No national bubble in sight, but there are some frothy markets

Photo by Sebastian Pichler,
Photo by Sebastian Pichler,

The following article, penned by Matthew Gardner, originally appeared on and Windermere Blog:

Earlier this year, I wrote an article called “No housing bubble in sight — for now” in which I shared my belief that the nation, as a whole, is not currently at risk of seeing another housing bubble.

However, I did qualify that statement by saying that I was noticing some “frothy” markets around the country that might be getting a little too hot.

In this article, I plan to divulge those markets that are likely to see slowing price growth in 2016 and possibly a downward correction.

The primary data sources that I used for my analysis were the Case-Shiller Index and the Federal Housing Finance Agency (FHFA).

I chose these two providers as they both prepare indices on home values using the repeat sales method. That is to say, they use data on properties that have sold at least twice to capture the true appreciated value of each home.

What the data shows

As I studied these data sets, it became apparent to me that there are some markets that we need to watch. From a very simplistic standpoint, both Case-Shiller and the FHFA indicated a few cities that have already surpassed their peak index levels.
Using the Case-Shiller numbers, these were Dallas, Denver, Portland and Boston. The FHFA data showed Dallas, Atlanta, Charlotte, Portland, San Francisco and Seattle as having surpassed their previous peaks.

While this can certainly be an indicator that a market is getting overheated, it’s not the be-all and end-all because external influences, such as mortgage rates and recessions, can all affect index levels.

Because of this, I thought it was important to take a closer look and focus on those markets that might be tracking above their natural trend.

That’s to say, I looked at pre-bubble growth rates, forecasted that rate forward in time and then compared that number to the present index levels.

After having completed this analysis, San Francisco, Denver and Dallas appear to be appreciating at a faster rate than their historic averages.

Even two indicators that point toward a potential problem don’t guarantee an outcome. Because of this, I decided to round off my analysis by looking at the ratio of home prices to incomes in the market areas that were of interest.

This is another important indicator when determining the health of a housing market as it speaks to affordability.

For the past few years, home values have been rising at rates well above that of incomes, but thanks to low-interest rates, this hasn’t yet created a significant barrier for buyers.

However, mortgage rates are set to rise, and this could leave some markets with homes that are too expensive for buyers earning that area’s median income.

When we look at the world through this lens, the cities where I see a cause for concern are San Francisco, San Diego and San Jose.

So what does this all mean?

Well, for one thing, San Francisco stands out — and not necessarily in a good way. Additionally, several markets have recovered from the housing collapse, and they are getting a little ahead of the rest of the country; specifically Denver and Dallas.

I will be watching these markets closely and anticipate that we might see a relatively steep slowdown in home price growth in these three cities.

The U.S. housing market has spent the past three years in recovery mode with robust demand, tight supply and favorable interest rates, which created a perfect environment for prices to rise — and rise they did.

However, I believe that a select few markets, such as San Francisco, Denver and Dallas, are getting a little out of sync and should start to prepare for an almost certain slowdown in price growth.

Now, if there is any consolation, it’s that the slowdown is supply-driven. If we do not see a significant increase in inventory in these markets, any slowdown in home prices might be offset by persistently high demand. Only time will tell.


Matthew Gardner is the chief economist for Windermere Real Estate

2015 Cost vs Value Report Demonstrates Clearly That Less Is More When It Comes To Remodeling

top 5 projects in terms of cost recouped, PNW_2015 The 2015 Remodeling Magazine Cost vs Value* Report numbers clearly demonstrate the most important remodel trend for projects centers on “less is more.” This proved true for both the Pacific Northwest statistics, and nationally. And here’s a noteworthy trend in the PNW statistics:  the incredible percentage of the remodeling cost recouped at resale. The top 5 PNW projects all gave back over 100% of your investment. One more reason why the Pacific Northwest Region rocks!!

top 5 projects nationally in terms of cost recouped_2015
The top five projects for cost recouped at the national level mirrors the PNW list pretty closely. Fiber cement board siding made the list nationally, while minor kitchen remodel is part of the PNW top 5. The percentage of cost recouped nationally ranged from over 100% to 82.5%– not too shabby of a return at all!

