2024 Forecast Report

BEYOND THE TRANSACTION

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We’re incredibly grateful for the unwavering support of the community that has played such a vital role in our journey. It’s with immense pride that we share the news of being recognized with the Best Real Estate Brokerage for Kirkland, Bainbridge Island, and Bellevue awards by our community. These accolades not only celebrate our dedication but also underscore the deep connections we’ve forged within the areas we serve. It’s a profound honor, and we’re deeply thankful for the trust and appreciation shown by our community.

Inflection Point

ealogics Sotheby’s International Realty is pleased to present our 2024 Forecast Report. In this report, you’ll find a compilation of established Pacific Northwest thought leaders who have analyzed the trends that defined the market in 2023 and offer their expert predictions on what we can expect in the upcoming year.

As 2024 progresses, we see continual improvements, with mortgage interest rates finally decreasing after record spikes of recent years peaked at more than eight percent and locked in consumers, causing the lowest residential sales volumes since the depths of the Great Recession. However, during this cycle, we find median home prices on the rise. At the same time, supply remains tight, and developers take a back seat to higher borrowing costs, inflation with construction budgets, and protracted deliveries pushed some potential buyers to rent instead of buy.

Meanwhile, it’s clear that work-from-home and hybrid work continue to change how and where we live, further challenging the in-city commercial real estate market and tepid recovery of urban ecosystems. Yet job growth and an expanding population base keep the Seattle/Bellevue metro area in high demand, with the City of Seattle commanding the top rank as the fastest-growing large city in the US, according to recent Census data. Demand for exurban locales, either as primary or secondary homes, also ticked up as improved accessibility was reached through transportation initiatives and by meeting more attractively priced offerings where consumers could commute from daily.

For our part, the Global Real Estate Advisors of Realogics Sotheby’s International Realty (RSIR) delivered benchmark results for 2023. RSIR continues to lead the luxury market, garnering the highest average sales prices on both sides of the transaction, the lowest days on the market, and the most expansive sales volumes per agent when compared to the top ten largest brands in the Northwest Multiple Listing Services. These statistics don’t just speak for themselves; they demonstrate the trust placed in our agents’ hands.

Inside this Forecast Report, we’ll hear from local real estate economist Matthew Gardner about where our housing market is headed and learn about market prices from appraisers Vince Healy and Diane Hayes. We’ll introduce you to Market Perspectives, a new podcast series hosted by Dean Jones, President and CEO of RSIR, as various guests will discuss the dynamics and trends shaping our region and global economy.

I hope you enjoy the report, which features curated perspectives from industry experts. If you seek support in your next move, we have real estate advisors who can help you navigate this evolving housing market.

Andrea Savage Chief Marketing Officer

Check out our podcast channel, Market Perspectives, to hear industry experts discuss local and global market trends. Scan the code to listen.

What to Expect From the Economy and Housing Market in 2024

by Matthew Gardner | Real Estate Economist Gardner Economics

Ihope to provide you with five distinct takeaways from this analysis which you can use as we move through 2024. We are in interesting times, both from an economic and housing perspective, and I hope that a discussion around the following points will assist you in making the most informed decisions.

The major takeaways I will give you insight into are as follows:

1. The US economy is unlikely to see a recession this year which will encourage both buyers and sellers of real estate;

2. Mortgage rates have peaked which will give purchasers more buying power as we move through the year;

3. Inventory levels are set to rise, and likely so will home prices;

4. Demographically driven demand should not be understated; and

5. The changing market might impact buyers’ decision-making.

NO RECESSION ON THE HORIZON

The surge of inflation that the US experienced in 2021 and 2022 led the Federal Reserve to hike interest rates at the fastest pace the country has seen since 1980.

Such a swift increase in the Federal Funds Rate led many economists to immediately conclude that the country was certain to enter a period of economic contraction (aka recession). Their rationale for such a conclusion being for no other reason than the Fed’s remarkably bad track record when it comes to trying to rein in inflation without pushing the country into a recession.

This time, however, I see the path to achieving the so-called “soft landing” becoming increasingly clear and, although I see very modest growth in 2024, it will still be growth.

