In Market Outlook & Strategy

With mortgage rates going up & down, increasing inventory, and some softness in price and closed sales, is now a good time to buy in the Seattle area?  Below I have tried to summarize the positive (bull) and negative (bear) case for purchasing real estate in Seattle.

The Bull Case

Go for It! A strong case can be made for stomaching the pain of making a major residential real estate commitment to the Seattle area.  A positive outlook on real estate is based on some key points:

Robust Local Economy – Employment +3-4% in 2018

The local economy is buzzing, in part driven by leadership from 11 major corporations with significant operations based in Seattle environs. Those corporations include: Alaska Airlines, Amazon, Boeing, Costco, Expedia, Expeditors International, Microsoft, Nordstrom, Paccar, Starbucks & Weyerhaeuser.  Much of the success of these Fortune 500 companies stems from tapping into a highly educated population base to create superior products and services.  The presence of these companies has also led to a spillover effect for start-up businesses, as many talented executives can also crossover into building successful companies.  This type of dynamic is extremely difficult to replicate and has led to competitors setting up shop locally to attract and hire key employees.

While Interest Rates Are Rising, They Are Still Low by Historical Standards

While interest rates are rising, they are still historically very low. Therefore, being able to lock-in low borrowing rates now may be advantageous.

Development Costs Are Sky High

Matthew Gardner, Chief Economist of Windermere Real Estate, argues that pricing will remain stable in Seattle as the price of new supply is very expensive. New development is driven by four key factors: land, labor, materials and regulations (neighborhood zoning, building standards).  All of these factors make development expensive and are unlikely to change dramatically in the near future.

Still Cheap (Relative to San Francisco)

While Seattle is a much more expensive place to live relative to a few years ago, it’s still better than San Francisco. Best places.net estimates that San Francisco is 49.4% more expensive to live in than Seattle, with median home cost being the biggest factor .  That means that a person moving here from the Bay area would effectively get a 49% pay raise on the exact same salary.  Matthew Gardner, Chief Economist of Windermere Real Estate, estimates that 36.8% of homes sold are “affordable” vs. only 6.0% in San Francisco.  That means there will be a continued exodus of “home equity migrants” from California to Seattle.  For the foreseeable future, it will be a great economic decision for both the employee, who wants an increase in purchasing power, and a company that wants to manage its costs and keep its employees in one place.

International Demand

Residential housing located in major US cities are attractive income investments (denominated in US dollars) for a broad swath of international investors. The Association of Foreign Investors in Real Estate ranks Seattle the third best place in the US for international buyers, behind only New York and Los Angeles.

No Amazon HQ2

The Seattle Times reported that Amazon has as much office space in Seattle as the next 40 biggest employers combined, representing 19% of all prime office space in the city. The article states: “And while Seattle’s booming economy is often attributed to a wide variety of factors, increasingly, it’s all about one company.” One of the biggest risks to Seattle real estate pricing – Amazon’s HQ2 – appears to have gone away.  Now that the company has scuttled plans to grow a secondary headquarters, it appears to be doubling down in the Seattle area.  The company was recently in the market to buy a 3.5 acre parcel in Bellevue for $195M, which the Puget Sound Business Journal reports would give the company enough room for more than 25,800 employees.

The Bear Case

Near Term Pricing Trends … Watch Out Below! After several years of unprecedented growth, price appreciation and rent increases have led to increased capacity.  Simple laws of supply-and-demand may suggest that the rate of increase in near-term housing prices is bound to slow down, or even reverse into decline.  In fact, there are key signs this may be occurring now.

Near Term Chinese Capital Constraints

In the last two years Seattle has received a boost from Chinese real estate buyers, in part due to tax law changes in Vancouver, BC and general interest in the Seattle market.  However, Chinese authorities have implemented some capital controls which have served to slow down the torrent of investment.  Further controls could hinder the ability of Chinese citizens to make offshore investment.

Risk of a Recession

Many local businesses are in economically cyclical industries (technology, consumer discretionary spending, manufacturing, trade), which can be disproportionately and negatively affected in an economic downdraft. In this scenario, Seattle’s local economy could be volatile.

Exposure to Technology Industry

Seattle is highly exposed to the technology industry. A downturn in this industry, sparked by competition, regulation or other factors, would be detrimental to the local economy and real estate prices.

Leveraged Buyers

Many new home owners need to stretch to close on a home. That means taking on more debt than some would like.  Highly-leveraged home owners are extremely vulnerable during an economic downturn.

Threat of Higher Interest Rates

Housing affordability is significantly affected by mortgage interest rates. Further increases in mortgage rates will dampen the ability of new owners to finance real estate at current prices.  The likelihood of lower price appreciation negatively affects the benefits of home ownership.

Rents Have Been Flat-to-Falling Recently

The Seattle Times reported that rents increases have been flat in 2018, due to new supply coming online and unfilled apartment owners offering perks and incentives. The assumption that you can rent out your home if you need to cover your mortgage payment may not be valid going forward.  The acceleration of flat-to-falling housing rents could make home ownership relatively less attractive.

The Take Away

From my perspective, it all comes down to timing.  What financial condition are you in?  Can you reasonably weather a financial storm?  What steps would you take to protect yourself if something happened outside of your control – recession, job loss, etc.?  It is hard to argue against the positive long-term value of owning real estate in Seattle.  However, in the short-term, individuals can encounter major difficulties, particularly when they do not fully understand the risks of owning a highly-leveraged investment, like a home.

If you want us to help you answer these questions based on your unique context, just give us a call, or set up a 15-minute meeting using this scheduling link.

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