Well, the time has come again to polish up the old crystal ball, gaze into it, and see what's in store for the housing market in 2013.

Having spent long hours staring into the mists, it appears as if this year will be about as easy to predict as last year. Not because of any fundamental change in the housing market itself – although I so see plenty of adjustments afoot – rather the future is clouded because of the prevailing fractured political environment.

That said, here is what I am looking for this year.

1.   Interest rates are likely to stay at close to historic lows at least through the middle of this year. Inasmuch as there are some mumblings from members of the Federal Reserve relative to a slowing down in Qualitative Easing (which is basically the printing of money which is then added to the economy in order to stimulate growth) before the end of the year, I do not see this as putting rapid upward pressure on interest rates in the near-term. That said, I do think that they will start to come off their current lows, so now may well be a good time to lock in.

2.   Housing prices have bottomed out and we will continue to see appreciation in values across the board in 2013. The caveat here is that we are unlikely to see the kind of upward pressure in values that was seen in 2012. Unless we see a rapid increase in inventory levels, look for more modest price increases – but increases we will certainly see.

3.   In 2012, many were heralding the veritable tsunami of foreclosed homes that were certain to come to market and cause a rapid reversal in price gains. This, of course, did not happen.  Many may remember the huge numbers that were being bandied around as to the number of foreclosed homes that were supposedly heading our way. I personally heard numbers as high as five million units. Now that the smoke has cleared somewhat, the numbers are becoming a little clearer.

With a shadow inventory of around 2.3 million units of pending supply, I am actually not too worried at all. We need to get these homes to market and sold, and we will. It's just a matter of how long it will take. With over half of these homes delinquent, but not yet subject to foreclosure proceedings, I believe there will continue to be a shadow well into 2014.

That said, demand from the investment community, as well as from buyers who are not finding sufficient choice in the non-distressed market, should continue to reduce the number of distressed properties.

4.   Household formations should start to increase but this will not be enough to get the homebuilding industry back into full swing. Many builders are still uncertain, and while they see a supply/demand imbalance in the market, they have not yet pulled the trigger and gotten back to full production. This is likely to remain the case in 2013.

5.   There are several buyer groups that are expected to make an entry into the market in 2013.

Entry level buyers – First-time homebuyers have been sitting on the sidelines waiting for a sign that we’re at the bottom. As they hear about price increases in their desired neighborhood(s) they are likely to rush to become homeowners.

Move-up buyers – The price appreciation that has occurred in the last year has already lifted over one million underwater homeowners above water, with future price appreciation to lift them even more.  Look to see many of them considering trading up.

Move-down buyers – Empty nesters and retirees, who still have equity in their existing home, will think about buying a home that is more suitable to their current lifestyle. This may, or may not, include adult children as well as their aging parents.

Investors – Investors and, yes, even flippers, will continue to grow in numbers as they realize housing is the best risk-adjusted return on their money.

The recovery in the housing market has been a very long time coming, but I believe that it is here to stay, and all things being equal, I expect 2013 to be another good year.

Have a fantastic year!

Many home owners, buyers, and sellers have been carefully watching the new federal finance package passed on January 1, 2013 by both the U.S. House of Representatives and the Senate. This is because it included automatic tax increases as well as federal spending cuts that involve real estate programs.

Many important real estate programs were extended, albeit for a limited time. Therefore homeowners, buyers and sellers should pay attention to these new time periods when planning financially.

Components of the legislation most likely to impact real estate decisions: 

• Capital gains tax exclusions for sale of a principal residence remain in place. This benefit protects up to $500,000 of capital gain ($250,000 for individual filers). However, home sellers with incomes of $450,000 ($400,00 for individual filers) or above and where the gain on the sale of their home is above $500,000 will now pay taxes on the excess capital gains at a higher tax higher rate.

