April Seattle Newsletter: Seattle Prices Dip (Surprise, Surprise)

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Howdy Seattle Redfinnians!

Here’s our round up of all the Seattle real estate news. At Redfin, our Seattle business is booming. Agents are racing to keep up with demand as offers were up 24% in the last two weeks over our four week average as buyers scurried to get under contract before today’s expiration of the federal tax credit. Meanwhile, our growing listing business is shooting through the roof, and our engineers are going deep, to build software to guide customers through home-tour scheduling and the escrow process.

We’re hiring as many brilliant people as we can find, hosting brown-bag lunches on management best practices that are open to the public, and occasionally popping up on talk shows to defend Seattle’s reputation as an innovation hub.

Prices Drop

But all that fun stuff doesn’t mean diddly to folks when prices are dropping. Here’s the latest Seattle data from Case-Shiller, the Standard & Poor’s index used to measure home prices. As we forecast in last month’s newsletter, it shows that prices are dropping:

  • Seattle prices dropped 1.1% from January to February
  • Compared to February last year, Seattle prices dropped 5.6%; only Las Vegas lost more ground
  • Prices have now declined 25.3% from the July 2007 peak
  • The market has declined for four straight months; the decline has lasted two months once you account for the pricing lulls that always happen in the winter.

    CaseShillerSeattle

    One note. Because Standard & Poor’s just reported problems in how it accounts for winter-time lulls in demand, we are no longer using the seasonally adjusted numbers.

    Though prices are dropping in the Seattle market overall, certain neighborhoods are still hot. According to Trevor Smith, Redfin’s Ballard team lead, “prices are increasing in Capitol Hill and Ballard and some homes are selling at 2006 & 2007 price levels.”

    For the full conniption on the pricing drop, visit SeattleBubble, a blog dedicated to the idea that Seattle homes have long been overpriced.

    Sales Up, But Demand Likely to Slacken

    Even as prices dropped in February, sales volume increased in March, because of low prices, but also low rates and today’s expiration of the federal tax credit. Nationwide, the number of existing homes that sold nationwide this March increased 16.1% over last March; mortgages for home purchases reached a six-month high this past week. In Seattle, the Northwest Multiple Listing Service (NWMLS) that brokers use to take properties on and off the market reported an eye-popping 51% jump in pending sales in March. Part of the increase is due to the fact that sales volumes earlier in the winter were dreadful.

    Even though Seattle is a very seasonal market, with demand sometimes tripling from January to July, we tend to think this summer won’t be as strong as usual. Robert Shiller, the economist who predicted both the real estate and Internet bubbles, believes the housing market will be vulnerable as the government withdraws support for lenders and home-buyers alike. The key question is whether the past three weeks of employment gains can begin to take up where government support leaves off.

    A leading indicator for slackening demand is the percentage of Redfin’s offers that involved a bidding war. In Seattle, where we handle about 100 offers per month, 29% of offers over $500,000 faced competition, while 42% of offers under $500,000 did. These numbers are still relatively high compared to last year, but lower than they were earlier in the winter:

    OfferCompetitionSeattle

    Foreclosures: The End of the Beginning

    Even if demand wears itself out, the supply of distressed homes may reach a limit. Yes, the number of foreclosure filings in the U.S. reached record levels in March, a largely seasonal increase we had already anticipated in our February newsletter.

    But what is noteworthy about the foreclosure filings is that more are in the final stages of foreclosure, not the early stages, suggesting banks are starting to work through their backlog of distressed inventory.

    So we are sticking by our forecast from November that foreclosures will peak in mid-2010; in California we have already seen a decline in foreclosure activity on entry-level homes, only partially offset by more foreclosures on homes above $500,000.

    The Year of the Short Sale

    The real change in the market has been in short sales, where a home-owner ducks foreclosure by selling the place and getting the bank to absorb any losses. After years of chaos, the banks are getting better about approving short sales in two or three months — in Seattle, our agents report that Bank of America has really turned things around, but Chase is still often slow — which is why we think 2010 is the year of the short sale.

    Justin Kim, a Redfin Seattle partner agent who specializes in short sales, reports that banks are using better tools and streamlining the closing process. “Banks are realizing that they’ll lose less money if they get short sales sold instead of letting the homes go into foreclosure.” For those concerned about prices, the predominance of short sales over foreclosures is good news; foreclosure can really trash a house, hurting property values across the whole block.

    Interest Rates Immune to Global Credit Crisis

    The other big bright spot is interest rates, which remain very low and have dropped slightly — to 5.06% for a 30-year mortgage — mostly because the U.S. government has promised to keep rates low for an “extended period.”

    AprilBankrateMortgageRates

    This is a big deal, particularly as credit for jumbo loans on expensive homes is easing for the first time in more than a year. As we’ve argued before, folks don’t pay enough attention to mortgage rates when thinking about the true cost of a home. We still expect rates to increase in the back half of the year, which would stifle demand. So that’s our take, though of course the truth is that anything can happen. If you have any questions or comments, just write back or leave a public comment on our Seattle blog.

    Best, Glenn
    Glenn Kelman | CEO, Redfin
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