My current forecast is that they will lower the Fed Funds target range to between 4.0% and 4.25% by the end of 2024.

This is important, because when the public feels comfortable that the economy is expanding, they feel comfortable in making big financial decisions and, for most households, the decision to buy a home is the biggest financial commitment that they will ever make. It also helps that the stock market has rebounded significantly, led by tech titans, which have witnessed more than $1.5 trillion in equity gains over the last year. Many indexes are posting benchmark records and testing new peaks, which will have a wealth effect and compel an increasing number of would-be buyers to pull gains from the stock market and invest in real estate.

I believe that all measures of inflation will continue to moderate as we move through 2024. Although inflation is generally “sticky” as it comes down – meaning that it is slower to fall than it is to rise – I expect that the Federal Open Market Committee has already closed the door on any further rate hikes and that they will start to slowly normalize policy rates starting around mid-year. My current forecast is that they will lower the Fed Funds target range to between 4.0% and 4.25% by the end of 2024.

Federal Funds Rate & Forecast

Source: Gardner Economics’ forecast using Federal Reserve historic data

MORTGAGE RATES HAVE PEAKED

30-year fixed mortgage rates fell to an all-time low of 2.65% in the first week of 2021 as the Federal Reserve started a massive bond-buying spree to support (and encourage) the ownership housing market.

Of course, it would be irresponsible to just blame the Federal Reserve for pushing mortgage rates lower at the start of the pandemic. Some responsibility has to be taken by banks who were being flooded with cash from consumers and, because of this, were also significant buyers of US treasuries.

In January of 2022, Fed Chair Powell announced an end to their purchases of treasuries and mortgage-backed securities, and the mortgage market reacted in a fairly predictable manner with rates doubling between January and September of 2022. Notably, this was the fastest pace of mortgage rate increases since the 30-year mortgage was created back in 1971.

During that time, some believed that such a leap in borrowing costs would be sure to crash the market – but no crash came. Just as the hyper-low mortgage rates of 2020 and 2021 likely drew forward consumer demand for housing, the fast-rising mortgage rates of 2022 and 2023 likely deferred demand. I suspect that pent-up demand is on the cusp of springing back and replacing the sales volumes that were lost in 2023, leading to year-over-year transactional growth in the range of 15% to 20%.

30-Year Mortgage Rate Forecast

As I look forward, I expect that the final quarter of 2023 was when rates peaked and, although we are certain to see some swings in rates as we move through the first part of this year, I am looking for the 30-year conventional rate to average around 6% by the final quarter of 2024, and then fall into the high 5-percent range in early 2025.

Of course, everyone would love to see a return to the historically low borrowing costs that we saw a couple of years ago, but this will certainly not be repeated. As consumers rationalize this new normal, and with home prices having recalibrated, more sales will occur. A temporarily higher mortgage payment is a smaller price to pay as opposed to waiting to purchase a home whose value has risen during that time.

I suspect that pent-up demand is on the cusp of springing back and replacing the sales volumes that were lost in 2023, leading to yearover-year transactional growth in the range of 15% to 20%.

Unlike the Great Recession, when a record number of distressed home sales were available, there is currently a very limited quantity of these homes available due to the significantly stricter lending guidelines that were put in place after the housing bubble burst. Moreover, current homeowners have seen the value of their homes rise significantly, which suggests that history will not repeat itself, as owners who may be in a financial predicament will simply list their homes for sale to preserve the equity they have built rather than go into foreclosure.

Given the expectation of mortgage rates falling as we move through the year, purchasers’ buying power will increase, and I anticipate that this will allow home prices in our Pacific Northwest market – as well as nationally – to rise further even with the affordability issues that are now prevalent in almost every US housing market.

Source: Freddie Mac history & Gardner Economics’ forecasts for a conventional 30-year mortgage

With almost 78% of single-family homeowners nationally – and over 84% in Washington State – holding mortgages with rates below 5%, there is little incentive to sell.

MORE CHOICE FOR HOME BUYERS

When the Federal Reserve and commercial banks effectively lowered mortgage rates to levels that had never been seen before, and in concert with a pandemic-induced surge of buyers, the housing market soared in 2021 with sales of existing homes breaking above the 6-million mark nationally (a level that had not been seen since 2006).

