Far From a Housing Market Crash, Home Prices in Seattle are Expected to Rise 18% Over The Next Year.

Posted by Cary W Porter on Tuesday, August 31st, 2021 at 9:57am

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The flaming-hot housing market has seen median home prices soar an unprecedented 24% since the outbreak of the virus last year. But in recent weeks, that fire has lost some of its heat as buyers finally start to push back at sky-high prices. Simply put: The housing market is slowing a bit.

Already, a growing list of doomsayers point to the shifting market as taking us one step closer to a bursting housing bubble. In their minds, housing went up too fast and now must come back down.

But what does the data say? When you look under the hood, the run-up to 2008 housing bubble and the hot 2021 housing market are very different bull markets. While there are several reasons why our latest frenzy won’t result in a bust, there’s one reason in particular that really stands out.

How does 2008 compare with 2021? Well, they’re very different—almost polar opposites. Burned by the 2008 crisis, homebuilders have been extremely conservative in recent years. In the eight years leading up to the Great Recession, homebuilders averaged 1.7 million monthly housing starts. Meanwhile, over the past eight years (2013 to 2021) they’ve averaged just 1.2 million per month. The problem? Recent levels of building aren’t growing fast enough to keep up with population growth. Indeed, our nation is under-built by about 3.8 million single-family homes, according to Freddie Mac.

Timid levels of building coupled with strong demand is why housing inventory—the number of homes for sale—was falling even before the pandemic. The rush of buyers into the market during the pandemic only made matters worse. Between April 2020 to April 2021, housing inventory fell over 50%. Though it has since ticked up, we’re still near a 40-year low.

 

As a direct result, home prices in the Seattle metro area are expected to rise 18% over the next year, according to a new study by Porch.

“Over the past 18 months, home prices across the nation have shot up to levels unseen since the build-up to the 2008 financial crisis,” researchers wrote in the study. “In April 2021, the year-over-year growth of the Case-Shiller Index, the premier metric for housing prices, eclipsed 14.5% for the first time in its history.”

By analyzing data from Zillow, Redfin and the Census Bureau, researchers at Porch calculated expected rises in home prices in 51 large metros across the U.S. Seattle’s forecasted rise in home costs was ranked the 19th highest on that list. Austin, Texas, took the top spot — homes prices there are expected to rise by more than 37% over the next year.

Real estate experts say the nation’s dwindling supply of homes is to blame for skyrocketing prices.

In June, the National Association of Realtors released a report calling for a dire, “once-in-a-generation” solution to the shrinking supply of houses in the U.S. That report estimates the U.S. is experiencing a shortage of anywhere from 5.5 million to 6.8 million units.

In their study, which was released last week, analysts at Porch detailed how such prices are affecting buyers:

“Redfin data revealed the percentage of homes selling above asking price shot up 13 percentage points compared to pre-pandemic levels,” Porch analysts wrote. “More than 60% of buyers were putting offers on houses sight unseen and the number of homes being bought without an inspection nearly doubled compared to the previous year.”

In Seattle alone, more than 4,500 homes have sold for at least $100,000 above asking price in 2021. During the same period last year, just 400 Seattle homes sold for more than $100,000 above asking price.

Home buyers are finding some relief, but Northwest MLS brokers say it is temporary.

Even with the recent cooling, the market still has a lot going for it. As Fortune has previously reported, we’re in the middle of the five-year period during which the largest tranche of millennials, those born between 1989 and 1993, are hitting their thirties—the age when first-time homebuying really kicks into gear.

Another reason a crash is unlikely: When factoring in income levels, housing costs are lower now than heading into 2008. Leading up to the foreclosure crisis, 7.2% of U.S. personal income was going toward mortgage payments. In 2021, that figure is just 3.4%. In part, homebuyers have the pandemic to thank: It spurred low interest rates and lowered mortgage and PMI (private mortgage insurance) payments.

That said, there are two big wild cards. If inflation fears cause the Federal Reserve to move up its timeline on higher rates, it would have an instant negative effect on the market. The second risk is posed by the wind down at the end of September of the mortgage forbearance program, which allows some borrowers to pause their payments. The program still protects 1.7 million borrowers. Of course, if those buyers face foreclosure or simply opt to sell rather than restart payments, then it could cause the number of homes for sale to rise. But even that is unlikely to create a supply glut: An analysis done by Home.LLC for Fortune forecasts the end of mortgage forbearance would only cause a temporary 11% rise in inventory.

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