Are There Clues that the Real Estate Market is Starting to Cool?

I’d like to begin this post with a disclaimer.  The information I’m sharing here is anecdotal in nature, and my opinions are based largely on my own personal experience investing in and selling residential real estate since 1993.  I know that quite a few Realtors may disagree with me, but I’m having a distinct feeling of “déjà vu” with respect to the local housing market, a feeling that reminds me of the months just before the market peaked in August of 2007.  Median home prices in Pierce County are currently well above that 2007 peak (see the chart below) and well above the levels we would expect to see with normal appreciation (the red line).  While the numbers differ by county in the Western Washington area, the overall trends remain the same.

FIRST SIGNS OF A CHANGE?  Watching what new home builders and developers are doing is never a bad idea.  I was recently showing homes to relocation clients interested in new construction in Puyallup, and what I saw gave me pause.  Builders were working their crews around the clock to finish houses that were already under construction, but there seemed to be little to no new ground being broken for additional homes.  Builders’ agents were also offering heavy, unadvertised incentives (in some cases 10-15% of a home’s total value) to buyers willing to purchase in June.  The MLS data below shows a recent decline in pending new construction home sales in Pierce County (the red line), consistent with a decrease in new housing starts.  Of note, Time Magazine has pointed to this decrease in new housing starts as an early warning sign of a broader recession (SEE THE FULL ARTICLE HERE).

IS A RECESSION AROUND THE CORNER?  For seven leading economists interviewed by Forbes Magazine in May of this year, the answer is yes.  Predictions for the start of that recession range from late 2018 to 2022.  SEE THE FULL ARTICLE HERE.  A lot will depend on the fiscal policies of the current administration, but rising interest rates in combination with a recession will almost certainly have a negative impact on our local housing market.

SHOULD YOU PANIC?  The answer here is no.  I’m not expecting a market drop like we experienced in 2007 because the fundamentals of home mortgage lending are significantly different than they were back then, but I do anticipate a decline in real estate values within the next year.  Is now a good time to buy?  It depends on how long you’re planning to own the house and how much equity you’ll have in the house at the time of purchase.  We’re advising clients who expect to have their house for at least five years and who have the capacity to hold on to the property through a market downturn to buy at a price they feel is reasonable.  If buyer clients tell us they might have to resell a house within the next two to three years and/or if they don’t have a lot of equity to put into a house, purchasing now may be riskier.  Is it a good time to sell?  Absolutely.  For seller clients thinking of selling “in the next few years”, we’re recommending that they do it sooner rather than later.  While today’s sellers could be missing out on additional appreciation, timing the housing market for maximum gain can be difficult.  If selling now fits with your larger life plans, sell now and avoid the risk of a loss in value if and when the market shifts.

Jeff Williams is a top-producing Realtor with Windermere in Tacoma specializing in the purchase and sale of historic and luxury homes.   Click here to email Jeff or give him a call at 253-303-1135.