Here in the Puget Sound region, we saw a similar phenomenon with over 77,600 sales in 2021 – again, a level that had not been seen since 2006.

Unfortunately, however, there was an impact that hit the market and was not foreseen when mortgage rates started to move substantially higher – this phenomenon became known as the “lock-in” effect.

Inventory levels fell to historic lows in 2023. Nationally, the average number of homes on the market that year was as low as my data goes (which is back to 1999), and we fared no better here in the Puget Sound region, with new listings last year also at historically low levels.

The primary reason for this is that homeowners had locked mortgage rates that were substantially lower than current rates, either due to the purchase of a new home or by having refinanced their existing home.

With almost 78% of single-family homeowners nationally –and over 84% in Washington State – holding mortgages with rates below 5%, there is little incentive to sell 1

However, as rates start trending lower, I anticipate that would-be sellers will become less tied to the rate that they currently have and will become more open to listing their home for sale and this will lead to more choice in the market – a pleasant surprise to homebuyers who are seeing very limited inventory in the market today.

This will likely also lead other sellers to be lured into the market as they see home prices rise and, as they secure buyers in waiting, the market “reboot” will likely sustain its upward march, suggesting that waiting to buy will mean that buyers will face more competition and higher prices.

1 Source: Federal Housing Finance Authority

(2020 - 2022)

ALTHOUGH SUPPLY LEVELS WILL RISE, THERE WILL STILL BE SIGNIFICANT DEMAND

To be sure, COVID-19 changed where we chose to live. Although some thought that we were going to desert our major job centers entirely, this was certainly not the case. However, we did see a resurgence in demand for ex-urban and suburban homes.

As much as I anticipate that we will see supply levels rise in all market locations, we did see our urban markets not fare as well as their suburban counterparts during the pandemically induced migration that occurred. That said, as we move forward – and with the expectation that we will continue to see businesses urge employees to return to the office – I expect that buyers will consider our urban markets as ones that offer relatively good value for money, as well as the potential to have more upside potential than their suburban counterparts. In-city buyers will enjoy a good selection and home prices that are 20% to 35% below replacement costs, even for new construction.

But apart from expecting to see supply levels rising, I also see significant, demographically-driven demand, coming from younger millennials (who are at the start of their homeownership journey), as well as more mature homeowners who did not retire during the pandemic and who will start to look at downsizing over the coming years.

These demographic groups are significant in size, with the four-county region home to more than 1 million millennials and 660,000 baby boomers, and they will be a force in our market going forward 2. Consider this, more Seattle-area residents rent than own, and with mortgage rates set to drop and home prices rising, the logic to invest in a home is

greater now than when the inverse effects were taking place over the prior few years.

Finally, we must also consider the impact coming from growth in international in-migration to our market. Although our urban markets, such as King County, experienced significant out-migration during the pandemic, it also saw palpable growth in households from outside the US moving into the county. Many of these migrants came here to fill high-paying technology jobs and, in addition to filling those much-needed roles, they have a higher natural propensity for homeownership than Americans do and will also stoke market demand.

The potential repeal of the Washington State capital gains tax (currently on the ballot) may also reverse the trend of high-net-worth individuals relocating out of our state to avoid paying additional taxes on the sale of equity holdings. By one high-profile example, the role of regulation and taxation that caused Amazon to seek HQ2 and later the loss of its founder, Jeff Bezos, who notably relocated to Florida, suggests that capital flight is a real issue to contemplate. Should these headwinds ease, the Pacific Northwest may return to its prior glory as a mecca for recruiting and retention, which is also good news for housing demand.

Given all these considerations, I see a solid base of demand from would-be home buyers in the Puget Sound region that extends out for well more than a decade.

2 Source: Washington State OFM

THE DECISION TO MOVE NOW OR WAIT IS CONFUSING BUYERS

If the reader of this treatise were to take all I have said at face value, then it would certainly be plausible that they may well be thinking that the “smart money” bet would be to wait until later this year – or even wait until next year – before pulling the trigger on a home purchase. Wouldn’t it make far more sense to wait until inventory levels rise and mortgage rates fall?

