We all want clarity, peace of mind and hope for the future. But oftentimes, when the future is unknown, we fall into a spiral of negative doomsday thinking that leaves us feeling hopeless, anxious and unable to move forward. We must admit, at times we’ve found ourselves paralyzed and scared of what to do next as we approach an impending US recession. When Seattle housing prices are dropping and the average time a home sits on the market increases past a month, it’s getting easier to let fear and anxiety take over. That’s why this month, we’ve written this blog. Hopefully it will provide context to where we are and practical advice to ensure you weather the storm with peace of mind.
How We Got Here
A real estate market is created by supply (houses for sale) and demand (people who want to buy those houses). When supply is low and demand is high, prices increase. This is what happened 2020-2021.
In March of 2020, the coronavirus crisis forced many business closures, event cancellations, and work-from-home policies which triggered a deep economic downturn. In April of 2020, in an effort to limit the economic damage from the pandemic, the Federal Reserve announced a plan to keep credit flowing by lowering the cost to borrow. This included large purchases of U.S. government and mortgage-backed securities and lending to support households, employers, financial market participants, and state and local governments.
Jerome Powell, Chair of the Federal Reserve
It worked. Ultimately making mortgage interest rates historically lower than they have ever been (20 year average was 5.6% and they went down as low as 2.75%). Lower rates made borrowing money to purchase a home incredibly cheap and with an overnight shift to working from home for millions of Americans, a massive wave of demand hit the single family housing market, creating one of the hottest real estate markets our country has seen to date. The median home price in the US skyrocketed 37.5% from $258,000 to $392,000 in just two short years. In Seattle we saw the median list price jump 27% from $773,494.00 in March 2020 to $985,421.00 in July 2022.
The Shift Towards a Slower Market
The Fed’s decision to lower the cost to borrow created such high demand that inventory dropped to historic lows. The same was true for hard goods and soft goods. If you needed to buy a couch, car or dishwasher, you had to pay top dollar and to wait months for inventory to catch up. This caused prices to increase, which created the inflationary environment we’re in today.
In March of 2022, the Federal Reserve began increasing interest rates in an effort to curb inflation. They have since increased the Federal Reserve rate multiple times, impacting the once average 3% mortgage interest rate to now an average 7%+. This means that a buyer today purchasing a $975,000 home in Seattle is paying 32.84% more per month than they would have in 2020. See below chart for reference.
Mortgage Calculator Google Sheet courtesy of Rise Seattle Group LLC. Click image to run your own numbers.
So Where is Supply and Demand at Today?
One way to measure demand is by looking at the percent of sellers that have decreased their price. If you look at the chart of single family homes in Seattle over the past 3 years that have had a price reduction, you see that on average, about 30% of sellers initially over-price their homes and eventually reduce the price to attract buyers. At the peak of our market this spring we saw that number dipped below 10%. Since then we have watched that number climb to 45.7%.
There are two factors at play here:
1.) We are watching a market shift happen (driven primarily by rising interest rates) and sellers are reducing their list prices in order to keep affordability within reach of buyers.
2.) There is a seasonal rhythm to price decreases as Sellers tend to drop their prices towards the end of the calendar year. The below chart shows a very consistent pattern of this.
Seattle area Price Decrease Data courtesy of Altos Research, Inc.
How has this impacted the price of your home?
It depends on when you purchased your home. In May of 2022, the median sold home price in Seattle hit its highest point at around $1,000,000 (a $200,000 increase). Today it's sitting around $850,000. While the median price has dropped $150,000 since the peak, it's still up $85,000 from September of 2021 of $765,000. TLDR: year over year, the median sold price for Seattle single family homes is still up 10% as of October 2022.
What if I bought between May and today?
The only people who get hurt on a roller coaster are those who try to get off in the middle. Take a deep breath. (Here's one of my favorite books that can help) You're going to be okay. This too shall pass. The main reason values have decreased is because interest rates increased. Once rates go back down your value will go back up. You purchased with a lower interest rate and the belief that you would be in your home for 7-10 years. Keep that belief in mind.
What does this mean for current buyers?
As Warren Buffett once said, “Get greedy when others are fearful and fearful when others are greedy.” This could be a good opportunity for you to find a home at a price you could not have dreamed of just 6 months ago. Despite interest rates being up, your monthly payment may be very similar to what you would have paid with the combination of much higher prices and a lower interest rate. The benefit is you can take advantage of lower prices right now knowing that when rates do come back down, you can refinance.
What does this mean for current sellers?
Pricing is so important right now. We have shifted how we price homes. Instead of looking at what has SOLD in the past 2-3 months, we are primarily looking at what other homes, like yours, are currently for sale and at what price. If those homes are not selling, then you need to price better than them (price to “win”).
An Essay on Hope
Wondering how to beat anxiety about the recession? Below are seven ways to help pick you up when you're feeling down.
1. Gratitude:
Dorthy Day once said, "Gratitude is riches. Complaint is poverty.". When we choose an attitude of gratitude for our life and circumstances it gives us perspective on what we do have and allows us to see opportunities to serve others.
2. Trust Your Thesis:
If you made a large investment in 2021, remember why. You needed a larger home. You knew it was a good investment. Don’t abandon that thesis just because people are talking negatively about the economy. Just because it’s down today doesn’t mean it’s down tomorrow.
3. Stop Listening to Doom and Gloom News:
This one is for me. The more I consume negative news the more ornery I become. Even if it’s true. Focus on what you can control and disregard everything else.
4. Be a Good-Finder, Not a Fault-Finder:
These days it feels like everyone is looking for the bad. But neuroscience has very clearly discovered that what we focus on grows in our minds. Ever heard of garbage in garbage out? It’s scientifically true what you listen to shapes you. Look for the good around you.
5. Find a Goal that is Exciting and Worth Pursuing:
My favorite times in life all stem from seasons of big goals. Is business slow? Go for a run! Climb a mountain. Spend time with your kids. Paint. Read a book. The world is full of free things you can do to better yourself, your relationships and future.
6. Take a Breath:
This too shall pass. The goal of the Fed is to temporarily stall the economy. Not to shut it down. Remember that all difficult things pass. Breath and know that you are going to be okay. And if you still don’t feel that way, refer back to #1.
7. Pray/Meditate:
This one may rub you the wrong way. I get it. I have my own religious baggage. But the science is very clear, those who pray/meditate and submit to a reality that they are not in control of the Universe (a higher power of some sort) live longer, have less anxiety and are overall happier. Ask yourself, if you are not in control can you trust that something out there is and it’s conspiring to build you into the best version of yourself? Maybe not. But it sure has been helpful for me when I have this perspective.
Understand that while the world around you may feel overwhelming, know that you are loved, you are capable and that you live in the best possible moment to be alive. May you go forth and bring love and creativity to everyone you meet.
Sincerely,
Tyler & Adam