January 31, 2018

Speaking of the bad news that frequently leads our newsfeeds, it seems that quite a few folks are prognosticating another housing bubble in our area. And it’s easy to understand why. We’ve been having rapid growth for several years now in both the housing and financial markets yet, the dark days of 2008 are still fresh in our memories. Too many people were caught “underwater” on their homes 10 years ago. Sadly, some still haven’t recovered from the hit they may have taken from a short sale or a foreclosure. None of us want that to happen again.

Why is the market crazy?

While no one, not even Punxsutawney Phil, that grand prognosticator of prognosticators, can know for certain what lies ahead, there are many reasons not to fear an impending “winter storm” in the local housing market.

• Increased Population – The people just keep moving here! Whether its Amazon, our beautiful scenery, or a love of too much rain, the Seattle area was the fastest growing big city in America last year, adding more than 1,000 people per week. And, despite the fact that Amazon is looking to open a second headquarters somewhere else, they’re still hiring here along with several other companies in our area. And these are good paying jobs. This fact, along with a lack of inventory (December had a record low 1.12 months of inventory; a balanced market being 4-6 months) means housing prices continue to skyrocket (11% year over year; nearly twice the national average).
• Low Inventory – Part of the reason for the low inventory does cause one to pause. People aren’t selling their homes because then they’ll be thrust into the wrong side of a seller’s market themselves. But this is not a major concern. Despite the record low inventory in December, closed sales remained virtually unchanged.
• Lack of New Construction – The other part of this low inventory puzzle is new homes. When the market tanked in 2008, not only did many people lose their homes, many companies went out of business, including builders. If you’ve talked to a builder, architect, or anyone else in the building trades recently, you’ll know that business is beyond booming.

The Good News

Tighter Mortgage Restrictions

While there are many other factors which lead me to believe that the real estate market will continue to boom for at least the next 2-3 years, I’ll touch on one more: mortgages. Back in 2008, anyone who could fog a mirror could get a mortgage. Thankfully, one of the silver linings of the mortgage crisis was that lending criteria were significantly tightened. While restrictions have been eased some since new laws were passed, the days of the Wild West Mortgage are behind us (at least for now; people have short memories so check with me in 30 years and my answer will probably be different).

Homeownership Leads to Increased Net Worth

So, what does this mean for those of you looking to buy a house but a little concerned you might end up taking a bath a year or two from now? Well, like. I said, no one can predict the future. If, God forbid, we were to have a catastrophic event like 9/11 or war with North Korea, all bets are off. But none of us know what tomorrow holds so I say seize the day! In the end, every decision we make is about risk management. You’re taking a risk when you drive to work every day but it’s worth the reward. Housing is the same way. If you’re currently paying somebody else’s mortgage you are paying quite a bit for “risk mitigation” (and, since rents continue to rise as well, is that such a good plan?). Once you write that monthly rent check, you’ll never see that money again. But owning a home? You’re building equity every month even when prices are stagnant. It’s a forced piggy bank. According to the Federal Reserve’s Survey of Consumer Finances released last September and covering the years 2013-2016, the median net worth of homeowners increased by 15 percent while that of renters fell by 5 percent. In actual dollars this equates to $231,400 for homeowners and $5,200 for renters. That’s 44.5 times greater!

Should You Buy?

In short, if you have plans to move out of the area in the next two years and don’t feel like becoming a landlord (a topic for another day), it may be best to continue renting. After all, the cost of selling a home is around 10% so, even in this hot market, you’re not going to gain that back for at least a year. But if you’re planning on sticking around for longer than that, let inflation work for you instead of against you. Not only will you be gaining equity, study after study shows that homeownership has a positive effect on mental and physical health and creates a stronger bond in our communities which leads to better friendships, less crime, and a better society at large. It’s why my mission is to help change the world by creating an ownership society one home at a time!