Over the past 20 years I have been monitoring the residential housing market in the Seattle metropolitan area using the MLS statistics, graphing the data and analyzing specific market trends where I have appraisal assignments. Generally speaking the market continues to perform each year with the same pattern. Inventory is at its lowest in December/January reaching its peak during the late summer months slowing during the holiday season. Meanwhile sales activity follows a similar trend with the least number of pending transactions occurring in December and January increasing into the summer months and slowing through the holiday season.

As well, the housing market has had ten year cycles in the 1960’s through the 1990’s with slower markets during the first 3+ years of a decade, stable trend that keeps pace with inflation during the mid-years, and appreciation trends that marvel our portfolios in the later part of a 10 year cycle.

What’s different? Trends of the past would indicate that the market of the first four years of the new millennium should be performing at a much slower pace. Why is the Seattle market experiencing a limited supply of inventory and rising home values in a year that should be chugging along at a snail pace?

It took two strong years of record setting sales activity throughout the Puget Sound region to absorb the over-supply of inventory that plagued the housing market in 2001 through 2003. Interest rates and the ease of borrowing money is the primary factor behind the market’s ability to absorb this inventory. And now, as the local economy is surging forward, the stock market is strong, unemployment is declining, wages are increasing, the supply of vacant land is dwindling, the market demands more housing units and there is a new term for what is affordable.

What historically has taken seven years to occur has happened in fewer than four years. And, there does not appear to be a reason for the market to slow. The economy is strong, Boeing is developing the 7E7 fueling job growth and Microsoft announced last month their plan to hire up to 15,000 +/- employees over the next 15 years. Nordstrom’s, Paccar, Starbuck’s and Costco are doing well and positive growth is projected in the Pacific Northwest.

Strong growth and low inflation have benefited the housing market, keeping interest rates below 6%. There are concerns that interest rates, now at 5.75%, will rise and slow demand during 2005. However, I was talking with Mark Bauhs, manager at Eagle Home Mortgage in Seattle and he indicates that economists have forecasted interest rates to rise to an estimated 6.5% by years end, an increase of ¾%. This is not unreasonable considering in the 1990’s interest rates exceeded 7% and in 1980’s they exceeded 10%. Also, Mark stated that the banking industry has eased the qualifying ratios in the lending process for those with high credit scores. In today’s market those with good credit are able to find creative financing alternatives to afford rising property values.

Today’s market is mirroring the market of the late1990’s. In areas of strong demand and limited supply, a competitively priced home could experience several competitive bids. Some buyers are using escalation clauses and offers are accepted at prices that are several thousand dollars above the asking price. Some buyers waive building inspections; shorten their financing contingencies periods and remove neighborhood review contingencies. A seller may indicate that they will accept offers but plan to review the purchase and sale agreements on a later date. Buyers considering a purchase of the real estate may retain the building inspector, appraisers and other professionals up front to posture themselves for negotiations.

Affordability may affect the choices some prospective buyers make, but those who want a piece of the pie will inevitably buy further distance from the location of choice, scale down their expectation in size, quality and function, or borrow in excess of their comfort level to enjoy the lifestyle that they feel that they deserve.

The seller negotiates with the buyer at a price point in excess of the asking price, the lender is processing the loan and a request is submitted to an appraisal firm. An appraiser is assigned to complete a report that reflects current market conditions, an estimate of Market Value. Market Value is defined as the most probable price in cash or its equivalent a property will bring in an open and competitive market, and the buyer and seller are knowledgeable and acting prudently.

So what is an appraiser to do when the asking price is $300,000, the negotiated offer is at $340,000 and sales history indicated that similar property has recently sold and closed in the immediate area in the $280,000 to $300,000 range? The negotiated offer above the list price usually indicates that there were multiple offers. The listing agent should retain these offers and make them available to the appraiser. The appraiser is required to review the listing and sales history of a subject property as this information is pertinent in analyzing Market Value.