• Key provisions of the Mortgage Debt Relief Act are extended through January 1, 2014. This provides financial relief in the form of lower taxes for home owners or sellers who have a portion of their mortgage debt forgiven by their lender. For sellers, this forgiveness occurs through a form of a short sale or foreclosure. For home owners, this relief comes in the form of a loan modification.  

Without this extension, any debt forgiven would become taxable. Home buyers will benefit from this extension since it will likely result in a greater number of short sales and foreclosures being available for sale, as underwater sellers are more incentivized.

• Deductions for mortgage insurance for filers earning below $110,000 are extended to through 2013. Mortgage insurance—usually paid for by home buyers—allows home buyers who have less money to put down to qualify for better loans. Home buyers with qualified residences will be able to continue to deduct the cost of this mortgage insurance. This benefit is also retroactive through 2012.

• The 10 percent tax credit for energy improvements to existing homes is extended through 2013. This credit, which is limited to $500, applies to existing homes and is also retroactive through 2012.

• Capital gains on real estate contributed by home owners for conservation are extended through 2014.  Increased contribution limits and carry-forward periods for contributions of appreciated real property will be maintained.

• The first $5M in individual estates and $10M for family estates are now exempt from estate tax. Tax rates in excess of these figures have increased. This will benefit the heirs.  

Other changes—such as new estate tax exemptions and an increased capital gain tax rate for those earning more than $450,000 ($400,000 for individuals)—may also impact real estate decision-making. As always, home owners, buyers, and sellers are advised to seek the advice of a qualified tax advisor before making major financial decisions, including the decision to buy or sell real estate. 

Windermere Real Estate is proud to partner with Gardner Economics on this analysis of the Oregon and Southwest Washington real estate market. This report is designed to offer insight into the realities of the housing market. Numbers alone do not always give an accurate picture of local economic conditions; therefore our goal is to provide an explanation of what the statistics mean and how they impact the Oregon and Southwest Washington housing economy. We hope that this information may assist you with making an informed real estate decision. For further information about the real estate market in your area, please contact your Windermere agent.

Regional Economics

On a year-over-year basis, the Oregon counties covered by this report increased employment by three quarters of a percent, or approximately 12,500 jobs. This is the good news. On a year-over-year basis, 11 counties expanded their employee base and 13 saw employment contracting.

The greatest increase in employment came in Lane County (+2.2%). This was followed by Washington (+1.6%), Multnomah (+1.3%), Clackamas (+1.2%), and Jackson (+1.1%) Counties. On an absolute basis, Multnomah County saw the largest increase with 5,900 additional jobs. This was followed by Washington County (3,800) and Lane County where employment grew by 3,000 positions.

On the negative side, job losses were, in general, fairly modest and accounted for a total of just under 4,200 jobs spread across 13 counties. The greatest losses were seen in Deschutes County which lost 1,060 jobs. This was followed by Marion (-893) and Linn (-640) Counties. Losses in other counties measured less than 400 jobs each.

What was different from our last report was that the significant increases in employment that occurred between the first and second quarters of 2012 totally dried up and the employment base actually contracted by 1,200 jobs in the third quarter. This is a concern and I will be looking closely at the data for the fourth quarter to see if this was an anomaly or a trend.

Continuing a trend that started earlier this year, the overall unemployment rate declined across the board when compared to the second quarter as well as the same period in 2011. As I have talked about before, this tends to be a function of a decline in the labor force participation rate, but it is interesting to note that we are also seeing a contraction in the labor force across all of the counties surveyed.

I am giving the employment situation a “C-” grade this quarter, down from a “C” last quarter. The job market remains in limbo and the growth that we saw in the last quarter has evaporated. We are not yet in the expansion mode that we are all hoping for.

Regional Real Estate

In the third quarter of 2012, the region sold 11,091 units of resale housing with the year-to-date figure of 30,485 units. The year-to-date figure was 13% higher than that seen in the same period of 2011, but sales slowed by 6% from Q2—likely a function of limited inventory for sale, a common theme across the whole of the United States.

