House Prices

Headlines clashed Sunday on the front page of the Seattle Times Real Estate section:

"Act Fast" screamed the headline to Elizabeth Rhodes’s article on the lack of affordable homes in the Seattle metro area. “In several areas in Seattle and on the Eastside, affordably priced homes are scarce and are being snapped up almost as quickly as sellers put them on the market. A market that tight keeps prices high.”

Just to the right this first headline, however, the headline to Rhodes’ weekly Home Forum column cautioned "Appreciate Fact That Prices Don't Always Rise."

Together the two headlines bracketed the uncertainty facing the Seattle-area housing market: where are house prices headed?

Last Wednesday, a Wall Street Journal article reported that “Housing Strength Shifts to New Markets” (link here, subscription required). In general, the Journal notes, the once hot housing markets of coastal metropolitan areas (Boston, Miami, Los Angeles and San Francisco) are cooling, with inventories of homes for sale up, while employment growth is weak. Housing price trends are flat in these cities. In contrast, cities like Atlanta, Dallas and Houston are experiencing very strong job growth with little or no increase in inventory for sale. In these cities, housing price trends are up.

Seattle is the one coastal city that the Journal finds to have a strong housing market.

The most recent home price data from Freddie Mac show Seattle area prices up 17.5 percent year-over-year, compared with a national average of 13.0 percent. From 2001 through 2004 price appreciation here lagged the nation. Current rates of appreciation fall far short of those seen in 1989-1990. See this chart.

Nationally, the weakness in housing markets is tied to rising interest rates. Mortgage interest rates have risen from 6.21 percent at the beginning of the year to 6.58 in Freddie Macs most recent survey. Nevertheless, rates remain well below the levels experienced in 2000, at the peak of the last business cycle. The Federal Reserve seems to be near the end of the current cycle of interest rate increases.

While rising rates tend to dampen the demand for housing, rising employment tends to increase demand. The Bureau of Labor Statistics reports that the Seattle area has one of the strongest rates of job growth among large metropolitan areas nationally. Employment in the Seattle-Bellevue-Everett metropolitan area is up 4.3 percent in the last year. All indications are that strong job growth will continue. On balance, the outlook for demand here is good.

Against this strong demand, geography and regulation conspire to constrain the supply of single-family detached houses in the central Puget Sound region.

Unless interest rates go much higher or job growth is much weaker than forecast, the supply/demand balance will remain tight in this market. And that argues for house prices to remain firm here.