The New Normal: What Will the Northwest Housing Market Look Like?

Austin Jenkins
08/19/2009

The Northwest economy is on the verge of recovery and with it ... transformation. Economists expect the recession to end in the next year, but not without some long–term changes. This week we're looking at lasting alterations to the region's economic landscape. Nowhere is that more apparent than in the real estate market. That used to be the one investment middle income families in the Northwest could rely on. So what does the future hold for real estate? Olympia Correspondent Austin Jenkins looks for answers in the first part of our series "The New Normal."

Here's one sign of just how much the housing market has changed. A few years back condos in Seattle and Portland were selling like hotcakes. Now witness what happened on a recent Saturday at a downtown Seattle hotel.

It was an auction to sell off the sixteen remaining units in the high–end Lumen Building on Seattle's lower Queen Anne. Bidding started out at an enticing $155,000.

Eighty two potential buyers packed the room hoping for an unbeatable deal. Within an hour, all of the condos sold, all for far below their original listing price. Buyer Peter Jenkins — no relation to me — was visibly shaking as he walked out of the auction — having just placed one of the winning bids.

Jenkins: "Never thought I'd ever buy real estate in an auction. That was probably the most nervous thing about it. But it was exciting, it was fun."

Jenkins got a one bedroom condo. It was originally listed for more than $550,000. He got it for $330,000.

Jenkins: "That's you know roughly about $70,000 dollars less than what I think it would have sold for on the open market. So I think it was overstated at $550,000."

You might think this auction would be a dark day for the man behind the Lumen condo project. But developer Alan Winningham put a good face on the situation.

Winningham: "What we're doing here today is being driven by things that we have no control over and it's the best thing to be doing. I feel good about it I'm glad that we're bringing closure to this. And I think you're going to see more product sold this way."

That's because currently there's a glut of condos on the market especially in the high–end price range. In the Seattle–Bellevue area alone nearly five thousand condos await a buyer. According to The Seattle Condo Blog, units in the city are staying on the market longer and the number of closings each month has dropped by nearly half since the peak in 2007. As a result developers are getting desperate to sell. Almost every week brings news of another fire sale on condos. So if this is a snapshot of the current real estate market, what does the future hold here in the Northwest? Will we ever see home prices inflate at a double–digit pace year over year? Real estate blogger Tim Ellis, for one, hopes the answer is no.

Ellis: "To me it's sad that so much of our local economy was based on people selling other people houses for twenty percent more than they sold last year."

Ellis is the man behind the popular blog Seattle Bubble.com. He hopes this recession serves as a course correction for the Northwest economy. He yearns for back–to–basics economic engines like Boeing airplanes and Microsoft software.

Ellis: "As opposed to people whipping themselves into a frenzy over how they're going to get rich on their house."

Ellis need not worry about a return of the frenzy says Tom Potiowsky, economist for the state of Oregon.

Potiowsky: "It just naturally is going to be a much slower growing market."

Potiowsky says an amazing speculative period has come to an end. Now that credit is tighter, he expects buyers will be more frugal and home prices will rise at a more historically "normal" rate.

Potiowsky: "We haven't probably seen normal for probably ten or fifteen years and it may be in a sense returning more to somewhat normal but it's going to seem so different from us from what we've been experiencing."

But what about the loss in value that Northwest homeowners have experienced? Home prices in Portland and Seattle, for example, are down about 20 percent since the peak in 2007. Potiowsky says it could take five or more years to recover from that drop.

Back at the Lumen Condo auction in downtown Seattle, developer Alan Winningham is also thinking about the future of real estate in the Northwest. He cautions against getting distracted by what housing prices are doing. He says a more important indicator of the future is how banks are lending.

Winningham: "Essentially what's happened is people who were previously qualified two years ago to buy a $900,000 home are now qualified to buy a $600,000 home."

Winningham says that fact alone will significantly alter the real estate market. He adds the second home market, once hot, has all but disappeared for now.

Winningham: "I don't know anyone, my contemporary or younger who is saying to me I'm going to go buy a second home — no one. And that does not bode well for many, many real estate markets."

Like Sun Valley, Idaho; Bend, Oregon and Lake Chelan, Washington. The bottom line say Northwest real estate watchers: buying a home will still be a good investment, home sales are already picking up, eventually prices will start to go back up too, but the giddy — if not insane — days of the housing bubble are unlikely to return anytime soon. I'm Austin Jenkins in Olympia.

© Copyright 2009, KUOW