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July 2017

Chamber meeting features economist with housing market overview

Svneja Gudell at Bellevue Chamber of Commerce meetingSince bottoming out in 2012, home values have approached pre-recession highs, which economist Svenja Gudell said was a "very fast recovery."  Equally impressive is the 7 percent annual growth rate - twice the historical rate of 3.5 percent.

Dr. Svenja Gudell, chief economist at Zillow, told attendees at a meeting of the Bellevue Chamber of Commerce that while Seattle area homes are appreciating at 12 percent annually as the market "soaks up all the inventory," it is not likely to turn into the next San Francisco. "There's still quite a bit of runway," she remarked.

Millennials encouraged by high-paying jobs and corresponding affordability are starting to make up a "bigger chunk" of housing activity, according to research by Zillow. Like most house-hunters, this cohort is experiencing the consequences of under building during 2008-2014.

"Across the board, home values in the Seattle metro area have exceeded their peaks," she noted while displaying a graph comparing median prices in Bellevue, Everett, Renton, Seattle and Tacoma. "While prices seem high, they are not alarming," she stated.

Home value growth is expected to slow through the first quarter of 2018, due in part to expected hikes in mortgage rates. Values in Seattle are forecast to increase by 5 percent, according to Zillow's analysis, although Gudell pegs the rise at "closer to 7-to-8 percent."

Zillow's home value index also includes an analysis of price changes when the price spectrum is divided into thirds. Since 1997, homes in the bottom third have appreciated at an annual rate of 9.7 percent. That compares to 6.8 percent for the middle third and 4.8 percent for the upper tier.

Today's first-time home buyers are older and more likely to buy a more expensive home, skipping the first tier (where inventory is sparse) if they can afford to do so, according to Gudell.

"Weak income growth and rapid appreciation, even with very low mortgage interest rates means homes are becoming more unaffordable more quickly for bottom-third buyers," according to Zillow's economists.

Growth in rents is moderating and were virtually flat in the second half of 2016 for the metro index. By comparison, rents in the Pacific Northwest had the strongest growth at more than 6.7 percent. "Rents can be hyperlocal," she noted, citing Belltown as an example where rent hikes have slowed due to the construction of many new units. As rent hikes diminish, landlords will start offering concessions.

As part of her program, Gudell also presented data comparing the share of income spent on housing from 1998 to present. Today's renters are spending around 29 percent, nearly twice as much as owners with a mortgage (around 16 percent). "Nationwide, the share of income spent on a mortgage is well below historic norms," she emphasized.

Seattle homeowners are spending about 25 percent of their income on a mortgage, while renters are allocating 32 percent.

"The bottom is really hurting right now," Zillow's economist remarked. For renters, as their share of income spent on rent rises, a growing number report saving nothing.

Renters' prospects for buying are dim, Gudell acknowledged, with opportunities narrowing in an era of acute inventory shortages and rising prices. She noted home values in the bottom third of the price spectrum are growing twice as fast as the other two segments. To compound the situation, income growth for the lowest wage earners has been especially weak, the pace of new construction is lagging demand, and investors are buying single family homes and converting them to rentals. (Zillow's data indicates single family homes as rentals have climbed to more than 19 percent, which compares to a historical average of around 13 percent.)

On a brighter note, research shows millennials have positive views of homeownership and their opinions align closely with those of their grandparents.

Data used at the Chamber's Housing Market Overview program may be viewed online.