Although that theory appears to be sound, I would offer you a different view. One where the cost of waiting could actually be higher than if you decided to buy a home today and, for those that need to sell a home to buy another, as the market gets more competitive, sellers will be less flexible on terms, especially for contingent home purchases.

Naturally, there are a lot of caveats to this theory with the biggest being that buyers have limited options today and may certainly be forced to wait until the home they really want comes on the market. New construction is not offsetting the lack of supply as builders are faced with significantly inflated development costs and onerous lender terms, all of which are being passed along to the consumer.

Moreover, the lack of developable land, especially here in the Puget Sound region, will also limit potential new supply (as well as significantly add to overall costs). If builders were allowed to significantly shrink minimum lot sizes and reduce setbacks, the supply limitations may well be lowered.

That aside, and although a buyer today would be using a mortgage with a rate that is higher than it will be a year from now, I believe that prices of homes a year from now will be significantly higher than they are today. This increase in value could easily offset a lower mortgage rate that will be available next year.

I would add that I also find it highly likely that there will be more competition for homes next year which, should the same house come to market in 2025, could mean that the purchase price gets pushed even higher as the seller holds the upper hand in negotiations.

You see, any belief in one’s ability to “time the market” is fraught with pitfalls. Of course, someone may well be successful by waiting, but that is far from an assured result.

Housing has proved itself to be a remarkably stable asset and one that I firmly believe will continue to grow in value.

CONCLUSIONS

The US economy appears set to avoid any significant decline in activity and, if history is any forecaster of the future, we are at the start of a multiyear period of growth as the business cycle starts to rotate again. With economic growth will come rising incomes and cheaper borrowing costs, which is particularly important for the housing market.

The pandemic led to a frenetic period for the ownership market, and nobody knew with any certainty how it would turn out. But, as we look in the rear-view mirror today, it becomes very clear that anyone expecting a collapse in the housing market akin to that seen during the “housing bubble” will still be waiting!

Housing has proved itself to be a remarkably stable asset and one that I firmly believe will continue to grow in value as well as being a home for us and our families.

As with all major investments, consumers are wise to consult an industry expert to review the trendlines and not just the headlines. The experienced agents at Realogics Sotheby’s International Realty have demonstrated their mastery of these market dynamics by delivering benchmark results in 2023, according to Trendgraphix research, and they remain well-qualified on how to position a property to sell or posture a buyer to purchase with optimal results. One thing that has proven to be true at every market inflection point is by the time the news media picks up on the trend, the market bottom has already passed.

Matthew Gardner is a Seattle-based real estate economist. He sits on the Washington State Governors Council of Economic Advisors and is an advisory board member of the Runstad Department of Real Estate Studies. His housing forecasts are used by Reuters in their U.S. Housing Market Forecast and by Fannie Mae in their Home Price Expectations Survey.

THE EVER-EVOLVING REAL ESTATE MARKET

Analyzing Trends and Predictions in Puget Sound

by Diane Hayes | Senior Residential Appraiser My Appraisal Office, LLC.

My suggestion for buyers who are waiting on the sidelines is that if they can afford a home with the current interest rates and find one that suits their needs, they should purchase now while activity is slower and then refinance the loan when rates drop over the next couple of years.

In the past three years, we have witnessed a changing real estate market, from double-digit appreciation to rising interest rates to levels we haven’t seen in two decades, inflation on consumer goods, and a declining stock market, all while still having a shortage of inventory. As we look forward, reflecting on the trends and dynamics that have shaped the market becomes important to understand its current pulse.

In 2021, despite the ongoing challenges posed by the COVID-19 pandemic, the Seattle area real estate market exhibited resilience. Limited housing inventory, coupled with pent-up demand, created strong sales activity with many homes receiving multiple offers and selling above their asking prices. Sellers benefited from the strong demand, while buyers faced heightened competition. The widespread adoption of remote work influenced buyer preferences, with a growing emphasis on home offices, outdoor spaces, and properties in suburban or less densely populated areas. Seattle’s suburbs experienced increased interest as individuals and families sought more space and a change of lifestyle. In 2021, home values saw double-digit appreciation in many areas of King County.

