Over the past 20 years I have been
monitoring the residential housing market in the Seattle
metropolitan area using the MLS statistics, graphing the data
and analyzing specific market trends where I have appraisal
assignments. Generally speaking the market continues to
perform each year with the same pattern. Inventory is at its
lowest in December/January reaching its peak during the late
summer months slowing during the holiday season. Meanwhile
sales activity follows a similar trend with the least number
of pending transactions occurring in December and January
increasing into the summer months and slowing through the
As well, the housing market has had ten year cycles in the
1960ís through the 1990ís with slower markets during the first
3+ years of a decade, stable trend that keeps pace with
inflation during the mid-years, and appreciation trends that
marvel our portfolios in the later part of a 10 year cycle.
Whatís different? Trends of the past would indicate that the
market of the first four years of the new millennium should be
performing at a much slower pace. Why is the Seattle market
experiencing a limited supply of inventory and rising home
values in a year that should be chugging along at a snail
It took two strong years of record setting sales activity
throughout the Puget Sound region to absorb the over-supply of
inventory that plagued the housing market in 2001 through
2003. Interest rates and the ease of borrowing money is the
primary factor behind the marketís ability to absorb this
inventory. And now, as the local economy is surging forward,
the stock market is strong, unemployment is declining, wages
are increasing, the supply of vacant land is dwindling, the
market demands more housing units and there is a new term for
what is affordable.
What historically has taken seven years to occur has happened
in fewer than four years. And, there does not appear to be a
reason for the market to slow. The economy is strong, Boeing
is developing the 7E7 fueling job growth and Microsoft
announced last month their plan to hire up to 15,000 +/-
employees over the next 15 years. Nordstromís, Paccar,
Starbuckís and Costco are doing well and positive growth is
projected in the Pacific Northwest.
Strong growth and low inflation have benefited the housing
market, keeping interest rates below 6%. There are concerns
that interest rates, now at 5.75%, will rise and slow demand
during 2005. However, I was talking with Mark Bauhs, manager
at Eagle Home Mortgage in Seattle and he indicates that
economists have forecasted interest rates to rise to an
estimated 6.5% by years end, an increase of ĺ%. This is not
unreasonable considering in the 1990ís interest rates exceeded
7% and in 1980ís they exceeded 10%. Also, Mark stated that the
banking industry has eased the qualifying ratios in the
lending process for those with high credit scores. In todayís
market those with good credit are able to find creative
financing alternatives to afford rising property values.
Todayís market is mirroring the market of the late1990ís. In
areas of strong demand and limited supply, a competitively
priced home could experience several competitive bids. Some
buyers are using escalation clauses and offers are accepted at
prices that are several thousand dollars above the asking
price. Some buyers waive building inspections; shorten their
financing contingencies periods and remove neighborhood review
contingencies. A seller may indicate that they will accept
offers but plan to review the purchase and sale agreements on
a later date. Buyers considering a purchase of the real estate
may retain the building inspector, appraisers and other
professionals up front to posture themselves for negotiations.
Affordability may affect the choices some prospective buyers
make, but those who want a piece of the pie will inevitably
buy further distance from the location of choice, scale down
their expectation in size, quality and function, or borrow in
excess of their comfort level to enjoy the lifestyle that they
feel that they deserve.
The seller negotiates with the buyer at a price point in
excess of the asking price, the lender is processing the loan
and a request is submitted to an appraisal firm. An appraiser
is assigned to complete a report that reflects current market
conditions, an estimate of Market Value. Market Value is
defined as the most probable price in cash or its equivalent a
property will bring in an open and competitive market, and the
buyer and seller are knowledgeable and acting prudently.
So what is an appraiser to do when the asking price is
$300,000, the negotiated offer is at $340,000 and sales
history indicated that similar property has recently sold and
closed in the immediate area in the $280,000 to $300,000
range? The negotiated offer above the list price usually
indicates that there were multiple offers. The listing agent
should retain these offers and make them available to the
appraiser. The appraiser is required to review the listing and
sales history of a subject property as this information is
pertinent in analyzing Market Value.
