I am thrilled to share Realogics Sotheby’s International Realty’s acclaimed Research Editor and Data Analyst, William Hillis, has put together a comprehensive year-over-year review featuring eight key counties and 31 communities around the Puget Sound. The market data is complemented by key insights and trend forecasts, including a review of the S&P Case-Shiller .Home Price Index, The Federal Reserve and interest rates, Seattle City Council overreach, and more.
Seattle City Council overreach
More than a year after the City of Seattle petitioned it for a direct review, the state Supreme Court declined to take up the King County Superior Court’s ruling against Seattle’s income tax, instead referring it back to the Court of Appeals.
Following the initial setback of Judge John Ruhl’s decision in December 2017, in May, the Seattle City Council passed an extremely controversial “head tax” on the city’s major employers, with the aim of raising funds to resolve the city’s festering homelessness. After the ensuing uproar, the Council quickly rescinded the new tax. Despite the near-universal focus on Amazon, those hit hardest by the defunct tax would have been high-volume, low-wage businesses like Dick’s Drive-In. In the aftermath of these two losses, three moderate Seattle City Council members have announced their intentions not to run for re-election to the Council later this year: Bruce Harrell, Sally Bagshaw, and Rob Johnson. Both Mike O’Brien and radical Council member Kshama Sawant already face challengers. Left to Seattle voters in the fall is whether today’s left-leaning council will shift to the right, or as predicted in the Seattle Times, radicalize further.
Home prices continue to rise despite doubts
As recounted in this year’s Case-Shliler analysis, Seattle finally dropped out of the top three leading cities in the country for residential home price increases; and the Seattle Times spent the second half of the year portraying the slackening rate of advance as an outright drop in home values. However, median residential prices actually ended the year three percent higher in King, Pierce, and Snohomish counties combined. Although price gains were smallest among the most desirable Eastside markets, median selling prices remained higher year over year in these towns, the City of Seattle, and throughout most of Puget Sound.
The number of residential transactions gradually started to decline in the third quarter of 2017, and accelerated in the third and fourth quarters of 2018. The year ended with 11.2 percent fewer home sales than in 2017.
For a second consecutive year, both in number and proportion of overall sales, fewer King County condominium units were sold in 2018 (6,885 units, compared with 7,898 sold in 2017).
After steadily shorter market times since 2015, median cumulative days on market in the fourth quarter of 2018 shot to 26 days—a 16-day year-over-year increase—breaking through the 24-day market time last seen in the fourth quarter of 2014.
Of King County cities with more than 500 residential sales in 2018, those with the highest average (not median) selling prices were, in order of average price: Bellevue, Kirkland, Sammamish, Redmond, and Woodinville.
The 2018 median residential price was $680,000 and the compound annual growth rate from 2014 through 2018 was 11.5 percent.
2019 Look Ahead: Affordability and Rising Interest Rates
Interest rates have remained historically low throughout the 21st century. They would need to rise sharply in order to meaningfully impact housing affordability. Indeed, the federal income tax deductibility of mortgage interest has been a key factor in affordability by driving home price appreciation. Articles going back decades from across the political spectrum have decried the deduction’s effects, which have tended to benefit wealthier homeowners and developers a good deal more than entry-level homeowners.
Some advocates within the real estate industry have zealously defended the mortgage interest deduction as necessary to sustain home prices. Yet although the deduction was to be reduced under the Trump tax reform that took effect in 2018, home prices did not immediately appear to be impacted by the measures taken.
Historically, the interest rate on a 30-year fixed-rate mortgage bottomed at 3.31 percent in the week of November 21st, 2012, 31 years after peaking in the week of October 9th, 1981 at 18.63 percent. Even today, rate remain more than 75 percent lower than their 1981 pinnacle, while since that time, U.S. median household incomes nationwide have increased by 222 percent.
However, home price increases have measurably exceeded increases in household income. The median home price in November 2012 was 252 percent higher than the price at the October 1981 interest rate peak. Moreover, across the country, home prices have continued to rise, and in Seattle have even accelerated the pace of their advance since interest rates bottomed in November 2012. It might be said that American families have been dollar-cost averaging their home investments since the 1980s. Rather than compute a target price based on a multiple of their annual income, effectively upon a mortgage-financed purchase, they have set monthly payment targets in direct proportion to their monthly income.
Therefore, even while interest rates sank, the amount that most homeowners plowed into the family home was never diminished. This is what drove prices higher: the incentive provided to homeowners by the U.S. tax code to maximize the tax-deductible interest they pay.
Now that the 2017 tax reform has settled the matter, further action on the mortgage interest deduction is unlikely in the near term. As the tax reform debate proceeded in 2017, none of the local voices who tend to speak out on housing affordability and upzoning had much to say about the MID—on the contrary, the Seattle Times had published an editorial in 2015 urging that the deduction be preserved.
Looking ahead, as mortgage interest rates cannot go much lower even if the Federal Reserve elects not to raise them, condominium developers are designing for affordability, offering more efficiently-scaled homes and removing parking and storage from the base features. These are now treated more like an option than a necessity.
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