The health of the real estate market is on everyone’s mind these days. We went from an unbelievable boom in housing prices in Seattle to a crash that is still being felt. I wanted to take a look at the supply and demand that has driven the last decade of housing activity here to get a clearer picture of where we are today.
Housing prices fluctuate based on a complex mix of job growth, population growth, interest rates and consumer sentiment. Layered on top of that is a large percent of pre-foreclosure and foreclosed inventory. But at the core, it is an exercise of supply and demand. Less buyers than sellers, and prices have to decline in order to spur demand. If the supply of housing shrinks and the buyers are still out there, competition and buyer frustration will eventually drive up prices.
I took an in-depth look at the number of active listings and closed sales in King County for the last 11 years.
The top line in this chart represents the number of active home & condo listings in King County each month. You’ll notice that the chart bottoms in December and peaks every summer in an identical pattern every year. The inflation of the bubble is also readily apparent, with suddenly declining inventories in 2004, which remained low until 2007. The burst of the housing bubble is also clearly visible, with a dramatic increase in active listing inventory starting in May 2007. (In hindsight, this all looks pretty obvious, but it took almost another year for the price declines to take hold.)
The bottom line in this chart is the number of closed sales for homes & condos in King County each month. You’ll see that closings climbed to 4000 homes a month during the summer of 2004-2006. Once consumer confidence tanked, the number of homes closed sank to roughly half of those numbers during 2008-2011.
What is most interesting about this graph is the distance between the two lines. During the boom, the number of closings was very close to the number of active listings. Homes would sell as soon as they were put on the market. In 2008, the gap between active listings and closed sales became enormous, with over 16,000 active listings against 2000 closings per month, driving prices lower.
Since the worst of the market in 2008, active inventory has been on a steady decline, with levels now down to where we were in 2007. 2011 also posted some very modest growth in the number of closings. If you have been a buyer in the Seattle area during 2011, the lack of inventory was probably apparent, as homes in popular areas have been harder to come by.
At the moment, we are finally entering a territory where the number of active listings is in better balance with the actual buyer demand. How prices will behave with this diminished supply is not entirely clear at this point. Increased competition for a smaller inventory will put upwards pressure on prices, but that will be counteracted by the distressed property liquidation that is still underway. Both short sales and bank-owned homes will continue to drag on home prices.
Also, it is important to point out that King County is actually a huge market area. It is useful to look at these statistics for the entire county, but recognize that inventory, demand and prices vary considerably throughout the county. Popular urban neighborhoods have fared quite differently than some suburban and rural areas.