More housing turbulence ahead

This was the year that residential real estate, in all its forms, encountered turbulence.

After several years of red-hot home sales, appreciation stalled and sellers weren't in command any more. Neither were renters, who until recently had their pick of properties.

And those needing home loans, either to buy or refinance, encountered a mortgage-meltdown situation unlike any we've ever seen.

Here's a look at the year that was, as well as a look forward to what 2008 may bring.

Housing appreciation

Meltdown fallout

Last year at this time, real-estate economist Matthew Gardner guardedly predicted homes in close-in Seattle neighborhoods would enjoy 10 percent appreciation; further out 7 percent would be more the norm. But wild cards could dampen that, he said, and listed his top three possibilities: a terrorist incident, a quick increase in oil prices or a sustained jump in inflation.

The dampening occurred all right. Gardner now expects 2007's annual appreciation for the Seattle area to be in the 2 to 3 percent range. That would make it the lowest since 1996, but still better than the negative appreciation numerous big cities experienced this year.

However the downturn wasn't caused by any of the anticipated wild cards. Rather it was "something that was impossible for anyone to see coming," says Gardner, a partner in Johnson Gardner, a Seattle land-use economics firm.

That factor was the August meltdown of the mortgage market, which has shaken Wall Street, curtailed the availability of mortgage money (particularly to credit-impaired borrowers) and caused home sales to sag. Economists usually tout local factors, such as employment growth, as the main drivers of home prices.

While that's still true, "it would be remiss to say Seattle would be absolved from any of the fallout" from the mortgage mess, says Gardner. "You can't be completely isolated. We have seen that."

For 2008, Gardner is predicting anywhere from zero appreciation to home prices falling as much as 5 percent. "Do I think we're going to see pain next year? Yes, I do. If there's some glimmer of hope, it's the fact we didn't get terribly overbuilt because of the expense of land," Gardner says.

Home sales

Year of transition

"This year has been a year of transition from many different perspectives," says Chris Pauling, president of Prudential Realty Associates. "For sellers it's been a year of transition from the standpoint of what is value. With more inventory, buyers have more choices than they've had in a long time and more time to make those choices."

There's no question the turmoil in the mortgage market, plus high housing costs, have kept some Puget Sound-area buyers away. That can be seen by comparing sales data for the first 11 months of 2007 with the same months in 2006.

King County sales were down 10.3 percent, based on numbers from the Northwest Multiple Listing Service, which compiles regional home-sales data. Snohomish County sales dropped 19.1 percent. Pierce County led the downturn with 23.3 percent fewer sales.

Meanwhile the number of homes for sale has surged. Depending on the county, they were at 30 to 50 percent higher last month than the previous November, the MLS reported. Sales of higher-priced homes sagged because of problems associated with jumbo loans (those over $417,000).

Sales times also slowed. Last month it took 64 days on average to sell a home in King County. A year earlier it was 48 days. The same trend was repeated in neighboring counties.

Pauling says he thinks next year's sales may be stronger than this year's, "but I'm not predicting it. I think people are coming to terms with things."

Nationwide, Lawrence Yun, senior economist for the National Association of Realtors, predicts 2008 will see 5.69 million sales, about the same as this year's 5.67 million.

Mortgages

Year of uncertainty, turmoil

HomeStreet Bank's Rich Bennion has seen the mortgage industry through ups and downs during his 30 years in the business, but he said he's never seen as much turmoil and uncertainty as he's seen this year. Subprime mortgages, with their interest rates resetting higher, turned toxic for thousands of borrowers. Rising foreclosures have followed.

"This time it feels like a self-inflicted wound by a number of players, including lenders, borrowers and bond-rating agencies," says Bennion, HomeStreet's executive vice president and residential lending director.

In a nutshell, this year's problems were caused by too much investor money chasing higher returns than they could get from Treasury bonds. "So they looked around for something else," Bennion says. "Some went into subprime, but it wasn't represented very accurately for its risk."

When housing appreciation began decelerating, the house of cards collapsed. Subprime loans dried up; Bennion (whose bank never wrote them) doubts they'll return any time soon. Then jumbo loans became less available. Now they're back, but more expensive — a concern in Seattle where the median price of houses is above that jumbo limit.

If there is one bright spot it's this: interest rates, in general, aren't expected to rise next year, Bennion said.

Renting

Some good news

For the last year or two, renters bemoaned the widespread conversion of apartments to condominiums, which pinched availability. Now, in a silver-lining reversal, the slowing home-sales market has lead developers to reconsider.

"Properties that were slated for conversion are 'reconverting' to apartments," observes Mike Scott, of Seattle's Dupre+Scott Apartment Advisors. "And the purchase of apartment properties for condo conversion has slowed. It should come to an almost complete stop for at least a year."

But that's about the only good news for renters, who next year are in for more of what they've experienced this year: higher rents and more competition for apartments. With mortgage financing tighter for buyers, fewer renters are making the leap to homeownership. That means fewer vacancies.

This fall, the vacancy rate for the central Puget Sound region was 3.8 percent. Next year, Scott predicts it will dip to 3.5 percent, before inching up again in 2009.

The current average rent, area-wide, is $930. That represents an 8.6 percent increase from a year ago. Renters will be paying about 4 percent more come spring, Scott said.

New-home construction

Deals to be had in hinterlands

Seattle-area building permits for single-family homes declined 20 percent year-over-year ending in September, according to Hanley Wood, a national construction-information firm. While Hanley Wood termed that dip "a sharp decline," it said it "was moderated by a negligible decline of just 1 percent in the multifamily segment," composed of condominiums, town houses and apartments.

As for new-home prices, they "have yet to take a measurable hit in comparison to other major markets across the country," Hanley Wood found. It cited a couple of reasons. Our region never got seriously overbuilt, as happened elsewhere. Plus job growth in the Puget Sound area has outpaced the national rate, adding enough new buyers to soak up new housing supply.

Still, the area has about 18 months of new-home inventory, said Sam Anderson, executive officer of the Master Builders Association of King and Snohomish Counties.

"There are deals to be had depending on where you are. If you're in Seattle and Bellevue, there are not that many," Anderson says. "But in the hinterlands, people are offloading inventory like crazy."

Builders are telling him they expect the deals to dry up after the first of the year.

Anderson expects sales next year will be steady, but not spectacular.

"You won't see a feeding frenzy like we saw in 2005 and 2006," he says.

Elizabeth Rhodes: erhodes@seattletimes.com

The information in this article, originally published Dec. 30, 2007, was corrected Jan. 5, 2008. The name of economist Matthew Gardner's Seattle firm is Gardner Johnson. A previous version of the story incorrectly reported the firm's name as Johnson Gardner.