Home prices will continue to increase, but at a slower pace
The strong local economy, high demand and very low inventory will continue to boost home values in 2018, according to Gardner. However, he believes that the double-digit growth of 2017 will moderate, and predicts home prices in King County will rise by 8.5% in the new year.
Mortgage interest rates will rise slightly.
Gardner admits that interest rates continue to baffle forecasters. The rise that many economists have predicted the past few years has yet to materialize. His forecast for 2018 sees interest rates increasing modestly to an average of 4.4% for a conventional 30-year fixed-rate mortgage.
More Millennials will enter the housing market.
Despite the relatively high cost of homes in our region, Gardner expects more Millennials to buy homes in 2018. They are getting older and more established in their careers, enabling them to save more money for a down payment. Many are also having children and are looking for a place to raise their family.
The tax reform bill will have a limited effect on our housing market.
The recent changes to the income tax structure will have an impact on homeowners, but Gardner does not believe that impact will be significant here.
The mortgage interest rate deduction will be capped at $750,000 – down from $1,000,000. But according to Gardner, just 4% of the mortgages in King County exceeded $750,000 in 2017. Most buyers of more expensive homes have been making larger down payments, or buying homes for cash.
Since the $1,000,000 mortgage deduction cap is grandfathered in for those who have already purchased a home, some homeowners may opt to stay put rather than move. That could result in fewer homes being placed on the market.
- The tax bill eliminates the deduction for interest on home equity loans. This is bound to slow down the trend of homeowners choosing to remodel their home rather than trying to find a new home our inventory-deprived market.
The increase in home prices may moderate, but inventory will still be very tight. 2018 is on track to be a strong seller’s market.
The Washington State economy added 79,600 new jobs over the past 12 months—an impressive growth rate of 2.4%, and well above the national growth rate of 1.2%. However, as we anticipated in last quarter’s report, we continue to see a modest slowdown in the growth rate as the state grows closer to full employment. Growth has been broad-based, with expansion in all major job sectors other than Aerospace (a function of a slowdown at Boeing). Given the current rate of expansion, I am raising my employment forecast and now predict that Washington will add 81,000 new jobs in 2017.
Given the robust job market, it is unsurprising that the state unemployment rate continues to fall. The current unemployment rate in Washington State is 4.6% and we are essentially at full employment. Additionally, all counties contained within this report reported either a drop or stability in their unemployment rate from a year ago. I maintain my belief that the Washington State economy will continue to outperform the U.S. as a whole. Given such a strong expansion, we should also expect solid income growth across Western Washington.
Home Sales Activity
- There were 25,312 home sales during the third quarter of 2017. This is an increase of 3.6% over the same period in 2016.
- Clallam County maintains its number one position for sales growth over the past 12 months. Only four other counties saw double-digit gains in sales. This demonstrates continuing issues with the low supply of listings. There were modest declines in sales activity in six counties.
- The market remains remarkably tight with listing inventory down by 14.2% when compared to the third quarter of 2016. But inventory is up a significant 32% compared to the second quarter of this year. Pending sales rose by 5.2% over the same quarter a year ago, which suggests that closings in Q4 will still be robust.
- The key takeaway from this data is that inventory is still very low, and the situation is unlikely to improve through the balance of the year.
- Given tight supply levels, it is unsurprising to see very solid price growth across the Western Washington counties. Year-over-year, average prices rose 12.3% to $474,184. This is 0.9% higher than seen in the second quarter of this year.
- With demand far exceeding supply, price growth in Western Washington continues to trend well above the longterm average. As I do not expect to see the new home market expand at any significant pace, there will be continued pressure on the resale market, which will cause home prices to continue to rise at above-average rates.
- When compared to the same period a year ago, price growth was most pronounced in Grays Harbor County where sale prices were 20.1% higher than the third quarter of 2016. Nine additional counties experienced double-digit price growth.
- Mortgage rates in the quarter continue to test the lows of 2017, and this is unlikely to change in the near-term. This will allow home prices to escalate further but I expect we will see rates start to rise fairly modestly in 2018, which could slow price growth.
Days on Market
- The average number of days it took to sell a home in the quarter dropped by eight days when compared to the same quarter of 2016.
- King County continues to be the tightest market, with homes taking an average of 17 days to sell. Every county except San Juan saw the days on market drop from the same period a year ago.
- This quarter, it took an average of 43 days to sell a home. This is down from the 51 days it took in the second quarter of 2016 and down by 8 days from the second quarter of this year.
- At some point, inventory will start to grow and this will lead to an increase in the average time it takes to sell a house. However, I do not expect that to happen at any time soon. So we remain in a seller’s market.
This speedometer reflects the state of the region’s housing market using housing inventory, price gains, home sales, interest rates, and larger economic factors. For the third quarter of 2017, I have left the needle at the same point as the second quarter. Though price growth remains robust, sales activity has slowed very slightly and listings jumped relative to the second quarter. That said, the market is very strong and buyers will continue to find significant competition for accurately priced and well-located homes.
Matthew Gardner is the Chief Economist for Windermere Real Estate, specializing in residential market analysis, commercial/industrial market analysis, financial analysis, and land use and regional economics. He is the former Principal of Gardner Economics, and has more than 30 years of professional experience both in the U.S. and U.K.
This article originally appeared on the Windermere.com blog.
