BY Stephen H. Dunphy Seattle Times staff columnist The lowest mortgage-interest rates in 32 years have made housing the strongest sector in the Puget Sound economy, launching a wave of mortgage refinancings and a shopping spree for first-time homeowners. Both have helped to push home values ever higher -- 18 months into a recession. The median price of a home in King County was up 2.8 percent to $257,000 in July, compared with the same period a year ago. Prices were up 8.5 percent in Snohomish County to $217,500 and 5.6 percent in Pierce County to $168,950. It is not just a Puget Sound phenomenon. Nationally, housing prices rose more than 10 percent in June compared with the previous year, raising concerns that housing may become the next bubble to burst. "Bubbles occur when the supply of houses greatly exceeds demand," said Raphael Bostic, an economist at University of Southern California's Lusk Center for Real Estate Research. Bostic said he does not see that situation developing, with many places reporting a shortage of housing. That means demand continues to push prices higher. Puget Sound falls into that category with few areas of oversupply. "What has happened is a huge increase in demand without the same increase in supply," Bostic said. Locally, the number of single-family homes and condos for sale in King, Snohomish and Pierce counties remained about the same in June and July and about 800 higher than a year ago. Demand is beginning to decrease as the economy slumps, but it is still strong enough to push prices higher. Places with a more diverse economy seem to be better-insulated from housing bubbles, Bostic said. Southern California is a good example, where Los Angeles and nearby Anaheim are among the top five housing markets in the country, according to the National Association of Realtors. Less diverse areas face some threat, although the change would be closer to a bubble deflating than a bubble bursting. "Seattle is one of the places I would worry about," Bostic said. "You have to ask where the demand would come from." The number of jobs in the region has dropped about 3.7 percent over the past year and Boeing continues to announce layoffs. Housing prices are likely to moderate soon in most areas of the U.S. because of relatively slow economic growth and flagging consumer confidence, Bostic said. But a crash of home prices would be impossible without a severe new recession. And for all the gloom and uncertainty of experts and financial markets, that is not the prospect today. Softening sales TimesWatch, the monthly look at the regional economy, shows a softening in the housing market here. The number of King County home sales that closed in July, traditionally a slower month, fell 3 percent from a year earlier. It also took on average five more days (49) to sell a home than it did a year ago. And, in King County, the median home price slipped 3 percent from the record $265,000 set in June. Housing-industry analysts say home prices should keep rising faster than normal for the rest of this year, but the pace will return to the usual 1 or 2 percentage points higher than the inflation rate next year, according to the National Association of Realtors. Nationally, the median price for existing homes this year will rise 5.8 percent, to $156,400, and the price for new homes 5.9 percent, to $185,600, the group predicted. There are some signs individuals are shifting from the stock market to the real-estate market. Speculation in homes -- buying homes to sell them quickly or for their appreciation only -- would be a sign of that. Real-estate speculating Government figures show home prices up 35 percent since 1995, while rents are up only 10 percent. That suggests people are speculating, buying homes as a can't-miss investment rather than for shelter. Comparing home prices and rents is a bit like price-earnings ratios in stocks. Stock prices rose much quicker than earnings during the bull market, a sign that a bubble market was developing. Home prices rising much faster than rent on the property could be a similar sign. Bostic, the real-estate economist, said one area where demand seems to be dropping sharply is home sales in the $500,000 and up range. That does not appear to be the case here, according to the Northwest Multiple Listing Service, an organization of real-estate agents who pool data on housing. It found a steady increase in the sale of homes priced above $500,000 in the first seven months of the year. Even sales of $1 million homes are holding steady, with 247 units closed in the first seven months of the year compared with 198 in the same period in 2001. Boost to retail economy A strong housing market here could help explain why the retail economy has held up during the recession. For most people, housing is the single biggest component of their wealth. It accounts for almost 25 percent of total wealth in the U.S. The average household has four times as much wealth tied up in housing as it does in stocks. The low interest rates and higher home prices allow owners to borrow more against the rising value of their property. That has fueled a boom in refinancing activity and home loans, according to several financial institutions. "It's unprecedented volume," said Kevin Horn, a Washington Mutual vice president. "There is a huge wave of refinancing taking place." If the supply of housing is the culprit in any potential bubble, the Seattle area appears to be in good shape. Windermere, one of the region's largest real-estate companies, compiles a quarterly index that includes supply. It found the supply of houses declined slightly in the second quarter of 2002. New-home construction was down slightly in the second quarter compared with the previous quarter, Windermere found. Over the past year, construction of new homes has on average been about 15 percent below the peak in 1999. Stephen H. Dunphy: 206-464-2365 or sdunphy@seattletimes.com.
August 25, 2002