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Thursday, July 26, 2007 - Page updated at 01:57 PM

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Home prices: from sizzle to simmer

Seattle Times staff reporters

With real-estate markets across the country reeling, Seattle-area homeowners may have a hard time getting any sympathy from distant relatives when they talk about how much the market has cooled off here.

After 2 ½ years of double-digit increases, King County's single-family home appreciation peaked early last year. But at 16 percent for the year, the increase in home prices for 2006 handily beat the previous five years' annual average: 9 percent. The same was true in the southern half of Snohomish County.

So far this year, King County's appreciation rate has dropped to 13 percent.

It remains to be seen if the housing market is seriously cooling off or merely taking a breather before prices shoot up again.

That has Dany and Liliane Rouhana wondering what it means to sellers such as them. If they'd tried to sell their Redmond Ridge home in last spring's fast-moving market, they likely would have had a quick sale.

But this spring the Rouhanas' three-bedroom house, which backs up to a greenbelt, has drawn just one offer in the past six weeks. And it was for less than the $489,950 asking price.

"We said no," said Dany Rouhana. He's now considering whether to market his home differently or just accept the fact that slower sales and picky buyers are the new market realities.

The median price of a house in King County has climbed every year since 1985. The last time the housing market had two consecutive years of double-digit price appreciation — at 15.6 percent in 1989 and 28.9 percent in 1990 — was followed by five years of anemic growth.

Seattle-area prices will continue to climb this year and appreciation will "be above 5 percent. But hitting double-digit in 2007 may be somewhat difficult," said Lawrence Yun, the senior economist at the National Association of Realtors.

National picture

Homeowners in other parts of the country would envy such an increase. House prices are falling in such diverse cities as Honolulu; Fort Lauderdale, Fla.; and Merced, Calif.

The National Association of Realtors forecasts prices will decline 1 percent this year — the first on record to see housing prices decline nationwide.

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The dramatic turnaround is a result of the subprime mortgage-lending business catching up with itself — lenders approved loans to homeowners for more money than they could afford to borrow to buy homes they couldn't afford. In addition, the loss of traditionally high-paying jobs in the auto industry is playing a significant role in the depressed housing markets in Michigan and Ohio.

What's going on here

Why our home prices behave the way they do is a lesson in housing economics Seattle-style, with a twist of "Duh!" thrown in.

As in other cities, house prices here have risen faster than incomes, outpacing the ability of many to get into their first house or trade up from it. Clearly that cools demand, which in turn cools prices. A no-brainer.

However, Seattle's real-estate market is unusual in that it's "somewhat more cyclical" than those in other metro areas, said David Berson, chief economist for the giant mortgage-money provider Fannie Mae.

"If you look at a graph of Seattle's home-price appreciation, it's less a straight line and more jagged ups and downs than most cities," Berson said, adding, "the good times are better, and the bad times are worse."

Typically it's the labor situation that most affects the housing market because additional workers require additional housing. And Seattle's job market is more volatile than most, he explained.

A look at recent history proves Berson's thesis.

In the late 1990s, King County's tech-fueled economy added nearly 300,000 jobs. Bingo! House prices shot up.

Then in 2001, the nation entered a recession that "affected the Seattle-King County area more dramatically than most of Washington's other areas, rural or urban," according to Cristina Gonzalez, an economist for the Washington State Employment Security Department.

The recession lasted until early 2004; during that downturn the county lost more than 120,000 jobs, and unemployment hit 6 percent. Annual home-price appreciation during much of that time coasted at 4 percent or so — roughly half of what it had been in the late '90s.

More recently the Seattle area has been adding jobs at about twice the national rate. On Tuesday, the state reported a record-low jobless rate of 3.8 percent in the area for April. While many of the newly created jobs are in the low-paying service sector, workers in the Seattle area earn the highest wages in the state.

In 2005, the last full year for which data are available, King County's average annual wage was $50,139.

People working in the technology sector earned almost twice that — $97,093 on average, according to the state. Those wages positioned them well for homeownership.

Meanwhile, mortgage interest rates have been in the 6 to 7 percent range — low by historical standards — and relaxed lending standards eased lower-income and credit-impaired borrowers into homes. All this meant more competition for moderately priced homes.

"If you've got pretty good job growth and good incomes, interest rates are good and there are liquid credit conditions, those are the supports for price growth," explained Keith Gumbinger, vice president of HSH Associates, a mortgage-information firm.

With Boeing, Microsoft and other local employers hiring, Seattle economist Dick Conway said, "It's hard to see how our local economy could falter."

Indeed, he predicts it will continue to grow and attract newcomers "at roughly twice the national rate over the next two years."

Cooling off inevitable

So why is Conway predicting that appreciation won't go double-digit for a third year running?

Because of a sharp drop in affordability, said Conway, co-author of the Puget Sound Economic Forecaster newsletter. House prices have increased much faster than wages, effectively locking the homeownership door for many moderate-wage earners and first-time buyers.

A Times analysis of single-family house prices found that only three of 112 areas in King County and South Snohomish County were considered affordable in 2006 to buyers with the area's median household income of $66,000 in King County and $63,000 in Snohomish County.

Homebuying could be further dampened if higher energy costs materialize, eroding family budgets. Tighter lending, in the wake of the subprime-mortgage meltdown, also could curtail home purchases.

"Seattle will have a period of time when home-price gains are positive but modest — less than income growth — and that will allow affordability to catch up," Fannie Mae's Berson concluded.

Jeff Mann, a John L. Scott agent in the Richmond Highlands area, said some buyers are hesitating because they have heard the national news about falling prices. They think they'll get a better deal by waiting.

"I've had clients who've been saying that for three, four, five years," Mann said.

Elizabeth Rhodes: erhodes@seattletimes.com.

Justin Mayo: 206-464-3669 or jmayo@seattletimes.com

Copyright © 2007 The Seattle Times Company

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