A reader dropped me the following email and posted this question in the forum, which I thought was interesting enough to share with the whole community to get everyone’s responses.
I’m recently engaged and looking to buy a home. I’ve crunched my budget inside and out, know what I can afford that isn’t over reaching. Got my 20% down saved up in the bank. I’m in a situation with a short sale right now, waiting for the bank to approve the offer. My fiancée and I were looking for a place we could get below market value, live in for a while and have some fun putting sweat equity into. We both like doing projects around our apartment and thought that fixing up a house could be a fun hobby.
Like I said, we found a short sale house in north Seattle. It’s a nice starter home by a park, the least expensive house in an expensive area, and really fits all of our requirements. We’ve been full steam ahead on the whole thing (Read: quietly waiting for the bank to approve the offer)… and then the news from Goldman Sachs came out… 20% decrease in the next two years.
I’m at a loss. I don’t take risks. I methodically scrutinize every single detail. News of this caliber really threw me for a loop. I’m realistic, I know Seattle seems inflated, I know prices have a bit more to fall. But a blanket statement that “Seattle Prices will fall 20%” confuses me.
Here’s the part I was hoping you could clarify for me:
- When someone says “Seattle prices will fall 20%”, do they really mean ALL Seattle homes equally? It’s my feeling that the really expensive +800K houses that are more prone to falling 20%, rather than the entry level 300K.
- From what I could gather, when GS and Case-Shiller refer to “Seattle”, its actually all of King and Pierce County. I’m more inclined to think that prices would fall 20% in a newly developed suburban areas (Kent, Lynnwood, etc.) and that core city areas (Greenlake, Ballard, Fremont, Wallingford) would be more protected from this.
Basically I was hoping you could give me an insight about what you’ve learned with all your research. If prices indeed fall 20% in Seattle, would you expect it to affect everyone equally, or do you think that things that add desirability (location, quirks, what have you) can help some houses weather the storm better than others?
Great question. The saying that “all real estate is local” has become somewhat of a cliche code-phrase that real estate agents tend to use to mean “prices will never fall in this neighborhood!” However, there is some truth to the “local” claim. Prices have already fallen more in the outskirts than in closer-in neighborhoods, and will likely continue to do so.
Also, as I said when I posted the forecast from Goldman Sachs, a 22% decline in the next two years seems high to me. My personal analysis of the data calls for more like a 10% decline to get us back in line with the economic fundamentals.
All that being said, it is of course impossible to really know where prices will go in the next two years, one year, or even six months. There are just too many unknown factors. Maybe the government will kick off a whole new permanent homebuyer tax credit program, giving anyone who buys a house $100,000. Or maybe our economy will spend the next two decades in a deflationary spiral, knocking another 60% off home prices. Or maybe we’ll enter hyper-inflation and home prices will soar 3,000%.
Obviously you can’t make your homebuying decision based solely on what might happen in the future with home prices. If you have found a house that you love and want to live in long-term (my baseline is 10 years, minimum), you can afford the mortgage without cutting your budget to the bone (and you’ve got a decent emergency fund in case of large expenses or job loss), and you feel that you are getting a fair price, who really cares if prices continue to drop after you buy?
During the bubble it was difficult for anyone to meet all of these criteria. Most people were buying smaller homes than they really wanted, in neighborhoods they really did not want to live in, at a price they felt was too high, but they bought anyway because they were afraid of being priced out forever. Buying out of fear turned out to be a really poor decision.
In summary: What the future holds for Seattle home prices is much less certain today than it was in 2007. If you can afford to buy a house that you love, you probably shouldn’t let fear of the future be the deciding factor. Just be aware that your house is not a money-making investment. It’s a place to live.