Here are a couple of the general rules that emerged in the 2015 Cost vs Value report, across most regions, supporting the ROI of replacement work within the home:

    • Simpler, lower-cost projects tend to return greater value.
    • First impressions are important.

The replacement steel entry door project is the only one, on a national basis, recouping more than 100% of its construction cost. Since it’s also the lowest cost project in the report, less is more is demonstrated quite clearly in this statistic! Further, with manufactured stone veneer’s debut in the 2015 report- and inclusion in the top 5 both nationally and locally in addition to those important curb appeal items like new entry and garage doors- gives a huge nod to the importance of first impressions buyers can see immediately.

*The cost-value ratio within this report details resale value as a percentage of the construction cost for the remodel project. For example, when the cost and value are equal, the ratio even is 100%. When the construction cost is higher than the resale value, the reported ratio is less than 100%. When resale value is higher than the construction cost, the ratio exceeds 100%.

Summer Bodes Well for Residential Real Estate

Mercer Island, Seattle, the Eastside and King County all posted strong gains in number of units sold over those of the prior year. In fact, residential sales met, or in most cases, far exceeded the volume of any July over the last four years.

While unit sales have risen dramatically, sales prices continue to be badgered by local short sales, foreclosures and bank-owned properties, many of which are coming to market in reasonably good condition. We continue to see signs that our market is in the early stages of recovery and are reminded that we are faring much better than most markets across the country. We expect to enjoy a robust Fall market across the Northwest this year.

May a Robust Month for the Island

Pending sales continue to be a driving force in the market with May sales on the island up 77.4% over those of a year ago. The market has become much more balanced with many more sellers coming to market and selling within a very reasonable market time. Buyers are seizing the opportunity to gain from both bottom of the market home prices and very low interest rates. Statistically speaking, prices have remained steady. However, some pockets of homes and neighborhoods have seen price increases due to demand.

April Shapes Up to be a Solid Month

April turned out to be a remarkable real estate month for Mercer Island. The Island performed much better than the Eastside, Seattle or King County as a whole. For the month of April, active inventory was at its lowest and pending sales at their highest in any of the last 4 years. Average $ per sq.ft., a stable market indicator, was $392/sq ft–up from a low of $289/sq ft in 2010. The months of inventory for sale (4.6) and the absorption rate (30.2) were are their best levels in the past four years. Only time will tell if this is a lasting trend, but certainly it was a fabulous month for Island sales–even considering that we no longer have a home buyer tax stimulus credit as has existed for the last few years.

March Sales Activity is Strong!

The attached report should brighten your day just a little!  I did a four year history this time to show just how much our market has changed. Nice to see that all market areas are on par with or better than 1 year ago on almost every level. That is quite a feat considering the percentage of sales spurred by the housing stimulus tax credit a year ago.

The Absorption Rate based on pending sales, one of the leading indicators of the overall health of our market, is up across all markets. This is real, non-stimulus created growth!!!

February Posts Nice Volume Gains!

February shaped up to be a spectacular month for pending sales volume! High pending sales coupled with lower active inventory resulted in marked improvements of the Months of Inventory and the Absorption Rate ratios. With pending sales double that of February 2010, the numbers clearly reflect the buzz we have been feeling and seeing in the marketplace.

 February’s numbers do show lower sales prices, however, when one factors out the bank owned and short sale properties, sales prices have remained very stable. As the activity we are seeing on non-distressed properties continues to increase we will likely see the average sales prices increase somewhat to more truly reflect the mainstream marketplace.

Solid Market Activity for January 2011

January shaped up to be a decent month…even compared to pending sales from a year ago when we had the advantage of the home buyer stimulus tax credit! Overall, Mercer Island and the Eastside performed much better than either Seattle or King County—potentially reflecting a trend toward growing demand in the moderate and higher price ranges.

Here is a quick summary of the highlights:

ACTIVE LISTINGS: The number or homes for sale was lower on Mercer Island (-16.9%) and the Eastside (-10.2%) but up in Seattle (+7.4%) and King County (+1.5%).

