Real-estate anxiety: What's next in '08?

Three Decembers ago, Vulcan Real Estate erected a tent in Seattle's long-unfashionable South Lake Union neighborhood and invited the public to see plans for 2200, a luxury condominium project to be built there. Within days, 2200 was nearly sold out.

Today the neighborhood is awash in new housing and the amenities to support it. So Paul Kelly, the owner of a 17th-floor unit in 2200, should be sitting on top of the world. But it didn't quite work out that way.

What looked like a surefire winner — homeownership in Seattle — has taken on a tinge of uncertainty. Trying since September, Kelly has been unable to sell his one-bedroom unit with its unobstructed view. Hardly anyone has come to see it, he says.

As thousands of other sellers have also found out, the Seattle area's formerly stellar real-estate market has finally, slowly joined in the national downturn. That makes for anxious times, not just for sellers like Kelly, but also for buyers who wonder whether buying soon is buying too soon. Will prices drop?

And then there's the issue of getting a mortgage. Since the widely publicized August meltdown in that industry, buyers (and those hoping to refinance) have had fewer choices.

"Whether you're shopping for a mortgage or for a home, there probably has not been as challenged a year as this one in years," says Keith Gumbinger, vice president of HSH, a mortgage-information provider. "This year, home is where the anxiety is."

Now the question is: Will that spill into next year, or is the worst over?

Economists caution that predicting housing-market activity is always uncertain. But their general take on the situation is that Puget Sound-area home sales will continue their decline and appreciation will stall. However, home prices are not expected to drop significantly.

Until recently, Seattle-area homeowners could bask in the knowledge that their houses would appreciate handsomely. Median home prices rose 16 percent in 2005 and 21 percent in 2006, a Seattle Times analysis found.

When this year's final numbers are tallied, the median annual increase will probably be more like 2 or 3 percent, Seattle real-estate economist Matthew Gardner says. That puts Seattle ahead of many cities; still, it's the lowest appreciation rate in roughly a decade.

Looking ahead, the concern on economists' minds now is recession. Fifty-two economists surveyed by The Wall Street Journal gauged the chances of the U.S. entering a recession at 38 percent — the highest response in more than three years.

Housing takes a hit in recessions. But even without formal news of a downturn, home prices nationally are expected to decline 3.5 percent next year, according to the Office of Federal Housing Enterprise Oversight.

Locally, economist Dick Conway acknowledges, "There's a lot more uncertainty for next year in what's going to happen to the economy. We could go into a recession, although no one is predicting it."

And recessions are hard to predict, says Conway, co-author of The Puget Sound Economic Forecaster newsletter. So hard, in fact, that the last national downturn, in the early part of this decade, was over before anyone realized it existed.

Further turmoil in the financial markets could cause one now, Conway says. "There's so much uncertainty among lenders that it's hard to tell where it will all end up."

If there is a recession, Conway predicts the Seattle area will weather it better than the nation. The main reasons, he says: local job and population growth, which are running twice the national average, plus high wages. Local per-capita income, expected to be $46,356 this year, is 19.7 percent above the national average.

All that's relevant because the health of the housing market is directly related to the health of the local economy.

That said, real estate is cyclical, and Conway anticipates average Puget Sound-region home prices will decline less than 1 percent next year, and sales will be down about 5 percent, before rebounding in 2008.

"Given that we had a pretty good run-up in prices, some downward adjustment shouldn't be surprising," he says.

It could also be good news for buyers. Recent double-digit home appreciation has outpaced wage growth and seriously undermined affordability. Negligible price increases, rather than being bad news, could actually be good by allowing wages time to catch up.

That, however, is probably not what owners want to hear. But Sam Pace, an agent with Bellevue's Executive Real Estate, says it's realistic.

"We've had double-digit appreciation for years in a row, and if you think you can't handle a little bit of a dip, you have a pretty special view of what your return should be," Pace says.

Conversely, buyers have their own quandary: whether to buy or wait for prices to fall. Many are "either trying to figure out what's going on or trying to time the very bottom of the market."

Pace considers attempts at timing futile. "If somebody tries to pick the very bottom of the market, they won't know if they got there until prices start climbing again, by which time they've missed the opportunity."

His advice: Pay attention to local rather than national real-estate news because "the important real-estate trends are local. If they read some national number, and don't look at what's happening with Washington's real-estate market, they wouldn't know that the accurate answer to 'How's the local real-estate market?' is 'Top 5 in the nation.' "

So the word for next year is patience. That's the approach Paul Kelly, the condominium owner, is taking.

Although he'd like to sell it now (and has reduced his price from $624,000 to $599,000 for buyers who purchase directly from him), he says that realistically it may be spring before he lists it again with a real-estate company.

"I think things should hopefully settle down by then; that's my plan anyway," Kelly says. "I know my buyer is out there. They just have to come see it."

Elizabeth Rhodes: erhodes@seattletimes.com