State’s economy will keep real estate strong

  • Tom Kelly / Herald columnist
  • Saturday, October 14, 2006 9:00pm
  • Business

It used to be a popular notion among local real estate agents that the Northwest housing market lagged behind the California market by about six months.

For example, if home prices shot up in the Golden State, a similar increase would occur in the Puget Sound region about six months later.

There was no specific gauge that predicted this presumption. Nor was there hard data to support that California activity had any effect on other areas of the country.

I thought about that idea recently when I read that home sales decreased 30.1 percent in August in California from the same month in 2005, the largest sales decline since August 1982. (September figures have yet to be released).

In addition, homes were taking a lot longer to sell. About 29 percent were on the market for 30 days or fewer, compared with 51 percent a year ago. In the past two years, the percentage of homes on the market for 90 days or longer nearly quadrupled from 6 percent to 22 percent.

Things are a bit different here, and will continue to be. According to the Northwest Multiple Listing Service, home sales were down about 15.7 percent in September from the same month last year yet prices were up 9.4 percent, marking the first time in two years that year-over-year price growth has not been in double-digit territory in Western Washington.

While the past 24 months have been crazy, the long-term outlook for the Puget Sound housing market continues to be bright. Here’s why.

Availability of jobs props up the housing market, and the job outlook for Western Washington continues to be extremely healthy, according to data compiled by Stewart Title Company. In fact, the Seattle-Tacoma-Everett area is expected to add jobs at a rate of double the national average for at least the next three years. While homes might take longer to sell and sellers again are considering offers contingent on the sale of the buyer’s home, local prices are not headed backward or even close to a “soft landing.”

The “soft landing” term began about a year ago when David Lereah, the National Association of Realtor’s chief economist, tried to steer clear of any concept of national or regional housing bubbles, preferring to substitute balloons for bubbles. He confused many observers by saying:

“Balloons don’t burst. You can put air in a balloon and it expands or you can take air out and it shrinks. We’re hearing a hissing sound not a pop … there’s a soft landing ahead.”

“I don’t see a lot of areas in the country are really in for a soft landing,” said Joe DiPaola, real estate attorney, broker and former in-house litigation counsel for Coldwell Banker. “I think what we have seen is that some areas have gotten absolutely hammered and others have slowed down just a bit. So, when you look at it on average I guess you call that a soft landing.”

DiPaola said the areas of California that went into the tank this summer were regions where the economy was flat, buyers were stretching to get in the door with down payments less than 2 percent of the purchase price, and in mid- to small cities where there was plenty of available land.

“What compounded the problem was that builders were taking advantage of extremely low interest rates and building homes as fast as they could, anywhere the could,” DiPaola said. “The areas that could sprawl – Sacramento, Riverside, San Diego – turned south while areas you could not find any buildable ground, like San Francisco, stayed relatively solid.”

John Tuccillo, one of the nation’s leading real estate economists, continues to assert that the local economy is the prime mover of single-family homes.

“No housing market has ever collapsed unless the underlying economy went sour,” Tuccillo said. “Short of recession, this means that virtually every housing market in the U.S. will hold up even though sales may slump and prices decline.” He did note, however, that home prices may slump in upper-Midwest rust belt areas.

What about a worst-case scenario mass foreclosures and rising inventories?

“If the United States undergoes a recession in 2007, the housing market will do much worse than we anticipate, but so will autos and retail,” Tuccillo said. “Exotic mortgage instruments will have an impact in increasing the foreclosure rate, but in any loan made before 2005, the consumer is in a positive equity position and will weather financial distress.”

So, when your friends in California swear the sky is falling and real estate will no longer be the same, remind them that property is cyclical and that their neighborhood will rebound when the “down” period ends late next year.

And, the down period in the Puget Sound will mean slower, not negative, appreciation.

Tom Kelly’s new book, “Cashing In on a Second Home in Mexico: How to Buy, Sell and Profit from Property South of the Border,” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in stores, on Amazon.com and on tomkelly.com

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