2022 was a year of transition. In the first quarter of 2022, home prices continued to rise; however, it was short-lived. In March 2022, the Federal Reserve began raising interest rates to curb inflation. By the spring of 2022, real estate indicators showed signs of a declining market; prices were down, listings had longer market times, and interest rates continued to increase. Due to the increase in mortgage interest rates, inflation on consumer goods tightening budgets, and the volatility of the stock market, buyers

The graph below shows the 30-year mortgage rates from 1971 to the present with the shaded areas indicating U.S. recessions.

Source: Freddie Mac

and sellers stalled and waited to see how things settled out. There was still a shortage of inventory but there was not a frenzy of activity like we saw in 2021. In November 2022, consumers saw the highest federal funds rate in more than a decade. According to Freddie Mac’s records, the average 30-year rate increased from 3.22% in January 2022 to a high of 7.08% in November 2022. That’s an increase of nearly 4 percentage points (more than double the rate). Sales activity slowed with many sellers reducing prices to generate a sale or opting to take their homes off the market with a plan to relist at a later date. With the rising interest rates, buyers and sellers found creative ways to offset the mortgage rates, such as seller credits toward buy-downs, larger down payments, and adjustable-rate mortgages (ARMs). By the end of the year, prices were down compared to the peak in the spring, and home sales were down 43.7% from December 2022 to December 2021. The rate of decline varied by neighborhood and price point. There was buyer fatigue, and the rising interest rates left some buyers priced out of the market.

In 2023, there was continued low inventory and fewer sales compared to 2022. The number of residential and condominium sales was at its lowest level in five years. Mortgage interest rates were higher than we have seen in two decades with housing affordability remaining a concern for homebuyers. Some would-be sellers, who purchased or refinanced their homes at rates below 3.5% in 2020 or 2021, opted to put their moving plans on hold rather than pay a higher rate and a higher monthly payment, which has contributed to the continued low inventory.

The next graph narrows in on the rates over the past five years.

Source: Freddie Mac

Median Sales Price - Last 5 Years

KING COUNTY - RESIDENTIAL

Median Sales Price - Year Over Year

KING COUNTY - RESIDENTIAL

In King County, the number of new residential listings was down 17% in December 2023 compared to December 2022 (there were 582 listings in 2023 compared to 701 listings in 2022), and closed sales were down 10.6% (there were 1,017 closed sales in 2023 compared to 1,137 closed sales in 2022). The number of pending sales was down 3.1% (there were 902 pending sales in 2023 compared to 931 pending sales in 2022), and the median sales price was up 3% (the median was $849,950 in 2023 compared to $825,000 in 2022). The supply of inventory was also down 29.4% (with 1.2 months in 2023 compared to 1.7 months in 2022).

For condominiums, there were some differences. The number of closed sales was down 14.9% in December 2023 (there were 274 closed sales in 2023 compared to 322 closed sales in 2022), while the number of listings was up 21.9% (there were 206 listings in 2023 compared to 169 listings in 2022). Pending sales were up 39% (there were 328 pending sales in 2023 compared to 236 pending sales in 2022), and the median sales price was up 14% (the median was $535,000 in 2023 compared to $469,000 in 2022). The months of inventory was also up 23.1% (with 1.6 months in 2023 compared to 1.3 months in 2022).

Median Sales Price - Last 5 Years

KING COUNTY - CONDOMINIUM

Median Sales Price - Year Over Year

KING COUNTY - CONDOMINIUM

When looking at residential home sales over $1,000,000 over the past year, the median sales price has been relatively stable (the median price was $1,470,000 in December 2023 compared to $1,475,000 in December 2022). The months of inventory has also been stable (1.5 months in December 2023 compared to 1.9 months in December 2022).

From conversations with agents, it appears that over the past year, turnkey homes that offered characteristics that met buyers’ needs (location, site, improvement, and amenities) typically sold quicker and many received multiple offers with escalations above the asking price. Conversely, less appealing properties (unique layouts, dated homes that needed work, undesirable locations, or other adverse influences) tended to have longer market times and experienced greater discounts to achieve a sale.

