King County houses aren't appreciating at the double-digit rates many enjoyed in the late 1990s, but last year's 5.1 percent jump sure beat the stock market, didn't it?

Try telling that to a guy we'll call Steve. When you hear his story you'll understand why he doesn't want his name revealed.

Steve was thrilled when his Redmond home's value grew 50 percent between 1996 and 1999. That propelled him to take the equity from its sale, pile on his Microsoft stock-option cash, and pay full price for a 5,110-square-foot manse on the Central Sammamish Plateau. The price: $1,325,000.

It looked like a win-win deal. In a sizzling market, Steve got a hot house, and the seller, who'd purchased the home just eight months earlier for $1,150,000, made a quick $175,000.

Last fall, sick of the Plateau's snail-pace traffic, Steve and his wife pulled the plug. But this time, instead of making money, Steve lost $175,000, which means his house fetched exactly the same amount — $1,150,000 — in late 2002 as it did in late 1998.

In other words, not one dime of appreciation in four years.

Is Steve's story a rarity?

Not as rare as you'd think, according to a Seattle Times computer analysis of recent single-family home-sales trends throughout King County.

And herein is the hidden story of what the dot.com bomb, the recession and general erosion of consumer confidence have done to local home sales.

While every segment of the county's housing market appreciated over the past three years, houses valued at over $500,000 have posted less than half the annual appreciation of those under $175,000, the bottom price range. That's quite a tumble from the previous three-year period, 1996 to 1999, when the priciest properties appreciated the most.

It's also meant that many expensive neighborhoods, such as Mercer Island, Queen Anne, West Bellevue and Medina, saw homes last year appreciate either not at all or very little compared to the countywide 5.1 percent. (The Northwest Multiple Listing Service's countywide figure, 6.3 percent, is based on sale prices rather than cost per square foot, as was used here.)

Pulling those appreciation numbers down are situations like Steve's — and those of other owners who sold last year for less than they paid. They include Madison Park sellers who lost $245,000, an Issaquah family that took a $159,000 bath, the owners of a home on Capitol Hill's superchoice Federal Avenue East who lost $97,000. And there are many, many more who bought at the market's height a few years ago and either lost money or didn't make any.

Conversely, sellers of the county's least expensive homes, those priced under $175,000, enjoyed the greatest appreciation of all — almost 8 percent annually over the past three years, vs. the upper tier's 3.5 percent. Those were all home sales over $500,000; appreciation in the bottom of that range, from about $500,000 to $800,000, is what helped offset losses like Steve's and keep upper-end home values growing.

The Times' analysis also shows that as home prices climb, appreciation drops — something that did not happen during the 1996-1999 boom.

Seattle economist Dick Conway says there's a significant factor that helps offset the soft economy — much to the benefit of first-time buyers. That's mortgage-interest rates below 6 percent, which fuel sales of starter homes.

"When you combine the high-tech downturn, where a lot of money was in the late '90s, with the fact mortgage rates are falling, you'd expect the high end would get hammered and the low end would do well," Conway says. "That's exactly what this data tells you."

But make no mistake about it: High-end homes are continuing to sell — and sell well. The problem is the disconnect between supply and demand. Currently about 480 million-dollar homes sit on the market, 20 percent more than the 400 that sold last year. And that was a record year.

On the Eastside, which has a large percentage of high-priced homes, the slowdown actually starts once houses hit the $700,000 mark, says Michael Smith, owner of Prudential Michael Smith Realtors in Bellevue. "You have the dynamic of escalating inventory and reduced buyer demand."

He says demand falls short for several reasons. A big one is economic uncertainty that goes beyond stock market woes and the current threat of war.

"There's a lot of uncertainty in high-end corporate America," Smith observes. "Where companies used to cut low- and middle-management and manufacturing salaries, they're now focused on high salaries."

And of course there's the effect of all those unrealized stock options. Conway estimates that in Microsoft stock's heyday, the company's employees and their options upped local housing prices about 4 percent. Not surprising, considering that back in 1998-99, option holders exercised 198 million of them. In the fiscal year 2000-2001 they exercised just 99 million, so there were many millions fewer dollars washing through the local economy.

Kimberly Brangwin, managing broker of Coldwell Banker Bain's Capitol Hill office, says she's no longer seeing the stock-option effect that allowed techies with $70,000 annual salaries to buy $800,000 homes.

"People can still have a sizable portfolio that may exceed their income," Brangwin notes. "But (buying) based on stock options that haven't been realized, that was the optimistic buyer we saw three years ago. The money stream was very fresh, and they were willing to take a gamble on buying a house and spending as much or more on a remodel. We're not seeing that buyer."

Today's top-tier buyers, she says, are shopping for value, expect to negotiate and will walk away if they don't get the deal they want.

That's exactly what Smith says has happened with one "impeccably maintained" Redmond manse. When its relocating executive owner couldn't sell it, his company took it off his hands for $1.55 million as part of his relocation agreement. In the last eight months the price has been cut four times and now stands at $1.35 million. The few shoppers who showed any interest have walked away.

"Buyers felt they had selection in their favor and could find a better buy. That's a classic example, and it's not rare. It's a sign of the times," he says.

Smith cautions, however, that the public shouldn't conclude that King County's real estate is a bubble that's either burst or is about to. A bubble happens when prices climb so high that home seekers can no longer afford to buy.

Fueled largely by house purchases under $350,000, local real-estate companies actually reported stronger sales last year than in 2001. If mortgage interest rates, currently the lowest in four decades, stay down, 2003 could continue the strong sales trend, predicts Geoff Wood, president of Windermere Real Estate.

However, appraiser Alan Pope doubts prices will go crazy again until both the local and national economies reheat. That could take several more years, a possible war in Iraq being the wild card.

Last October, Steve, the guy who lost $175,000 on his Sammamish Plateau house, moved on and made peace with his loss.

"We knew looking at the neighborhood that a lot of houses were just unrealistically priced and were on the market forever," he says. "So we decided a quick sale at a loss was better than a long sale."

Besides, Steve easily reconciled himself to the situation. "We bought that house with (Microsoft) stock-option money. Since that time, the stock went in half, so the way we look at it is, we lost less money than if we'd left the money in stock."

And there's yet another benefit: His new Redmond house cost about $700,000, or roughly half what he paid for the old one.

"It will be easier when the time comes to sell because it's priced where more people can afford it," Steve figures. "Buying anything — cars or houses — just makes it hard to sell when it's in the higher price ranges."

Elizabeth Rhodes: erhodes@seattletimes.com

Justin Mayo: jmayo@seattletimes.com