The appraiser needs to make himself or herself aware of current market conditions. Historical data may not be the best indicator of value in an appreciating or declining market. Other data; such as, pending sales, listing competition, days on market and the supply of inventory should be considered in an analysis to better understand the mood of the market and the motivating factors behind an offer that is well above or below the asking price. And market trend adjustments should be made to reflect change.

The appraiser is not given an assignment to support a sale price, they are asked to estimate Market Value. In most instances sale price and Market Value are generally synonymous. However, there are instances where market behavior in a purchase and sale agreement falls outside the parameters of the Market Value definition. The real estate community, agents, the mortgage company and their buyers and sellers should be prepared in the event the appraised value does not support the negotiated offer.

The Northwest Multiple Listing Service reports indicate that in the summer of 2002 and 2003, listing inventory in King and Snohomish counties exceeded 14,000 units per month in most every month of the year with buyers absorbing an average of 25% and 29% of the monthly inventory, respectively.

In 2004 listing inventory exceeded 14,000 units only twice, in June and July, and set a new record in June 2004 in negotiated offers at 6,076 pending units in King and Snohomish counties. Buyers absorbed an average of some 42% of the available inventory each month, an increase of 68% over 2002 and 45% over 2003.

In the analysis of the total market at all price points and neighborhood locations, when pending offers exceeds some 30% of the listing inventory for three consecutive months, home values are generally appreciating. Absorption rates between 20% and 30% reflect a generally stable housing market. When absorption rates fall below 20% for three consecutive months, a buyers market prevails. The absorption rate is the relationship between pending sales and available inventory, a percentage that measures the strength of the housing market.

By December 2004, 8,394 available listings were reported by the NWMLS in King and Snohomish counties; the lowest single month in the 11 years that I have graphed multiple listing data in its current reporting format.

The number of available listings has increased over the first two months of 2005. However, the demand for housing is exceeding the supply of inventory and continued market appreciation is anticipated in most neighborhoods over the next several months.

As always, I caution that not all markets respond equally to economic conditions. Review of market data in smaller market segments may indicate an oversupply of inventory reducing the prospective seller’s ability to achieve pinnacle value in the marketplace.

In 1985 I was given my first assignment to appraise a single family home that was reported at a value above $1,000,000. At that time I could count on one hand the number of residential sales that had sold above $1,000,000. In 2004, the NWMLS reported an average of 95 units per month selling above $1,000,000 in King and Snohomish counties.

Throughout 2003 buyers acquired 711 $1,000,000+ homes averaging 59 units per month. In 2004 buyers acquired 1,140 $1,000,000+ homes averaging 95 units per month, an increase of 61%. The absorption of this inventory ranged between 6.7% and 10.2% each month well below the absorption rates for the entire housing market in the two counties. In February 2005 the market absorbed 10.4% of the available inventory, the highest level in five years.

Does this mean the high-end market is in decline? Each market and price point within the region has different factors that affect marketability and value. While the high-end market may appear saturated, it isn’t. Homes that are competitively priced and located in preferred neighborhoods are in demand, selling quickly and can experience multiple offers. However, due to the price point of the market and the financial capability of the seller to hold a listing for a longer period; many homes come on the market at the uppermost end of their value range. Buyers of high-end real estate are location sensitive and may heavily discount property with negative location influences and/or functional and physical problems. The high-end market is strong with many areas experiencing high demand.

In conclusion, the regional economy is strong and housing demand shifted to a sellers market in most areas of King and Snohomish counties in 2004. Although, the volume of inventory increased in January and February 2005, it fell short of market demand indicating that the trend will continue over the near term. Rising home values may create affordability issues that could dampen the dreams of some prospective buyers.

Interest rates may rise but they are not projected to increase to a level that will affect the local housing market. However, inflation concerns may drive interest rates upward beyond the fed’s projections compounding the affordability issues created by a seller’s market. This will slow buyer demand particularly at the low end of the price range. If interest rates increase too quickly, the stock market could respond negatively affecting the high-end housing market as well.