The average 30-year mortgage rate peaked in October 2023 at 7.79% and began to decline in November with a continued downward trajectory into January 2024. The 30-year fixed rate is at 6.60% as of January 18, 2024. The rates are at the lowest level since May 2023, which is good news for buyers. Since the first of the year, inventory has increased, and pending sales are up, which are typical seasonal trends.

Months of Inventory - Last 5 Years

Months of Inventory - Year Over Year

As we move into 2024, inventory levels continue to be low and interest rates will play a key role in demand. There is more optimism in the market this year from industry leaders. The year will start slow as buyers are cautious and will wait to see if the Federal Reserve continues to cut the interest rates. There will be modest growth over the year with sales activity increasing over the second half of the year. I anticipate the Feds will cut interest rates in 2024 but it might not be until mid-year. Financial analysts are predicting positive returns in the stock market but lower compared to 2023. Other factors that will play a role this year include consumer spending, the unemployment rate, the ongoing conflict in the Middle East, and the U.S. presidential election.

My suggestion for buyers who are waiting on the sidelines is that if they can afford a home with the current interest rates and find one that suits their needs, they should purchase now while activity is slower and then refinance the loan when rates drop over the next couple of years.

Months

Months

Unveiling the Past, Present, and Future of Puget Sound’s Real Estate Market

by Vince Healy | Senior Residential Appraiser Owner, Clearpoint Appraisal

s a single-family property appraiser, I have appraised properties in the Puget Sound region since the mid1980s. I have seen quite a few ups and downs over the years.

I don’t have a crystal ball, but several decades of experience help me understand what factors and forces tend to move markets.

Real estate appraising is generally practiced by looking backward and using recently closed or pending sales to figure out where values stand at the time of the appraisal. Looking forward is not something residential appraisers generally do, though it is a skill we should all try to practice. As a result, I can tell you where the market is currently and why, which will help form a foundation to build a forecast for how 2024 might unfold.

Residential property values come from a wide variety of factors, such as household formation, income levels, financing costs and terms, employment trends, and population growth. There is a stew of factors that create demand, supply, transaction volume, and value. Those factors are always in relationship to each other. They can and do shift from time to time; it is like a complex math equation. Changing inputs and variables yields different answers. During my time in the Puget Sound region, that price trend

has generally been upward with a few dips along the way. Also, it is well established that home values tend to increase faster than income, likely due to job growth and constrained supply—a trend that has been helped by a four-decade-long overall decline in interest rates.

In trying to forecast what 2024 has in store, I first look at where the market is and try to understand what brought us here. Each shift in the market often has conditions that create movement. There are usually a few dominant factors. In the Dot Com surge around 2000, it was a stream of new wealth that entered the market disproportionally at the top price points. That price surge wore off as the money that fueled it stopped flowing. The next price increase happened due to a highly accommodative credit environment up until about 2007. The more credit-dependent a location and property type were, the greater the effect on prices (both on the upside and the downside). The most recent surge in prices over the past couple of years was due to historically inexpensive money. The impact was fairly evenly spread into all markets from low to high price points.

There was a steady rate of more moderate price increases statewide until 2019 and then the low interest rates caused rapid appreciation. Statewide median values increased 47%

Below are two graphs that show median and average prices for the past 10 years, first in the entire state of Washington and then in King County (the center of the Seattle metro market).

Washington State

in five years from 2014 to 2019, then increased another47% in just three years from 2019 to 2022. In the county, the increase was 53% and 35% during the same time. In the ten-year time frame, median prices increased 2.1 times statewide and 2 times in the county. In 2023, prices reversed course with King County showing a 3.3% decline, which was

King County

just slightly more than the state’s 1.7% decline. However, when price trends are viewed on a dollar/square foot basis, there was almost no decline in 2023. Buyers generally opted for smaller homes and slightly lower price points which caused the contract prices to slip, but the dollar/square foot remained steady.

At this point, early in 2024, the outlook for this year’s volume and prices will continue to be driven by the direction mortgage rates go. The low rates were the main factor that drove prices to the current high level and now the high rates have driven sales volume to a low point.

The next set of graphs highlights the interplay of inventory and bidding. The more the red line is over the green one, the more the market favors sellers. The red line is what percentage of last list price homes end up selling for and the green line represents the months of inventory.