The appraiser needs to make himself or herself aware of
current market conditions. Historical data may not be the best
indicator of value in an appreciating or declining market.
Other data; such as, pending sales, listing competition, days
on market and the supply of inventory should be considered in
an analysis to better understand the mood of the market and
the motivating factors behind an offer that is well above or
below the asking price. And market trend adjustments should be
made to reflect change.
The appraiser is not given an assignment to support a sale
price, they are asked to estimate Market Value. In most
instances sale price and Market Value are generally
synonymous. However, there are instances where market behavior
in a purchase and sale agreement falls outside the parameters
of the Market Value definition. The real estate community,
agents, the mortgage company and their buyers and sellers
should be prepared in the event the appraised value does not
support the negotiated offer.
The Northwest Multiple Listing Service reports indicate that
in the summer of 2002 and 2003, listing inventory in King and
Snohomish counties exceeded 14,000 units per month in most
every month of the year with buyers absorbing an average of
25% and 29% of the monthly inventory, respectively.
In 2004 listing inventory exceeded 14,000 units only twice, in
June and July, and set a new record in June 2004 in negotiated
offers at 6,076 pending units in King and Snohomish counties.
Buyers absorbed an average of some 42% of the available
inventory each month, an increase of 68% over 2002 and 45%
In the analysis of the total market at all price points and
neighborhood locations, when pending offers exceeds some
30% of the listing inventory for three consecutive months,
home values are generally appreciating. Absorption rates
between 20% and 30% reflect a generally stable housing market.
When absorption rates fall below 20% for three consecutive
months, a buyers market prevails. The absorption rate is the
relationship between pending sales and available inventory, a
percentage that measures the strength of the housing market.
By December 2004, 8,394 available listings were reported by
the NWMLS in King and Snohomish counties; the lowest single
month in the 11 years that I have graphed multiple listing
data in its current reporting format.
The number of available listings has increased over the first
two months of 2005. However, the demand for housing is
exceeding the supply of inventory and continued market
appreciation is anticipated in most neighborhoods over the
next several months.
As always, I caution that not all markets respond equally to
economic conditions. Review of market data in smaller market
segments may indicate an oversupply of inventory reducing the
prospective sellerís ability to achieve pinnacle value in the
In 1985 I was given my first assignment to appraise a single
family home that was reported at a value above $1,000,000. At
that time I could count on one hand the number of residential
sales that had sold above $1,000,000. In 2004, the NWMLS
reported an average of 95 units per month selling above
$1,000,000 in King and Snohomish counties.
Throughout 2003 buyers acquired 711 $1,000,000+ homes
averaging 59 units per month. In 2004 buyers acquired 1,140
$1,000,000+ homes averaging 95 units per month, an increase of
61%. The absorption of this inventory ranged between 6.7% and
10.2% each month well below the absorption rates for the
entire housing market in the two counties. In February 2005
the market absorbed 10.4% of the available inventory, the
highest level in five years.
Does this mean the high-end market is in decline? Each market
and price point within the region has different factors that
affect marketability and value. While the high-end market may
appear saturated, it isnít. Homes that are competitively
priced and located in preferred neighborhoods are in demand,
selling quickly and can experience multiple offers. However,
due to the price point of the market and the financial
capability of the seller to hold a listing for a longer
period; many homes come on the market at the uppermost end of
their value range. Buyers of high-end real estate are location
sensitive and may heavily discount property with negative
location influences and/or functional and physical problems.
The high-end market is strong with many areas experiencing
In conclusion, the regional economy is strong and housing
demand shifted to a sellers market in most areas of King and
Snohomish counties in 2004. Although, the volume of inventory
increased in January and February 2005, it fell short of
market demand indicating that the trend will continue over the
near term. Rising home values may create affordability issues
that could dampen the dreams of some prospective buyers.
Interest rates may rise but they are not projected to increase
to a level that will affect the local housing market. However,
inflation concerns may drive interest rates upward beyond the
fedís projections compounding the affordability issues created
by a sellerís market. This will slow buyer demand particularly
at the low end of the price range. If interest rates increase
too quickly, the stock market could respond negatively
affecting the high-end housing market as well.