PENDING SALES: Mercer Island’s pending sales were up 25%; the Eastside was up 5%; Seattle was down 5%; and King County was about the same as a year ago.

CLOSED SALES: Seasonally low and typically reflecting homes that went under contract in November and December, once again Mercer Island and the Eastside were up; and Seattle and King County were down.

AVERAGE $/SQ FT: All areas saw a decline in the Average $/Sq Ft reflecting lower closed average and median sales prices for the month.

SOLD/ORIGINAL LIST PRICE DIFFERECE (%): All areas saw a slight decline in the Sold/Original List Price ratio (Note: Mercer Island had too few sales closed in January to make this a meaningful #)

SALES PRICES: With the exception of Mercer Island, all areas saw lower average and median sales prices. Mercer Island’s # were skewed by a small handful of transactions.

MONTHS OF INVENTORY (Based on Closed Sales): Favorable movement with lower months of inventory Mercer Island was seen on Mercer Island and the Eastside. King County was near even and Seattle was up somewhat.

ABSORPTION RATE (Based on Pended Sales): Aside from firsthand knowledge from the trenches, this is the most accurate measure of the market. It reflects the ratio of pending sales to active listings. The higher the percentage the stronger the buyer market. Seattle showed the highest rate of absorption (24.2%); followed by Mercer Island (22.7%); King County (19.8%) and the Eastside (19.5%).

How Did Real Estate Do in 2010?

2010 Year in Review by Windermere Mercer IslandIt’s that time of year where we look back at what the real estate market did in 2010 and speculate about where home prices and values might go as 2011 unfolds. Most of the news is good…prices are slightly up across the region and sales activity saw a healthy boost. Scroll down to find more details on your area!

Mercer Island continued to tread water through much of 2010. While sales prices increased slightly during the year, buyers got far more home for their money–about 450 more square feet for nearly the same price. With markedly lower prices and more favorable jumbo financing terms, waterfront home sales more than tripled to a count of 27 in 2010 compared to 7 in 2009.

The condo market continued to struggle in 2010 with an oversupply of units on the Island and also in the downtown core markets of Seattle and Bellevue. However, lower prices have boosted sales and begun to reduce the number of available condos–a first step toward stability.

Short sales and bank-owned properties made up only 10% of all homes closed (23 of 220)-the lowest level in the Seattle-Eastside region. On the other hand, they accounted for a remarkable 40% of all condos sold on the Island in 2010 (16 of 40)-the highest level in the region. Click here for a full report.

The Eastside real estate market showed the greatest strength of any area in the Puget Sound region in 2010. Gains were seen nearly across the board with a year over year increase in sales of more than 12%. Sales of homes priced above $1 million increased 29% as high-end buyers took advantage of rock bottom prices and favorable interest rates. Bank-owned properties and short sale transactions made up just over 17% of all homes closed, 911 sales, throughout the year.

The bad news for The Eastside was the continued decline of the condo market, with sales prices and cost per square foot now down to 2005 levels. 2011 will be a year to watch as potential buyers, banks and developers set the tone for demand, prices and stability throughout the Eastside region. Click here for more.

The Seattle real estate market posted its first year over year price gains since 2007. Cost per square foot, days on market and list price to sales price ratios all indicated a return to stability and balance after two years of freefall. Current prices land somewhere between those of 2005 and 2006 levels-bringing affordability to its highest levels in recent history. Sales of homes priced above $1 million increased 27% due to low prices and record-low interest rates. Bank-owned properties and short sale transactions made up just over 13% of all homes closed, 773 sales, throughout the year.

The Seattle condo market was very diverse with some buildings posting strong sales and others faltering. Stability will only come when demand meets up with the over-supply of available units for sale. With no new construction permits expected to be issued for condos for some time, we could see a shift by 2012 as buyers snap up the available supply of units for sale. Click here for the full Seattle report.

While the days of falling prices appear to be behind us and double-digit appreciation only a faint memory, 2011 and the years ahead should see slow and steady appreciation of 1% to 4% per year. Interest rates will likely begin to volley in an upward direction spending much of the year in the 5% to 5.5% range.

Find more up-the-minute trends on our website.