Will home prices rise? Look at trends

What’s going to happen with home prices?

I usually answer an individual’s question, but home prices are what’s on everybody’s mind, so let me tackle a general question this week.

In a few words, I think they’re going to stay flat for the next few years.

Now keep in mind, I don’t have a crystal ball and I don’t claim to be perfect, but I have more than 20 years of experience as a real estate broker and mortgage broker and I have studied housing statistics in this market during the last 40 years.

I have noticed a fairly predictable cycle in the Puget Sound real estate market that has enabled me to be relatively accurate in guessing what is going to happen one or two years down the road. For example, in late 2005, I wrote that the housing market was peaking, meaning that it would soon start cooling off. That was at a time when the news was full of stories about how hot the housing market was and how fast home prices were rising.

Few, if any, people at that time were thinking that the party would soon come to an end. In December 2006, I wrote a column in which I said that the booming housing market had finally slowed down as I had previously predicted, and I said that there would probably be little, if any, home price appreciation in 2007 because the number of homes on the market would increase and turn a seller’s market into a buyer’s market.

Again, that prediction proved to be correct.

How am I able to do this? Because I am very familiar with what I call the stair-step pattern of the Puget Sound housing market. If you look at home prices over the past 40 years, there is a very predictable cycle: Home prices increase rapidly for two or three years, are followed by a slight price drop and then stay flat for the next few years. If you looked at home prices on a graph, you would see a pattern that looks like a staircase: Up, flat, up, flat and so on.

So what do I think will happen next year?

I think we are now in the correction phase and the beginning of a flat market. Home prices may drop an average of 10 to 20 percent during the correction, but keep in mind I am talking about dropping from the very peak of housing boom prices.

For example, if you bought a house in 2005 and saw it increase in value by 20 percent during 2006 and then prices dropped 20 percent during 2007-08, you have not really lost money on your house. You’re just near the price you paid for it in 2005. The only people who are likely to lose money in the correction phase are the people who bought at the absolute top of the market and have to sell in the next year or two. If you can hold on for seven to 10 years, you should be fine no matter how much you paid for your home, because by then we will have experienced another up cycle in the staircase.

Also, keep in mind that the higher priced homes are the most volatile. They tend to go up the fastest when the market is hot, and come down the fastest when the market gets cold. There is always a market for low-priced starter homes, so they tend to hold their value fairly well, even in a weak housing market.

I think the number of homes for sale will continue to increase next year, especially during the prime home selling months in the spring. The increased inventory of homes on the market will continue to exert downward pressure on home prices. It’s basic economics, the law of supply and demand.

The reason home prices increased so rapidly during the recent housing boom is because there were more buyers in the market than homes for sale, causing bidding wars with multiple offers on desirable properties.

The demand exceeded the supply of homes for sale, and prices went up.

Now, we have the opposite situation. The supply of homes for sale exceeds the demand from buyers. Sellers are having to reduce their prices. While I think home prices will come down from their peak, I do not think that we will experience a crash with prices dropping 50 percent or more, as we often see in the boom-and-bust housing markets of California, Arizona and Florida.

Why? Because that is the historical trend. Our home prices never go up as fast as those super-heated markets, but we also don’t come down as fast. Foreclosures in the Puget Sound region traditionally average far fewer than other states. And even though they’re up significantly this year, we are still far below the national average. Part of the reason for this is because we have one of the lowest home ownership percentages in the country, probably due to the fact that the high price of homes in this area price many people out of the market.

I don’t buy into the “gloom and doom” scenarios being promoted by blogs such as seattlebubble.com, which has been predicting the imminent collapse of the local real estate market for a long time. While I give it credit for pointing out that many people in the Seattle media were overly optimistic about the Puget Sound real estate market during the boom, I think the bubble bloggers tend to be overly pessimistic.

So, if you are thinking about buying a home, I think that next spring may be an excellent time to pick up a good deal. And if you can’t afford to buy next year, don’t worry about being priced out of the market because I think home prices will remain flat for the next few years.

Of course, I could be wrong.

Check back next year at this time to find out.

Mail questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206 or e-mail him at economy@heraldnet.com.