year and 33.6% above the national average of $61,372. In the housing market, the total number of permits issued were 26,004, which was down 3.4% from 2017. Seattle has 310 active new home projects on the market, which is 4.0% more than the 298 from 2017. The average list price in the market is $679,878, 6.4% higher than last year, and 112.5% above the national average. In Q4 of 2018, new homes under contract
decreased by 31.2% to 1,036.*
The general sentiment in the lending arena is that mortgage rates will continue to rise in 2019, which decreases affordability, and increases monthly payments and debt-to-income (DTI) ratios. However, market softening can offer a slight reduction to down payment costs. As of Q1 2019, the average rate for a 30-year mortgage was 4.55 percent; still low by historical standards. That’s up from 4.00 percent a year earlier. Projections from Realtor.com and Redfin forecast the rate of a 30-year, fixed-rate mortgage will rise to 5.5 percent by the end of 2019. Zillow expects rates will reach 5.8 percent.*
As rates rise, the allure of adjustable rate mortgages (ARM’s) also increases. The alternative mortgage products that do not have a fixed-rate amortization schedule (unlike the more popular 15 and 30-year home loans), provide borrowers with reduced payment options that may offset short term costs. The rates on adjustable mortgages reflect short-term interest rates, which are usually lower than the long-term rates of fixed-rate mortgages.
The result is that an ARM will have a lower initial rate, allowing a home buyer to qualify more easily, or have a lower payment.
For example, a 5/1 ARM, the interest rate does not begin changing based on the underlying index immediately. Instead, the interest rate on a 5 Year ARM is fixed for the first five years of the loan. After five years, the interest rate can change annually for the next 25 years until the loan is paid off. The first number in the name 5/1 ARM indicates the number of years of the fixed period while the second number indicates the adjustment interval. An adjustment interval is the period between potential rate changes (in this case, one year). Most 5/1 ARM’s will have a lifetime payment cap that limits how much the interest rate on your loan can rise.
A good indicator of determining whether or not an adjustable rate mortgage upstages a fixed-rate mortgage, would be the tenure of the homeowner. The NAR report shows that people were staying in their homes only six to seven years before the housing downturn began. After 2008, this has increased to nine years. A recent pole by Redfin revealed that on average, 35 percent of homeowners plan to stay in their current homes for only five years or less. Surprisingly, the number jumped to 53 percent for home owners who were at age 34 and under.* With that data, there is a large number of homeowners who are planning to move or sell their homes within five years – could be perfect candidates for an ARM mortgage product.
From a national perspective, Economists are projecting that home prices will rise more slowly in 2019. Zillow’s forecast calls for prices to increase nationally by about 3.8 percent. Realtor.com has them rising at just 2.2 percent.
“There are still voices out there that seem to suggest the housing market is headed for calamity and that another housing bubble is forming, or in some cases, is already deflating. In all the data that I review, I just don’t see this happening. Credit quality for new mortgage holders remains very high and the median down payment is at its highest level since 2004.”
-Matthew Gardner, Chief Economist, Windermere Real Estate
Appreciation and Inventory Projections
The inventory of U.S. homes for sale was up 4.2 percent as of Q4 2018 to 1.74 million units. The number of homes presented to the market this year is expected to continue rising, albeit from historic low levels.
For several years in a row, appreciation (price growth) exceeded 5 percent, and as recently as Q1 and Q2 of 2018, it was around 7 percent. Redfin expects annual price growth nationally to settle somewhere around 3 percent over the first half of the year.
This seems reasonable to me, and feels more like how a normal market should behave. The hyper-appreciation we witnessed over the last two years has been abnormal market behavior.
*Sources: Myers Research, Zonda, Statista, Freddie Mac, Realtor.com, Zillow, Redfin