Interplay of Inventory

The start of the last ten years had higher inventory levels, particularly on a statewide basis. As inventory declined, the list-to-sales price ratio increased. The seasonal variation is also clear with peaks in the warm months and low points in the cold months. When interest rates dropped in early 2020, there was a rapid increase in buyer interest and purchasing power, increasing the number of buyers above the available inventory which resulted in bidding wars, pushing prices even higher. Atypical transaction terms were common, like escalation clauses and waiving all manner of contingencies. Those conditions peaked and then dropped very rapidly after March 2022.

Washington State

Interplay of Bidding

While buyer interest and purchasing power have changed over the last ten years, so have sales volume and price levels. The graphs below show prices and the number of single-family sales. Sales volume peaked in 2021 when money was the cheapest, and prices crested by early 2022. Then, as mortgage rates doubled, sales volume declined. Last year’s volume was the lowest in a decade. It was 27% under the average volume for the last ten years statewide and 35% countywide.

King County

The most recent market cycle was driven by the historically low mortgage rates. Their effects still dominate how the market is behaving today. Prices were driven to the current high level by low rates that have since gone up significantly. Existing owners are happy with high values and cheap debt. Potential buyers are not too sure today’s prices and today’s mortgage rates are a good deal. Given current house prices and mortgage rates, potential buyers can rent at a substantially lower monthly cost without a substantial downpayment and being locked in place with a mortgage. Current owners are very reluctant to move away from their low mortgage rates. This is often called the “rate trap effect.” Any move by a seller to a new home with debt involves a stiff headwind of higher interest. This is the inverse of the motivation a few years ago when sellers could trade up in housing and down in mortgage rates. Now a move with the same level of debt is an automatic increase in payments. This is a substantial hurdle for sellers and causes the market to remain in a low-volume environment. In this low-volume environment, a greater portion of the transactions are driven by “have-to sales” rather than the less necessary “want-to” ones. The more highly motivated sales, or the “have-to sales,” are often the result of household formation and major life events, such as marriage, children, divorce, death, job relocation, and major changes in income. Life’s circumstances and economic conditions can bring buyers into the housing market and also price them out of it.

On a slightly different note, the longer the current low volume of sales continues, the bigger the backlog of deferred decisions. These are delayed sales that are building in number as our region’s population continues to grow and sales volume remains below average. Over time, the reasons sellers and buyers resist moving may ease. While each side of this process reconsiders their interests, abilities, and motivations, a pool of delayed transactions grows and eventually will spill over its banks.

One market segment not influenced by the rate trap effect is new construction. Builders have no incentive to hold finished inventory in a flat price environment when their interest expenses continue to mount. As a result, the share of new construction sales has increased compared to the overall volume of sales. In any given year, new construction volume represents about 15% of the total sales volume. I expect this will increase as long as owners are not motivated to sell.

At this point, early in 2024, the outlook for this year’s volume and prices will continue to be driven by the direction mortgage rates go. The low rates were the main factor that drove prices to the current high level and now the high rates have driven sales volume to a low point. If rates decline in 2024, as anticipated, that will make decisions easier for both sides of the transaction. The rate trap effect would be smaller and more potential buyers could afford what might be an increased supply of listings coming to market. Until the gap between the conditions the sellers have and what the buyers face narrows, the market is likely to tread water at a low volume of sales. There are always other factors to consider that may change the buy/sell equation, but for the time being, the rate trap effect is going to keep a large portion of potential sellers from acting. Additionally, the current high house prices and interest rates will continue to keep many buyers from contracting because they cannot afford the down payment and monthly payments, or they do not think the value proposition is currently compelling.

Economic data shows inflation is coming under control to the point where the Fed will start lowering interest rates in 2024. It might start in spring or summer. As that happens, sales volume should increase commensurately and start moving back to average. Delayed transactions will happen, and usually, the conditions that favor higher sales volume also favor price appreciation.

