Real estate predictions: Gazing into 2006

Residential real estate was front-page news in 2005, with stories of rapid price increases, bidding wars and speculation about a "bubble" deflating prices in some areas. What will 2006 bring? Seattle-area real-estate insiders weigh in.

What will the market for single-family homes be like?

Look for a moderate cooling in 2006, predicts Lennox Scott, chairman and chief executive of John L. Scott Real Estate.

But to put that into perspective, 2005 will go down as the strongest sales market on record, according to the National Association of Realtors. If home sales nationally decline 3.5 percent this year, as the NAR predicts, that will make 2006 "the second best year on record," Scott said.

Scott doesn't know how much home sales will dip here, but he thinks they'll likely follow the national trend.

"All the indicators remain in a very favorable condition for a very strong market," said Scott, particularly job growth and a relative scarcity of new homes. Both fuel housing demand relative to supply, and that's what keeps prices up. Although the number of houses for sale probably will increase, buyers still will encounter bidding wars for lower-priced houses and those in very desirable neighborhoods.

What's the outlook for condominiums?

The high cost of detached homes plus a growing population of buyers who choose the condominium lifestyle will keep condo sales strong, said Edward Krigsman, lead broker of Seattle's ek Real Estate Group, a boutique real-estate brokerage. He estimates that 2,000 to 3,000 condos will go on the market in King County this year.

"Developers will be competing more than they have for buyers, so buyers may see financing incentives," Krigsman said. "Also, first-time buyers will be more heavily marketed to, and buyers will have more to choose from."

Among the choices will be a number of new downtown Seattle and Bellevue properties. But Krigsman said buyers won't find downtown bargains — not when prices of $500 a square foot have become the norm for new high-rises.

Otherwise, problems new-condo buyers have had in recent years with faulty construction seem to be abating, Krigsman said.

"Buyers should be a little less afraid than they have been in the past during boom cycles," he said. "Developers are spending more money on building-envelope studies [to prevent costly leaks]. Buyer knowledge, insurance knowledge and the insurance industry seem to be more in sync so we'll have fewer buildings that become albatrosses in five years."

What's the forecast for appreciation?

In 2005, houses and condos appreciated just over 12 percent locally. This year will be less, predicted Matthew Gardner of Gardner Johnson, a Seattle-based land-use economics firm. "But it's going to vary. Detached homes are probably going to appreciate about 7 percent, which means we're on a downward slide but still slightly above the norm."

Appreciation of 5 to 6 percent would be a normal, balanced level. Because of pent-up demand, condos should see about 9 percent appreciation, he predicted.

Does this mean a real-estate bubble has burst?

"There is no bubble in Seattle," Gardner said. "Prices aren't going to fall, but they're slowing down, which is good."

Consistently high appreciation can't be sustained by wages that are growing more slowly, he said.

What will interest rates do?

"Interest rates are extremely hard to predict with any precision," said Rich Bennion, executive vice president and residential-lending director of Seattle-based HomeStreet Bank.

But it's a little easier to predict direction, he said, and information from local and national sources leads him to expect a slight rate increase over the next year. As 2005 ended, the rate for 30-year fixed-rate mortgages stood around 6.25 percent. By the end of 2006, they could be half-a-percent higher, an increase "so moderate it shouldn't have a big impact on affordability," Bennion said.

Those who do feel stretched will find an increasing number of mortgage options as lenders roll out new loan products, he said.

What's the picture for refinances?

In 2005, between 35 and 45 percent of all mortgage transactions were refinances, and this year will be about the same even if interest rates rise, predicted Tony Meola, executive vice president of home lending for Washington Mutual.

"That's reinforcing the fact that something has changed," Meola said. "Owners are now refinancing with rates not being the main driver."

Indeed, a significant percentage of those who refinance are getting new loans with higher interest rates — making obsolete the old notion that it only made sense to refinance when rates were at least 1 percent lower than the current mortgage rate, Meola said.

"Consumers view their mortgage now as a financial instrument, and depending on their financial condition, may seek a cash-out refinance," Meola said. "They may spend it to buy a car, add on to their house or use it for college. I think we'll see a steady stream of that."

Other homeowners will refinance to move out of variable-rate loans and into fixed-rate ones, Meola said.

How much homebuilding will we see?

High land prices and a shortage of available lots, particularly in King and Pierce counties, will crimp builders' ability to meet demand for new homes, said Suzanne Britsch, senior analyst for New Home Trends, a Mill Creek construction-analysis and consultation firm.

In 2005, about 16,000 permits for detached and multifamily home construction were granted in King, Snohomish, Pierce, Thurston and Kitsap counties. This year, we likely will see a 10 percent decline in permit activity, Britsch estimated.

"The reason it's going to be down isn't because of the lack of buyers," Britsch said. "It's because of pricing and the availability of land. Land prices are so high now, and, frankly, I don't know of many pieces available with five or more lots in King or Pierce counties.

"If you want a new single-family house, the best place to look is in Pierce or Thurston counties, based on availability."

Including land, the average price in late September of a new home in Thurston County was $145 a square foot. In Pierce County that same home was $156 a square foot; in Snohomish County, $178 a square foot; and in King, $212 a square foot.

Increases in the cost of building materials, driven, in part, by demand after Hurricane Katrina, mean prices likely will go up $15 a square foot next year, Britsch said.

That increase would be for all counties.

What will 2006 bring for renters?

For a start, they'll have more to choose from, said Mike Scott of Dupre + Scott Apartment Advisors. In King, Pierce and Snohomish counties, about 3,700 new rental units will open this year, up from about 2,500 last year and 2,000 the year before.

However, because the strong local economy is adding jobs, apartment vacancies are actually falling.

"This year will be a tighter market for the first time in five years," Scott said. "Vacancies will probably drop below 5 percent."

That means the market will favor landlords rather than tenants, but how much depends on the neighborhood. In-city Seattle always has more demand than most suburbs.

That means areas like South King County may offer bargains relative to close-in neighborhoods such as Ballard.

Scott predicts that rents will edge up about 4 percent overall this year, compared with 2.5 percent in 2005. He expects rental concessions — two weeks' free rent, for example — to fade away.

"By spring or summer, they'll be negligible," Scott said.

What's the forecast for property taxes?

This one's incredibly hard to foretell, King County Assessor Scott Noble said. King County has 166 taxing districts that overlap in 656 ways.

Local levies for schools, parks and other measures ensure that taxes vary by area.

"I feel confident in saying that, in general, an individual's property tax will not be increasing as fast as their home's value, but because of taxing areas I can't say by how much," Noble said.

Property taxes are computed on a two-year rolling average, he said.

Elizabeth Rhodes: erhodes@seattletimes.com