WINDERMERE REAL ESTATE | MATTHEW GARDNER, CHIEF ECONOMIST JANUARY 2016
2016 ECONOMIC & HOUSING FORECAST
THE NATIONAL ECONOMIC FORECAST
1. THE U.S. WILL CONTINUE TO EXPAND WITH REAL GDP GROWTH OF 2.3% IN 2016.
Although a positive number, the forecasted rate of growth suggests that we will be modestly underperforming in 2016. On a positive
note, oil prices are likely to remain well below long-term averages, which puts more money into consumers’ pockets in terms of disposable
incomes. However, I believe that consumers are likely to continue to save rather than spend which will constrain growth. That said, there is
certainly no recession on the horizon—at least not yet—and a strong dollar will act as a bit of an anchor.
2. EMPLOYMENT WILL CONTINUE TO EXPAND BUT THE RATE OF GROWTH WILL SLOW. LOOK FOR AN INCREASE OF
1.6% IN 2016.
We are rapidly approaching full employment (generally considered to be when the unemployment rate drops below 5 percent). As such,
growth in employment has to be driven more by population growth rather than a return to employment. 2015 saw an average of around
210,000 jobs created per month and I believe that this is likely to slow to an average monthly gain of 190,000 new jobs.
3. THE U.S. UNEMPLOYMENT RATE WILL CONTINUE TO DROP AND END 2016 AT 4.8%.
As mentioned above, we are heading toward full employment and, as such, the national unemployment rate cannot trend much lower. That
said, the less acknowledged U-6 rate (which includes those working part-time and those marginally attached to the workforce) will remain
elevated at around 8%, signifying that there is still some slack in the economy and room for the rate to drop a little further.
4. INFLATION WILL REMAIN IN CHECK WITH THE CONSUMER PRICE INDEX AT 1.9%.
The Federal Reserve has begun the long-awaited tightening of monetary policy and we will likely see the Fed Funds Rate continue to move
higher over the next two years. Inflation has yet to respond to the low unemployment rate, but it will.
The core rate of inflation should remain in check and the overall rate could stay below long-term averages as a function of stubbornly low
energy costs. Should we see a shift in OPEC’s position relative to oil supply, the overall rate of inflation could rise more rapidly. Oil prices,
therefore, will remain in focus during 2016.
THE NATIONAL HOUSING MARKET FORECAST
5. MORTGAGE RATES WILL RISE, BUT WE WILL STILL END 2016 WITH THE AVERAGE 30-YEAR FIXED RATE BELOW 5%.
I am taking the Fed at its word when it says that monetary tightening in 2016 will be gradual and heavily data dependent. Accordingly, I
expect only a modest uptick in long-term rates in 2016. Furthermore, as long as the Federal Reserve continues to reinvest the dividends that
it is receiving from their bond holdings—which is highly likely—the yield on the key 10-year treasury will remain low and hold mortgage
rates in check. This is only likely to change after the general election, therefore suggesting that rates will remain very attractive relative to
their long-term averages.
6. CREDIT QUALITY—
WHICH HAD BEEN REMARKABLY STRINGENT—WILL RELAX A LITTLE.
Access to credit, specifically mortgage instruments, has not been easy for many would-be homebuyers but that is set to change. I believe
that we will see some improvement, specifically for borrowers with “near-prime” credit. This will be of some assistance to first-time buyers;
however, credit quality will still be higher than it needs to be.
7. EXISTING HOME SALES WILL RISE MODESTLY TO AN ANNUAL RATE OF 5.53 MILLION UNITS WITH EXISTING
HOME PRICES UP BY 4.7%.
I anticipate that we will see some improvement in overall transactional velocities in 2016, but unfortunately, demand will still exceed supply.
Prices will continue to rise, but at a more constrained pace than seen over the past few years. This will be a function of modestly rising
interest rates as well as slightly improving levels of inventory. I anticipate that we will see more listings come online as more households
return to positions of positive equity in their homes.
8. NEW HOME SALES WILL JUMP AND BE ONE OF THE BIGGEST STORIES FOR 2016. LOOK FOR A 23% INCREASE IN
SALES AND PRICES RISING BY 3.4%.
I believe that builders will start to build to the entry-level buyer, filling a huge void. Additionally, I see the total number of new home starts
increase quite dramatically in 2016 as banks start to ease lending and builders start to believe that the downward trend in homeownership
has come to an end. This will help to absorb some of the pent-up demand currently in the market.
9. FORECLOSURES WILL CONTINUE TO TREND DOWN TO “PRE-BUBBLE” AVERAGES.
Any story regarding foreclosures will be a non-story as the rate will continue to trend down toward historic averages. However, we will see
the occasional uptick as banks work their way through their existing inventory of foreclosed homes. Move along. There’s nothing to see here.
10. THE MILLENNIALS WILL START TO ENTER THE MARKET.
There are several substantial reasons to expect an increase in Millennial buyers. Firstly, early Millennials are getting older and starting to settle down, and even with modestly higher mortgage rates, rents are likely to continue to trend upward, and this will pull many into homeownership.
Secondly, more favorable mortgage insurance premiums, additional supply from downsizing boomers, and growing confidence in the
housing market will lead to palpable growth in demand from this important—and substantial—demographic.
To conclude, it appears to me that 2016 will be a year of few surprises—at least until the general election! Because it is an election year,
I do not expect to see any significant governmental moves that would have major impacts on the U.S. economy or housing markets.
MATTHEW GARDNER is the Chief Economist for
Windermere Real Estate, specializing in residential
market analysis, commercial/industrial market
analysis, financial analysis, and land use and regional
economics. He is the former Principal of Gardner
Economics, and has over 25 years of professional
experience both in the U.S. and U.K.