SAN JUAN

$927,500 (K 3.39%)

RESIDENTIAL HOMES $472,000 (I8.63%)

CONDOMINIUMS

ISLAND

$590,000 (I3.51%)

RESIDENTIAL HOMES $305,000 (K 4.69%)

CONDOMINIUMS

CLALLAM

$463,412 (I2.98%)

RESIDENTIAL HOMES $379,000 (K 1.56%)

CONDOMINIUMS

JEFFERSON

$645,000 (I3.21%)

RESIDENTIAL HOMES $455,000 (K 3.48%)

CONDOMINIUMS

GRAYS HARBOR

$342,250 (K 1.30%)

RESIDENTIAL HOMES

$217,000 (K 14.90%)

CONDOMINIUMS

PACIFIC

$330,000 (I1.54%)

RESIDENTIAL HOMES $291,750 (I0.96%)

CONDOMINIUMS

WHATCOM

$590,000 (K 1.67%)

RESIDENTIAL HOMES $399,000 (I 5.28%)

CONDOMINIUMS

SKAGIT

$555,000(I1.83%)

RESIDENTIAL HOMES $422,500 (I5.63%)

CONDOMINIUMS

SNOHOMISH

$737,500 (K 3.59%)

RESIDENTIAL HOMES $490,000 (K 4.85%)

CONDOMINIUMS

KITSAP

$540,000 (I0.05%)

RESIDENTIAL HOMES $325,000 (K 15.58%)

CONDOMINIUMS

MASON

$399,950 (K 1.25%)

RESIDENTIAL HOMES

$435,000 (K 13.00%)

CONDOMINIUMS

THURSTON

$505,000 (I1.00%)

RESIDENTIAL HOMES $328,500 (K 0.45%)

CONDOMINIUMS

LEWIS

$399,450(I0.11%)

RESIDENTIAL HOMES

$315,000 (K 10.31%)

CONDOMINIUMS

KING

$875,700 (K 2.70%)

RESIDENTIAL HOMES $509,000 (I1.80%)

CONDOMINIUMS

PIERCE

$535,000 (K 2.90%)

RESIDENTIAL HOMES $390,000 (K 2.49%)

CONDOMINIUMS

The median closed sales price of single-family homes and condominiums is shown for each county.

OKANOGAN

$342,500 (I1.03%)

RESIDENTIAL HOMES

$620,000 (I5.80%)

CONDOMINIUMS

Median Sold Price By County 2023

In 2023, the Puget Sound region experienced notable shifts in its real estate landscape, as reported by the Northwest Multiple Listing Service (NWMLS). Residential homes and condominiums collectively saw 64,208 sales, totaling over $48 billion in closings. Residential properties accounted for nearly 87% of these transactions, with condos making up the remaining 13%. This marked a significant decline of 23.6% in sales compared to 2022, reflecting persistent low inventory and high interest rates, particularly in populous counties like King and Snohomish.

CHELAN

$549,000 (K 6.15%)

RESIDENTIAL HOMES

$440,000 (K 1.01%)

CONDOMINIUMS

KITTITAS

$534,445 (K 3.36%)

RESIDENTIAL HOMES

$402,494 (K 10.36%)

CONDOMINIUMS

Median home prices also experienced a slight decrease, with the median price for completed transactions reaching $600,000, down 2.44% from 2022. Condo median prices decreased by 1.69% to $465,000. Despite these decreases, prices remained considerably higher than a decade ago, indicating a softening market as interest rates began to lower towards the end of the year.

New listings added to the MLS saw a substantial drop of 26.01% compared to the previous year, with listing activity peaking in June. However, despite the surge in listings, inventory levels remained persistently low throughout the year, averaging a 1.77-month supply. This shortage of inventory continued to drive prices up, particularly in rural counties where affordability remained a key concern.

In terms of new construction, 9,130 units were sold in 2023, accounting for approximately 14.2% of total sales. The median price for all new construction stood at $700,000, with residential homes and condos showing slight decreases from the previous year.

Overall, while the Puget Sound region continued to grapple with challenges such as low inventory and high prices, there were signs of optimism towards the end of the year as interest rates began to decrease. These shifts in the market dynamics will likely shape the real estate landscape in the coming months.

NWMLS data. Information was obtained from sources deemed reliable but cannot be guaranteed. Reader is encouraged to perform independent due diligence before acting upon reports outlined herein. Errors and omissions excluded.

Puget Sound Overview

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