Market Update: So Now What?

Hi Everyone,

I hope that this email finds you well, healthy, and enjoying the sunshine. As most of you know, I'm not one who is short on words either in person or in print. I have to admit, I have been struggling to get this update started as I find it hard to find the delicate balance to address what is going on in the market without sounding tone deaf given all of the historic events occurring this year.  

Our market and the national housing market in general continue to be among the strongest segments of the economy this year, technology being the other. Hmmm, I wonder if we have any local companies that are performing well in the current digital online economy?  

There is some irony given how strong the housing market is performing against the backdrop of record unemployment, GDP contraction, and business closures. In 2008-2011, the housing market was the engine leading the global economic train right off the tracks, and pulling most other parts of the economy right along with it. Record numbers of homes were for sale at distressed and discounted prices. In many parts of the country, sellers literally couldn't give a home away. Fast forward to spring and summer of 2020 and the exact opposite is taking place. While I am fighting the urge to say I told you so to several of you who "disagreed" with my market update on April 10th "The Sun Will Rise Again," your analysis was not wrong. Record unemployment, historic modern day health and economic uncertainty, and record stock market volatility were all reasons you correctly gave. What was missed though, was thinking history would repeat itself the exact same way it did a decade after the worst housing and credit crisis in 80 years.  

So why has the local and national housing market been a positive economic leader during this cycle when it led us into the economic abyss last time?

·  Inventory Levels: Record numbers of homes were for sale during the housing bust and currently there are record LOW levels of inventory. I didn't go to Harvard Business School like my brilliant big brother, but I seem to recall him mentioning something about supply AND demand, not just one or the other. Of course he was using that phrase to explain to me why the Mariners can't ever land a key free agent pitcher.  

·  Mortgage Rates:  In July of 2007, just weeks before Countrywide Financial seized up and the mortgage market came apart, 30 year mortgage rates were at 6.70%. Over the last week, the 30 year mortgage rate has fallen to an all-time low of 2.90%. For context on what that does to the principal and interest payment on a $500,000 loan: $3,226 vs $2,081. A dramatic increase in buyer purchasing power. The Federal Reserve continues to forecast that interest rates will remain historically low for the foreseeable future.  

·  Amazon and Microsoft: I know, I know. I mention this in almost every update. It's impossible to understate how impactful it has been to our market to have over $2 trillion of market cap value created by these two companies headquartered here.  

·  Consumer Sentiment and Housing Popularity: In 2008-2011, housing was seen as a bad investment, home-ownership rates were plummeting, and some market "experts" were recommending renting over purchasing, even though mortgage payments were lower than monthly rental rates in many markets. Fast forward to today and a unique form of reverse nesting has occurred after the lock-down. Many homeowners were stuck inside their home for extended periods and now feel that they are missing 1-2 additional rooms: an additional home office, work out space, and a home school study area are common on buyers’ wish lists right now. The number of buyers searching for homes online is currently surging. 

·  Migration from Big Cities and Millennials:  These two trends have the potential to be impactful on the national housing market for years to come. Over the last decade, both young renters and home buyers alike had been flocking to large cities like Seattle, San Francisco, and New York. Urban living was a big draw: numerous employment options, walkability, plenty of recreational activities, shopping, and nightlife. This trend now appears to be sharply reversing course due to the pandemic, right as Millennials have become the largest living adult generation in the country (72.1 million Millennials, 71.6 million Baby Boomers, 65.2 million Gen Xers: Per U.S. Census Bureau and Pew Research). Why is this so important? Because as recently as February, it was unthinkable that Millennials in mass would choose to leave large urban cities in exchange for the 'Burbs. Reports of younger homebuyers actively searching for homes on the Eastside, all the way to Idaho and Montana are now commonplace. Is this a short-term trend that is a knee-jerk reaction to the pandemic, or is this the start of a generational trend taking shape as millions of Millennials are reaching key historic home buying ages? If this is the start of a longer trend, it is something we will discuss in this space extensively for years to come.   

Does all of this mean that the real estate market will continue to rise sharply without any bumps in the road? My short answer is no. We still face a fall that can be simply categorized as uncertain, in bold and underlined. Will there be additional lock-downs in certain states? Will schools, from Elementary Schools to Universities hold classes in person in 2020? Will there be a vaccine breakthrough by the end of the year? Will the tens of millions of unemployed Americans be able to make it to the other side of this crisis? Will we feel more or less confident about the state of things in the United States leading up to a contentious election cycle? I could write a market update on any one of those topics and thankfully for you, I won't. Each of those subjects highlights the amount of uncertainty that we are facing as summer starts to head towards fall.  

Wishing you a wonderful second half of your summer and a 7 game winning streak for the Mariners. 

All the best,

Steve Curran