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Saturday, February 18, 2006 - Page updated at 12:00 AM

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Are area housing prices getting ready to pop?

Seattle Times staff reporter

While recent real-estate buzz has centered on a slowing home-sales market — with some doomsayers even questioning whether greater Seattle's high prices are ripe for a fall — Lawrence Yun has crunched several economic numbers and come to a startlingly different conclusion:

Median home prices could shoot up 30 to 40 percent over the next two years.

"I feel comfortable with that, although 40 percent would be in the upper end of possibility," Yun said. "As for the lower end, getting double-digit appreciation will be an easy task for Seattle."

The senior economist for the National Association of Realtors, Yun holds a doctorate in economics and regularly analyzes home-sales trends throughout the country from his office in Washington, D.C.

He also predicts that the Seattle area will lead the nation's major metro areas this year in home-price growth, even as prices moderate in some cities and perhaps fall in others. In Yun's analysis, the Seattle area stretches from Everett to Tacoma.

However, Yun cautions, any of a number of factors, particularly a significant rise in mortgage-interest rates, could moderate growth. And other economists doubt that appreciation will be as high as Yun estimates.

"Forty percent doesn't seem reasonable," said Seattle economist Dick Conway, publisher of the Puget Sound Economic Forecaster newsletter.

Conway anticipates home prices will climb about 10 percent over the next two years.

"Relative to what people are predicting for the nation, that's fairly strong," Conway said.

Likewise, Roberta Pauer, a labor economist in Seattle, said: "Forty percent seems too optimistic. But I do agree housing prices in Puget Sound will rise faster than for the nation as a whole."

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Still, Yun lays out a case for a big spike in house prices, which could be good or bad, depending on one's perspective.

"It would be good in a way because it would boost the economy, but bad for everyday blue-collar workers," Seattle police Officer Victor Maes said. "They'd be forced to move out farther."

Seattle-area home appreciation fell significantly behind other West Coast cities over the past five years, Yun said, citing our recession as the reason.

It began in January 2001, and over the next few years, almost 130,000 jobs were lost. Generally, big job losses lead to flat home sales, but that didn't happen this time because low interest rates kept sales cooking and prices rising.

But they rose much more slowly here than elsewhere along the West Coast. While the Seattle area saw home prices climb 56 percent from late 2000 through late 2005, prices jumped 124 percent or more in Las Vegas, Los Angeles and San Diego.

That made Greater Seattle's housing market "a significant underperformer" compared to other large Western cities, Yun said.

Now, the Seattle area has rebounded, so much so that job growth is running more than twice the national average and far ahead of California's metro areas. Moreover, many of the new jobs pay well — a reflection of Seattle's highly educated work force, Yun pointed out.

This is key, Yun explained, because job creation drives up housing demand, which drives up prices. Indeed, the recession acted as something of a stopper, bottling up demand. Now that stopper is off, and prices are primed to climb, he said.

"Any time there's job creation, historically prices don't go down," Yun said.

Still, Pauer said the current job growth isn't as strong as it was during the tech boom.

"In no sense does anyone expect a boom like we had in the late 1990s," she said.

Housing is already feeling the impact of more jobs and more people in the region. Last year King County detached homes appreciated 15.43 percent, Northwest Multiple Listing Service figures show. Pierce County's house prices shot up 20.04 percent, while those in Snohomish County rose 18.8 percent.

In arriving at his appreciation predictions, Yun also looks at mortgage rates, income growth, the number of new households being formed and whether people are moving to or from the area.

Yun said house prices in Detroit and Cleveland may fall, for example, because both have been losing jobs and people for several years, with no sign of a turnaround. Conversely, he expects Western Washington to attract more equity-rich Californians who consider local housing costs a bargain.

Yun also adjusts his appreciation calculations based on factors unique to the area.

"The special factors for Seattle were its undervaluation compared to the West Coast market and its lack of buildable land," he said.

San Francisco also has a severe lack of available land — a major reason its prices continue to climb even though it's long been considered overpriced.

"People have been saying that for 20 years," Yun said. "But in San Francisco, it's very difficult to build, so there's a supply constraint. Seattle is also encountering a supply-constraint situation."

In doing his own analysis, Conway, the Seattle economist, doesn't think prices here will climb because of any game of catch-up with California.

"The question I would have is whether we're too low or San Diego is too high," Conway said. "If you think in terms of a speculative bubble, you'd point to San Diego, not Seattle."

He also thinks any forecast must consider whether housing prices are climbing so fast that they're outstripping local incomes and buyers' ability to pay. That, he says, could be happening here.

"As homes become less affordable because home prices are going up, fewer people will be buying," Conway said.

Prices would be expected to moderate if that happens.

But Conway doesn't expect average prices to fall.

The last time that happened was more than 30 years ago, during the so-called "Boeing bust," when the local unemployment rate hit 11 percent. It's now approximately 4.7 percent.

Elizabeth Rhodes: erhodes@seattletimes.com

Copyright © 2006 The Seattle Times Company

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