I want to talk about Snohomish Co., not that there’s anything wrong with King Co. (hey, I grew up on 23rd and Prospect on Capitol Hill, so I know the area). Not everyone in Snohomish Co. drives Ford trucks, has big hair/mullet and listens to Cinderella or Quiet Riot. Yeah, cheap shot. Moving on…
The question most interesting to me is that of “who understood the path we were on during the last three years or so and who did not? And, why? What shaped their perceptions?” I’m an amateur enthusiast of the markets with a small wrinkle, so you can take what I discuss with a grain of salt if you wish. The wrinkle is that I have no credentials whatsoever other than being on the front lines, per se. I have no interest in a slowing market, as it translates into lower revenue, but I do have in interest in assisting readers in garnering sensible market knowledge. And I’m very keen on strategies to keep money in consumers pockets, but that is for another day and another blog.
In escrow you see what the majority of those outside can’t and to a scale (conservatively) of roughly 50:1— meaning that your average allied real estate professional is closing one transaction for every 50+ in a busy escrow office. It is an interesting perch to be on, looking at the frenzy below like an Eagle in wait. The simple graph below show steady price increases in Snohomish Co. in 2006 up from 2004 and 2005 levels. During 2007 you can see that the market bounced around and was “trying to find its legs.”
In late 2006, something very interesting occurred. Agents started to see very small downward pricing adjustments appear in the NWMLS. Why did it catch my interest? Because downward price adjustments were virtually non-existent during all of 2005 and much of 2006. As we moved along into the 4th quarter of 2006 and beyond, the downward price adjustments for listed property picked up a steam and continued in earnest throughout 2007. As inventory began to increase, houses taking longer to sell, other characteristics started to come into play as well. Sales incentives started showing up— in commissions paid to agents and in other forms such as cars, trips or upgrades in new construction. These distinctive signs were the beginning of the “winds of change.”
Today, the one common denominator everyone can agree on is that the market has changed. One of the changes I’ve noticed is the pool of entrants into the market are meaningfully healthier, at least in closings our office has performed. For example, the credit worthiness and down payments of recent clients are of higher caliber. Also, casual interactions (with people who don’t know I’m in the business) over the past month or so lead me to believe that housing is really on the forefront of minds, perhaps superseding that of our election year festivities. There are not many places you can frequent without somebody discussing housing. Much of this is attributed to news and the mortgage and credit market dysfunction that came to a head in August, just a few months ago.
I thought I would tap a few of my resources to find out how 2007 ended the year compared to the market of 2006 in Snohomish County. My interest is in single family home data, so the simple chart below exclude condominiums. The focus on single family homes really is two-fold in my mind. First, the majority of housing inventory is single family homes, both resale and new construction. Second, I am of the belief that the inventory of resale homes is a bellwether for the general sales activity of the market and is most easily understood as it impacts and triggers sales activity of other segments of the market.
As 2007 came to a close and I had some time to look through files and reflect over the differences of 2006 and 2007 transactions, I came away with a few things:
- the transactions our company closed in the 2nd half of 2007 involved more price negotiations
- there were more inspection related work orders (just about non-existent in 2005-06.)
- more commission credit being allocated to a buyer or seller from agents
- started to see more repeat clients in the refinance arena
- started seeing distress sales and distress refinance transactions (must refi or must sell)
- anecdotal pricing confusion was evident as the market tried to get it “legs” back. Seller confusion about the direction of the market started to become noticeable in wide pricing swings.
- some sellers today are probably still unrealistic about what the market will bear in today’s credit environment and are not necessarily prepared for expectations of buyers who believe they are now in the drivers seat.
In Snohomish County, we have gone from a median single family home (SFH) price of about $382,500 in March of 2007 to close out the year at $358,000, a meaningful adjustment. Sales of SFH’s finished the year in December 2007 at 570 units sold vs. 950 in December of 2006 (excluding the for sale by owner market). To give you a scale of price increase the county experienced since Jan of 2004 to the median price peak in 2007: the median price in January 2004 was $232,433 and at the peak in March of 2007 it reached $382,500.
Looking back, there is absolutely no question in my mind that one of the largest triggers of the price increases was due to the type of financing available: 100% loans with sellers increasing prices over and above the list price to offset buyer closing costs paid by the seller to fulfill that type of loan program. It was artificial appreciation at its core, not based upon traditional fundamentals. And that is the biggest story nobody covers. Today, the removal of many of these products (or heavily pared down with many strings attached such as low LTV, large down payment, can afford the loan and 700+ FICO scores), has led to the opposite market movement.
My best assessment of the market moving forward is that we will see sustained inventory, probably increasing, (after one week of 2008, we are already off to a swift start) which will lead to further price pressure even in the realm of what I would consider exceptionally good interest rates on mortgages. As of today, a few resources have indicated that 30 yr fixed rates have been as low as 5.375 paying 1/8th of a point to 5.5 at par. For those that have decided that buying is right for them, it is hard to argue against locking in 30 yr rates at these levels. Just a few weeks ago they were over 6%. In light of the recent drop in 30 yr fixed rates, I expect to see a tick up in mortgage refinance activity and perhaps some sales as well. Overall, I’m bearish on the market in aggregate. I hope I’m mistaken.
Once again, thanks for those that have supported our small business during 2007 and have corresponded with me during the last couple years or so.
“Debt is real, equity is a matter of opinion.”