How is Inflation Impacting Seattle’s Current Housing Market?

The topic of inflation has been in the news a lot lately. But how is inflation related to real estate? We recently texted several of our clients asking what questions they had about Seattle real estate at the moment, and inflation was on everyone’s mind. Here are a couple of the questions we received and their answers!

Q: How does inflation impact Seattle’s housing market? 

A: Our predictions for Seattle’s future real estate market have everything to do with inflation, which complicates matters quite a bit. Inflation is still very high. While it’s true that inflation may have peaked in June 2022, it has not fallen enough to stop increasing interest rates, in our view. Sure, 9.1% in June to 8.3% in July is heading in the right direction. However, we don’t find ourselves celebrating. I’m sure our FED chair Jerome Powell isn’t, either.

Here are recent inflation rates: 

source: tradingeconomics.com

And for more context, here are inflation rates from the past decade: 

source: tradingeconomics.com

Okay, please step away from the edge of the building, dear reader! Seattle’s market is pretty lucky in many ways. This is mainly due to the crazy competitive real estate market we all endured over the last DECADE! Because of how competitive the market has been, most buyers purchased with a minimum of 20% down. It was ubiquitous to see higher down payments; many buyers put 30% or 50% down, or heck, all cash. Most low down payment buyers could not win a home in our area. So only the financially fittest could best other bids for a home. 

As a result, most Seattleites have between 50% and 70% equity in their home. According to the Case Shiller Index, Seattle’s home prices have increased 44% since January 2018. So we can all thank the weird world for that! In other words, Seattle can tolerate some pain with minimal fallout. Our hyper-competitive market may have been a blessing in disguise; it will help us endure quite a bit of housing market pain when most sellers choose not to sell and ride this downturn out. 

Q: What if inflation does not go down sharply, and soon? 

A: As of today (October 21, 2022), interest rates are at about 7.2% (there is a lot of variable to this, just FYI, but we’ll use this number for now). But let’s say 10% interest rates as our worst case for these future predictions. This is our worst-case scenario if inflation proves more stubborn.

If interest rates hit 10% and the median home price “bottoms out” at $820,000, monthly payments would be $6,463. In our experience, most of our first-time home buyer clients have a tolerance for about a $4,800 mortgage payment, and anything above $5,000 becomes a much harder pill to swallow. So $6,463 is going to be just too high for most buyers at the median price point. Many buyers do have tolerance for increases, but not that much. 

In that event, home prices would need to come down another 24%, in our view, for buyers to feel like the payment was worth the cost.

We are cautiously optimistic that the FED will not have the cajones for a 24% price decline, which could lead to a wave of foreclosures as folks walk away from their mortgages. If the FED were to increase interest rates to 10%, we would be talking about potentially writing downward 49% in the Seattle area’s median home values, until they drop to $750,000. This is why we doubt a 10% interest rate will happen. 

In our view, interest rates at 10% would be the beginning of a much larger economic issue that would reach way beyond the housing market. Again, we do not think the FED will take us to this point. 

We believe that the slowdown in consumer spending that we are seeing should bring inflation numbers down. We may see something just under 8% for interest rates before inflation begins to turn around sharply as it needs to for rates to stop increasing. 

Where does all of this put us? Well, to be honest, it’s still not great. If rates hit 7.875%, we think Seattle’s home prices may go down to $750,000. That would be a loss of another 16% from today’s median home price. That would put us about where we were back in February 2021. 

The good news—if that is what you want to call it—in our opinion, is that the rise in median home prices will likely be just as quick on the other end of all this. 

The other good news is, unfortunately, terrible news for the United States as a whole. But it is “good news” for the Seattle area. And here is a bit of why we believe that Seattle will prove to be more stable than some other places in the U.S.

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And as always: Please do not hesitate to reach out if you have any questions. Every situation is unique, and we are ready to help you strategize. There are also often reasons that people need to buy or sell, no matter what the market is doing—life happens. We can also help you make a plan if this is the case.

Here are a few other blogs we’ve written about our current market:

– What Does the Future Hold for Seattle’s Real Estate Market?

– How Will I Know When It’s A Good Time to Buy a Home in Seattle Again?

– We’re Very Optimistic About Seattle’s Housing Market & Here Are a Few Reasons Why

– Is Now a Good Time to Buy A New Construction Pre-Sale Home?