Housing market's bumpy ride isn't over

Home prices may slide further, but some analysts see signs of stability emerging in 2011
By Eric Pryne, Seattle Times business reporter
For all the turmoil the residential real-estate market experienced over the last few years, by one measure it hasn't changed much at all.
About 16,000 houses sold in King County in 2008, the year after the housing bubble burst. Another 16,000 got new owners in 2009, according to the broker-owned Northwest Multiple Listing Service.
When the last of 2010's sales is recorded, the total is likely to be right around that 16,000 mark once again. But those annual totals mask what has been a wild ride for the real-estate market over the past two years.
Activity rose and fell with new federal tax credits for home buyers, a key component of the Obama administration's economic-stimulus package. Home sales surged in mid-2009 after the incentives were adopted, and then tailed off after they expired in mid-2010.
With Republicans hostile to the stimulus soon to be in control of the U.S. House, there's little chance the credits will be revived.
So what's in store for the local real-estate market in 2011, in this brave, new, post-tax-credit world? Real-estate executives say they see signs of stability emerging. "We're regaining our footing," said Lennox Scott, chairman and chief executive officer of John L. Scott Real Estate.
But other observers caution that it's too soon to say where demand is heading, and warn that prices may have farther to fall.
"Right now Seattle is doing worse than the rest of the country," said Stan Humphries, chief economist with Zillow, the Seattle-based real-estate marketplace and database.No one is forecasting a dramatic resurgence. "I don't think anybody believes we're going to be jumping up to where we were [in 2007] again," said OB Jacobi, president of Windermere Real Estate.
Here's a look back, and a look ahead:
Home prices
After drifting between $363,000 and $399,000 for most of two years, the median price of single-family homes sold in King County hit in a new post-bubble low in November: $359,950.
Was that an aberration, or an omen?
Median sale prices have been dropping since August when compared with the same month in 2009, according to the multiple listing service. Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University, anticipates that trend will continue into midyear, although he said the declines should be fairly small.
Prices will keep falling until the foreclosure pipeline begins to clear, Crellin said — foreclosed homes, often priced low to sell quickly, help push all prices down. Until job growth resumes, "it's going to be tough to get any momentum," he added.
Real-estate blogger Tim Ellis of Seattlebubble estimates prices could fall up to 5 percent countywide next year, if only because the gap between household incomes and home prices still is wider than it's been historically. But any drop won't be uniform, he added: Prices could rise in close-in, desirable neighborhoods such as Ballard and Capitol Hill.
That's where the turnaround is likely to start, Scott agreed. By the end of 2011, he expects prices region-wide will have hit bottom and begun inching up again. Zillow, which attempts to measure the value of all homes, sold and unsold, calculates that values fell more steeply in the Seattle metropolitan area — 11.6 percent — than the national average of 5.0 percent between October 2009 and October 2010.
Humphries expects the region's decline will continue to outpace most of the rest of the country through the first half of next year. But, while home prices peaked nationally in mid-2006, they didn't crest in Seattle until mid-2007. Seattle is just catching up with the rest of the country, Humphries said; any illusions that this region would escape the full brunt of the housing recession were dispelled in 2010.
"It's not really hitting us harder here," he said. "It's hitting us later."
Home sales
Opinions vary on whether the Obama tax credits boosted sales overall. "It worked," said Scott. "It allowed the economy 18 months to help heal itself. It brought first-time buyers into the market." Crellin disagrees. The credits helped persuade some people to buy sooner, he said, but they didn't bring many people into the market who wouldn't have bought at all.
The steep drop in sales after the incentives expired at midyear is proof of that, he said. Many who probably would have bought in August or September bought in March or April instead.
But that phenomenon has pretty much played out now, Humphries said: "We're starting to see a better reflection of true demand," he said, a picture that should become clearer in early 2011.
Realtors report more activity than usual in recent weeks. "We're working our way back toward a healthy market," Scott said.
The new Congress, the defeat of a proposed state income tax on high-income residents, and the tax compromise between Obama and congressional Republicans "are all boosts for the market," he added. "They create certainty."
Windermere's Jacobi agreed. "People are feeling better about things," he said. Crellin is more cautious. The slow winter months are a poor indicator, he said — wait until March or April. If prices do slip next year, sales could be affected. But it's unclear how. It only makes sense that "if prices go down, sales are going to go up," Ellis said, perhaps as much as 10 to 20 percent.
Or falling prices could keep prospective buyers on the sidelines, waiting for the market to bottom, Humphries said. But for long-term buyers, timing the bottom precisely may not be that important, he added.
Foreclosures
They're still not as common in the Seattle area as the country, and certainly not as prevalent as in hard-hit markets such as Las Vegas, Miami and Phoenix.
But they are on the rise.
Nationally, according to the Mortgage Bankers Association, the share of home loans that are either in foreclosure or more than 90 days past due fell to 8.7 percent in September, the most recent period for which numbers are available. It was 8.9 percent a year earlier.
In Washington, however, that percentage rose from 5.5 to 6.4. "We've clearly closed the gap," Crellin said.
Foreclosed homes are accounting for a larger share of total sales, too: 16.7 percent in King, Snohomish and Pierce counties in October, up from 13.4 percent a year earlier, according to Zillow.
"It's going to continue like this for a few years," Jacobi said, "and the banks will price their properties aggressively."
If there's a bright spot, Crellin said, it's that the numbers suggest fewer homeowners are falling seriously behind on their payments and heading down the foreclosure path. "Hopefully it will turn around in the next couple quarters," he said. Humphries also foresees a reversal. Foreclosures should peak in the Seattle area in 2011, he said.
Mortgages
There's consensus here: Interest rates will edge up next year, because they can't go any lower. Of course, that's what the experts said a year ago — and they were wrong.
The average rate for a 30-year fixed-rate mortgage fell below 5 percent this year and stayed there for months. Lately, however, it has started climbing again. That could suppress demand, Ellis said. But Jacobi said it could spur sales by persuading prospective buyers to act before rates climb even higher.
Interest rates should remain low by historic standards even if they do rise, Crellin said. But, to keep buyers' monthly payments the same, prices would have to drop 10 percent to counteract a 1 percentage point bump in the interest rate, he added.
Higher interest rates won't help sales, Humphries said, but their impact will be minimal if the economy improves, job growth resumes and consumer confidence rises. People still are buying houses, Ellis said, but they're going about it differently than in the days before the market downturn.
"A few years ago everybody just knew you had to buy a house — it's what you did," he said. "Now it seems like the urgency isn't there. People are buying only if they get a really good deal, or if they find a house they really like."