We’ve heard a lot about the rapid rise in home prices across the Seattle metro area. The city has been one of the hottest markets of the last two years, in terms of home-price appreciation.
And it has some people asking: Is the Seattle housing market in a bubble in 2017? Not quite, the experts say.
What Is a Real Estate Bubble?
In economic terms, a bubble occurs when an asset price is based on implausible or inconsistent views about the future. Prices tend to rise rapidly, and faster than usual, leading up to a bubble. This trend is typically followed by a rapid reduction in asset prices.
A real estate bubble is the same thing. The assets in this scenario are homes. When home prices rise rapidly, and there doesn’t appear to be enough to justify or sustain the rise, it’s often referred to as a real estate bubble.
Stated differently, a housing bubble occurs when there is unjustified speculation in the market that leads to a rapid increase in prices.
We saw a lot of this in the first half of the last decade. New home construction was booming in many parts of the country, and home prices were skyrocketing. But much of this growth was based on speculation and assumptions. We know how that turned out.
Is the Seattle Housing Market in a Bubble?
According to Teo Nicolais, a housing expert who teaches real estate courses at the Harvard Extension School:
“Those who lived through the financial crisis of 2008 will (we hope) always be weary of the next major crash. If George, Harrison, and Foldvary are right, however, that won’t happen until after the next peak in 2024. Between now and then, aside from the occasional slow down, the real estate industry is likely to enjoy a long period of expansion.”
Click here for more of his fascinating explanation of real estate cycles.
Many analysts argue that Seattle is not in a housing bubble right now, because home-price gains are based on real demand and not speculation. Last year, housing economist Svenja Gudell said as much when discussing the Seattle real estate market on KIRO Radio:
“I don’t think we’re seeing a ton of speculation in the Seattle market … These increases in prices that we’ve been seeing is not driven by investors just trying to flip homes over and over. It’s driven by true demand and true limited supply.”
By “true” demand she is referring to people who actually want to live in the homes they are purchasing, as opposed to buying them solely for investment and/or flipping purposes.
While it might not be in a bubble, the Seattle housing market does present challenges for home buyers. Inventory is currently well below the six months of supply indicative of a balanced real estate market. It is still very much a sellers’ market, with stiff competition among buyers.
Will the Market Slow Down in 2017?
The big question, among local home buyers and homeowners alike, is this: Will home prices in the Seattle area continue to rise rapidly over the coming months? Or will they slow down at some point, settling into a more sustainable pace?
As we pointed out in a recent article on our blog, home price forecasts for the Seattle metro area suggest that additional gains are likely over the next 12 months. Analysts expect house values in the area to continue rising through the summer of 2017, and probably beyond that as well. (When you look at the current supply and demand situation, this appears to be a safe assumption.)
But the price gains going forward might be smaller than what we’ve seen over the last 12 – 18 months. If home values do rise more slowly in the months ahead, it would ease the fears some people have about a Seattle housing bubble.
According to Sam Debord, who covers the Seattle real estate scene for MarketWatch, there’s already a sense that the market is slowing down.
“From the MLS board to the Realtor association and brokers’ offices,” he said, “the general murmur is that while the market is still very hot, we can feel a bit of a slowdown in the air.”