New Year, New Market with Kyle Bergquist

Puget Sound Real Estate:  New Year, New Market!

According to Freddie Mac, mortgage interest rates averaged 6.776% in December 2023, which is higher than last year by .414%, but considerably lower than October’s average interest rate of 7.648%.  Despite being higher year over year, the recent trend of falling interest rates is great news for the Puget Sound housing market as we move into 2024.  With rates expected to continue falling over the next few months, we can expect activity to increase – Maybe not at that rate that we saw in early 2022 when rates were still in the 3s and 4s with a borderline panic to “get in” before rates rose further, but definitely higher transaction volume over the next few months than we’re seeing now.  Overall, high mortgage interest rates in 2023 resulted in 5,138, or 23.77% fewer purchase transactions in King County than in 2022, but outside of simply “fewer transactions” there were a few other major trends that presented themselves as well:

1. Cash Buyers – When interest rates are in the 2s, 3s, or 4s, it makes a lot of sense to keep your cash working for you in the stock market (Note that the average annual return in the S&P since 1960 through the end of 2023 is 10.15% per year, or an inflation-adjusted return of 6.18% per year).  Monthly payments are also much more reasonable at the lower rates, enabling homebuyers to put less money down and still have an affordable monthly payment.  But when rates are sitting in the 6s, 7s, and 8s – different story.  The premium return-on-investment for putting/keeping your money in the stock market vs a higher down payment isn’t necessarily there, so the incentive to access those funds for buying a home is higher.  Overall, there were slightly fewer cash buyers through the first 11 months in 2023 than there were in 2022 or 2021, but as a percentage of overall transactions we’re seeing cash buyers make up a much larger portion of the pie than we’ve seen in many years.  Generally speaking, cash buyers account for about 11% of all transactions in King County, but in 2023 that percentage was 18.44%.  I would imagine that until rates meaningfully fall, cash buyers will continue making up a higher percentage of the overall transaction count.
2. Fewer Investment Properties for Rent – Over the past couple years the FHFA (the governing body over Fannie Mae, Freddie Mac, and Ginnie Mae) has increased the cost to buy an investment property by increasing “loan level price adjustors” on those loans.  Add on higher mortgage interest rates in general, and unless someone is putting 50% down, it’s very hard to be cashflow positive on investment properties-for-rent these days.  Thus, we have seen far fewer new landlords entering the market over the past couple years.  One of the main reasons behind the FHFA manufacturing higher interest rates for rental investment properties is because the FHFA wants to discourage people from buying them.  This downward pressure on investment property-buyers opens up supply for first time homebuyers looking to buy an owner-occupied home for themselves instead.  Even if rates trend lower, given the macro-economics of the US housing market and there simply not being enough housing supply to go around, I would suspect the FHFA continues manufacturing higher borrowing costs for investment properties-for-rent in an attempt to increase supply and affordability for first-time homebuyers.
3. More Investment Properties for Developers – Last but not least, the other major trend we’re seeing here in Puget Sound is the rise of the Condo-ized units.  Simply put, legislation passed in 2019 that enabled the addition of accessory dwelling units in Seattle.  With this legislation, developers are now able to buy 1 home, submit permit applications for condo-izing the parcel, and building three-unit projects that resemble town houses with a main home, ADU, and DADU.  By condo-izing the parcel and splitting up the lot for multiple units, developers are charging less per unit but making more overall with the sale of multiple homes instead of just one.  Thus, with this new legislation, plus the profit-carrot for developers to condo-ize the parcel, and high interest rates putting downward pressure on affordability, we’re seeing massive growth in this type of construction.  In fact, in 2022 DADU and ADU permits outpaced Single Family Residence permits in Seattle for the first time ever.

Take it Home

The stage is set for the Puget Sound Housing market to take multiple steps forward this coming Spring with lower mortgage interest rates.  But that’s not to say that rates will be low – ie 2s and 3s.  Rates are still elevated, and these elevated rates are also portending some other trends we’re likely to see more and more of as well this Spring – namely, more cash buyers as a percentage of overall transaction count, and DADU/ADU development.  Time will tell what actually happens, but for now it looks like a New Year, and a Brand New Market.  Happy 2024!