In my column on Oct. 7, 2007, I predicted that home values in the Puget Sound region would fall by an average of 10 to 20 percent (depending on the neighborhood) during 2008. I took a lot of heat from real estate agents over that last prediction, but once again, it proved to be pretty accurate.
For example, home values in my own neighborhood are down about 15 percent compared to their peak value in 2007.
So how do I manage to make such accurate housing market predictions? I use a combination of analyzing historical housing market trends in the Puget Sound region over the past 50 years and having a gut instinct for where the market is headed based on actual sales.
There is a fairly predictable 7- to 10-year real estate cycle and we are in the "down" part of that cycle. What makes the current cycle different is that we are entering what may turn out to be the worst national recession since the Great Depression. Now, I know that phrase is grossly overused. It seems that every few years some politician claims that the economy is the worst since the Great Depression, but this time I think it's actually true.
I hate to sound alarmist. Please do not use this column as stock market investing advice, but there is a very eerie similarity between the 1929-32 stock market crash and depression and our existing financial situation. Major national banks have failed, including Washington Mutual right here in our back yard. The stock market is down dramatically this year and it has had some of its worst trading days ever over the past two months. Some people, including me, think that the stock market may continue to drop much further. Again, let me emphasize that is just my personal opinion -- it is not intended to be investment advice. The national economy looks like it will be very slow next year as many people hang onto whatever cash they have so they can weather the financial storm. Since consumer spending makes up about two-thirds of all economic activity, many businesses could be in for a very rough time over the next year or two. We are already seeing very poor sales reports from the nation's major retailers.
How does all this affect the housing market? To be honest, I'm not sure. Keep in mind that even though the stock market fell almost 90 percent from 1929-32, home values fell only 30 percent during the Great Depression. So a severe recession does not necessarily mean that housing prices will fall as much as the stock market. In fact, during the last serious recession in the Puget Sound region (early 1980s) housing prices held fairly steady.
The coming recession is a major wild card that may throw my predictions totally out of whack, but I am going to go ahead and make my annual guesstimate of what I think will happen in the Puget Sound area housing market.
In 2009, home sellers will finally accept the reality that home values have fallen and they aren't coming back any time soon. The reason that you see so many homes sitting on the market unsold for six months to a year is that many sellers have been stubbornly clinging to the hope that somebody will come along and pay a price that is close to what the home was worth a year ago. By next spring, when the traditional home buying season starts and the housing market is flooded with new listings, home sellers will be forced to cut their prices if they want sell.
There are homebuyers sitting on the sidelines waiting to buy, but they are afraid of buying too soon and missing the bottom of the housing market. I think that overall home prices will fall an average of 5 to 10 percent next year, but the depreciation rate will vary dramatically from city to city and neighborhood to neighborhood, just as we've seen wide variations this year.
Nobody can call the bottom of the housing market until that point has been passed, but I think by the end of next year we will be nearing the end of the down part of the current real estate cycle. But as I said above, a severe economic recession could prolong the pain a little longer. We'll have to wait and see.
Of course, bad news for home sellers is good news for homebuyers. Many people ask me, "Is this a good time to a buy a house?" I say yes -- as long as you plan to live in the house for at least 7 to 10 years. Real estate is a long-term investment. You should never buy a house with the intention of selling it within a few years because you are almost guaranteed to lose money. People forget that fact during housing booms because they read stories about people flipping houses and making big profits after holding the property for only a year or two. That's not normal. Yes, you can get away with it if you time the market right, but most people don't.
At my mortgage company, I've talked to several people this year who are stuck with houses they bought at the top of the market with the intention of flipping them for a quick profit. Now, if they sell the house they'll take a big loss; and if they keep the house they can't get enough rent to cover the mortgage payment. That's a very bad situation to be in.
If you find a house you'd like to live in for at least seven years, I don't think there's any reason not to buy now. Sure, your home may lose a little value over the next year or so, but it will come back. I'm confident that any house you buy today will be worth more money 10 years from now. You have to think long term. As long as you're not trying to make a quick buck, there's no need to try and time the market and buy at the absolute bottom.
There will be another housing boom someday, but at this point I think it's still several years away. If we follow the historical trends, once housing prices bottom out they will stay flat for a few years with little or no appreciation until the demand for homes finally outpaces the supply of homes for sale which will kick off the next seller's market."
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at email@example.com.