For the Puget Sound/Seattle metro area, the driving force behind the single family housing market over the past 12 months has been interest rates. In a year of downturn in most areas of the economy, the housing market appears to be the bright spot.

The Northwest Multiple Listing Service reports that the average closed sales price increased in each county provided in their statistical area, i.e., King and Snohomish counties increased 4% over the past year. In fact, gross sales volume, number of closed sales, pending volume, and average price increased as well. These stats make for good reading.

Many articles have been written to address the current state of the single family housing market in the greater Puget Sound region. Headlines quote blanket statistics that rarely give a qualified account of a specific neighborhood or home and how changes in economic condition can affect marketability and the value of the real estate.

The truth is, not all markets experience economic conditions the same. Prior to the high tech/dot-com revolution, Seattle was predominantly driven by Boeing and a blue collar housing market. The entry level and move-up buyers were motivated by the employment swings of Boeing and the affordability of housing driven by interest rates. Few sales were reported above $1,000,000.

As the high-tech, bio-tech, telecommunications and dot-com industries grew in the 1990s, the new age of young wealth increased dramatically. The regional economy and the demand for high-end housing responded with rapidly appreciating home values.

With the rise and fall in economic wealth through growth and correction of stock portfolios, there became fewer buyers capable of acquiring high-end housing. The supply of inventory was unable to keep up with demand in 1997 through the spring 2000. Conversely, today's residential housing market is experiencing an over-supply at the upper end of the price range.

While 6% interest rates benefit all segments of the housing market, their greatest impact is on first-time and move-up buyers. High-end buyers are more sophisticated in their approach to financing real estate. Although interest rates benefit high-end home sales, personal wealth, the portfolio of a high-end buyer, is the primary basis on which real estate decisions are made.

Residential prices under $500,000 account for some 95% of the home sales in the marketplace, 4% are in the $500,000 to $1,000,000 range and 1% close at prices above $1,000,000.

In December 2002, the multiple listing service reported a total of 13,293 listings in King and Snohomish counties at the end of the month and 2,910 sales occurred during the month, indicating absorption of 21.9% of the available inventory. They also reported 713 listings above $1,000,000, of which 37 pendings were reported, indicating absorption of 5% of the inventory.

The absorption rate is a relationship of listing inventory to sales activity. When placed in the context of supply and demand, the market may appear healthy at one price point but weak at another.

During the height of the real estate market in 1997 through the spring of 2000, the market experienced low inventory levels below 12,000 units and an absorption rate consistently above 25%, and as high as 47% in March 1998. Listing inventory rose to over 17,000 units in September 2002 followed by absorption rates for the fourth quarter of the year that consistently fell below 25%.

While inventory has increased significantly since the height of the regional housing market in the spring 2000, net pending sales have remained relatively stable, fluctuating in the 2,000 to 4,350 range over the course of any year throughout the past decade. See the 10-year cycle graphs included on the website.

It is not the demand for housing that is affecting housing prices, it is the supply of inventory.

How do I handle the changing market? I use the most current sales, listings and pending data, as well as historical information in the neighborhood and conclude at a price point that is representative as of a specific point in time (the date of valuation).

As an integral part of each appraisal report, our office completes a competitive market analysis that reports the number of listings, pending offers and closed sales. The relationship indicates how many months inventory is available. The number of months inventory will determine the strength or weakness in the market: under-supply, stable or over-supply. Some neighborhoods have fewer than 3 months inventory, while others may have upwards of two years.

Home values at the lowest end of the range remain upbeat due to affordable interest rates. However, as property values in any specific neighborhood rise above what can be termed the low to mid-portion of the value range for the community, they are generally experiencing flat market conditions and, in some instances, a decline in home values.

In a declining market, buyers are unwilling to accept negative influences, and the deterring influences are magnified. Accordingly, the property with an adverse location or improvements with physical or functional problems may see a more dramatic correction through longer marketing times and greater price reductions when compared to a home that has all the physical attributes necessary to appeal to a broad pool of prospective purchasers.

The mid-to-upper end suburban market is having a similar affect due to the volume of builder competition. Builders drive this market. They are reducing their inventory by accepting below asking price offers or negotiating other forms of concessions, something unheard of in the appreciating market during the latter part of the 1990s.

All communities in the region have been affected by the changing economic climate. If history repeats itself, the market will see a re-adjustment period over the next 2-4 years moving from a buyer's market to stability, gradually building during the mid-years of the decade, and a bullish real estate market will prevail during the latter part of the 10-year cycle.

The key to marketing real estate during eras when there are more sellers than buyers never changes. Sellers need to first stage their homes for resale, then price their housing based on current listing competition, not what sold last month or year.

The seller or his agent looking to the past will chase property values attempting to achieve what was, rather than what is. The seller or agent who has vision will catch the market, selling their listing in a reasonable time frame.

Today is a great time to buy housing: interest rates are low; sellers are motivated, and; housing prices have generally declined meaning that today's buyers get more for their money at a lower monthly cost.