How Low Will or Can housing Prices Go?

Don Davis Ph:360-652-9994 email:dond@htlnw.com

Is it the right time to buy? If I had a nickel for every time I’ve heard that in the last six months! Here is the reality of today’s market. While there may still be some volatility in certain local segments, it is very much a supply and demand. As long as the supply (inventory of homes on the market) remains high the prices will remain soft. That is the reality of today. However, once the inventory decreases to below a 3 month supply the prices will firm considerably. Even more important is when the inventory of existing homes falls below a 30 day supply. How long will that take? Well the short answer is; in a while. What drives a real estate market is employment. Employment affects population increases or decreases and thus controls the need for housing. If employment opportunities exist and continue to bring people in from outside this market then the need for housing will continue to grow. With that said, we are in a very stable employment climate here in the Puget Sound region with some areas stronger than others. This is what creates a housing market. If no one wants to live in a particular area, usually because of lack of employment opportunities, then the property values are low to very low. Conversely if there is a high demand for real estate then the values escalate. A local comparison would be comparing Everett to Omak. Compare the employment opportunities and you’ll see the correlation to housing costs. Once the market is deemed “desirable” then one needs to consider the value of the property itself, the dirt without a home. The value of the lot is the basis cost of what the property with the home will be valued at. An identical home built in Bellevue or Snohomish or Mount Vernon will essentially be the same, it is the cost of the lot that will affect the ultimate cost of the home. This is why a home in North Snohomish County is less than the exact same home in South Snohomish County. When appraised, every appraisal will compare like homes in a relatively close area. Also on every appraisal is a “cost approach”. This is where the appraiser will determine the value of the land and dwelling and approach the total value using a price per square foot to determine what the home would be worth as if it needed to be built. So in this example let’s say that a 2300sf home would cost $75 per square foot to build. The dwelling itself would cost about $172,500. That includes materials and labor. Add to that the value of the land that it would sit on; let’s say $125,000 and you would have a value of $297,500. Of course the cost of the dwelling would be adjusted up or down depending on what type of materials we used to construct the home. In this example all we used was just an average. In addition to that there could also be “site improvements” this is where landscaping and outbuilding and such would be considered. If a home costs $75 per square foot to build, it doesn’t matter where that house is located, it will still cost $172,500 to build that house. The ultimate cost would be determined by how much the land cost to build the home. Using the above example and the fact that Washington State has a Growth Management act (GMA) where no county can overbuild based on population growth projections; it should be clear as to why this market has remained somewhat stable. Yes homes did appreciate too rapidly a few years ago. But if you bought a home prior to 2005 your home should be worth no less than it was in ’05 or ’06 even though it might have been worth more in ’07 and early’08. There is a finite amount of land available. King County is essentially out of buildable land. Most of South Snohomish County is used up. Add to that the fact that most building has come to a complete stop with very few permits issued in the last year and only a handful of new homes being built and you can see that once the inventory decreases what kind of impact that will have on the values. It comes back to supply and demand. Now, once again using the above example on what it costs to build or value a home, the cost to build the dwelling won’t go down by much even in these tougher economic times. Only the value of the land will adjust. The price of existing homes will always be slightly less than that of a brand new home that is why appraisers use similar age homes with similar floor plans to do their comparables. What has decreased essentially with the price of a home is the value of the land it sits on and even in this market some homes actually still appreciate because of the value of the land (try getting a bargain on water front property on Mercer Island) if it can’t be duplicated and they aren’t making more land, then the value will remain as long as there is the stable population to support it. Bottom line; there is a pent up demand for homes in our local market. We have had over 1% population increase every year this decade and projections show that it will continue through 2025 (just look at the Snohomish County comprehensive plan) If builders are not currently applying for permits and most of the new construction is actually remaining inventory from last year, how long will it take to deplete the inventory of existing homes to where we are under a 3 month supply or less? It will take a while, but once reached the demand will do what demand does and start driving the home values back up. That is why now is a great time to buy a home. The market has remained stable for most of this year and we are actually approaching a four month inventory. It won’t take much to drop the inventory even lower. The builder’s banks aren’t lending money for new construction, and won’t be for at least the next couple of years. The interest rates for mortgages are still at or near record lows. So if you are looking to buy and live in a home for at least the next five years draw your own conclusion as to when you think the best time to buy is.

below is a chart of homes sold in the four county Puget Sound region for the last 9 years.  we are at or above the statistical average for amount of homes sold per month!

2000 to 2009 break down of sales per month

                 Jan    Feb   Mar    Apr   May   Jun    Jul     Aug    Sep   Oct    Nov    Dec

2000 3706 4778 5903 5116 5490 5079 4928 5432 4569 4675 4126 3166 2001 4334 5056 5722 5399 5631 5568 5434 5544 4040 4387 4155 3430 2002 4293 4735 5569 5436 6131 5212 5525 6215 5394 5777 4966 4153 2003 4746 5290 6889 6837 7148 7202 7673 7135 6698 6552 4904 4454 2004 4521 6284 8073 7910 7888 8186 7583 7464 6984 6761 6228 5195 2005 5426 6833 8801 8420 8610 8896 8207 8784 7561 7157 6188 4837 2006 5275 6032 8174 7651 8411 8094 7121 7692 6216 6403 5292 4346 2007 4869 6239 7192 6974 7311 6876 6371 5580 4153 4447 3896 2975 2008 3291 4167 4520 4624 4526 4765 4580 4584 4445 3346 2841 2432 2009 3250 3407 4262 5372 5498 5963 5551 5764 5825

bove is the statistics from Northwest Multiple Listing. If you look at home sales over the last nine years, remember we came out of he last recession the first part of the decade, you can see where we are at compared to previous years. The statistics are compelling and as people become more comfortable with the emerging economy and taking advantage of the affordable prices and interest rates, I think you’ll find this to be a very appealing market, if you’re a buyer! Questions? Comments? Feel free to contact me any time. Don