Year-over-year, the greatest increase in sales was seen in Skamania County (+47%), Hood River County (+30%), and Clatsop and Lincoln Counties, which both grew by 25%. Washington County rounded out the top 5 with an increase of 20%. There were three counties where sale volumes dropped from the same period in 2011: Wasco (-5%), Linn (-4%), and Cowlitz (-2%).

From a transactional standpoint, the market took off in summer but the 55% growth in transactions seen between Q1 and Q2 has not been sustained. The market sold just over 11,000 properties in the third quarter, a loss of 6% from the previous quarter. Inasmuch as this is disappointing, I attribute it to lack of homes for sale. Listing inventory in all the counties surveyed either remained static or contracted in September, and many did not see a more normal increase in listings through the summer.

As I stated in my previous report, “Choice in many markets has become limited which, if it does not improve, will likely lead to a slowdown in transactions in the second half of 2012.” I appear to have been proved correct.

Turning our attention to home prices, 16 of the markets analyzed registered year-over-year price increases (up from 14 in the last report) with just seven showing declines in values from a year ago. In aggregate, the markets surveyed saw values increase by 5.8% over the same period in 2011.

Other than the substantial 71% growth in the small Klickitat County market, 14 other counties registered double digit gains from September 2011. When compared to prices seen in the first quarter of the year, 15 counties are higher with eight declining.

Overall, I am giving the real estate market a “C” grade this quarter. This matches that seen in the last quarter. Prices are generally on the rise, but low inventory levels may weigh on prices through the winter months.

Conclusions

The Oregon economy has taken a step backward this quarter. The job growth that was apparent in the summer has not been sustained, which is certainly disappointing. Contraction in the market’s unemployment rate offers little in the way of solace, as much of the improvement came through a decline in the labor force.

In a similar situation to that seen across much of the country, employers are waiting to see what tax changes may be in store for the new year before they even consider expanding their payrolls. I hope that this is the situation in Oregon, and I will be very interested to see if non-seasonal employment increases in fourth quarter and early 2013.

The housing market is certainly more buoyant than the economy. Listings are scarce and this has had an effect on the number of sales, but has not negatively impacted prices yet. I do hope to see listings start to grow, but I fear that we will have to wait until next year before we see any tangible improvements. I also believe that next year will show an increase in the number of bank-owned properties coming to market. Although it is too early to tell exactly what effect this will have on home prices, at this juncture I do not believe that it should have a significant impact. But this will be very heavily dependent on whether we also see an increase in non-distressed listings.

About Matthew Gardner

Mr. Gardner is a land use economist and principal with Gardner Economics and is considered by many to be one of the foremost real estate analysts in the Pacific Northwest.

In addition to managing his consulting practice, Mr. Gardner is a member of the Pacific Real Estate Institute; chairs the Board of Trustees for the Washington State Center for Real Estate Research; the Urban Land Institutes Technical Assistance Panel; and represents the Master Builders Association as an in-house economist.

He has appeared on CNN, NBC and NPR news services to discuss real estate issues, and is regularly cited in the Wall Street Journal and all local media.

Windermere Real Estate is proud to partner with Gardner Economics on this analysis of the Western Washington real estate market. This report is designed to offer insight into the realities of the housing market. Numbers alone do not always give an accurate picture of local economic conditions; therefore our goal is to provide an explanation of what the statistics mean and how they impact the Western Washington housing economy. We hope that this information may assist you with making an informed real estate decision. For further information about the real estate market in your area, please contact your Windermere agent.

Regional Economics

As the weather starts to turn in Washington, so do its economy and real estate markets. In all, I was quite pleased with this report inasmuch as it shows, in aggregate, continued improvement on all fronts, but there are headwinds that need to be acknowledged.

The counties included within this report increased the employment base by 50,000 over the past 12 months. That said, we actually lost 7,300 jobs between Q2 and Q3. At present, I am not too worried about this as I am seeing some wild seasonal fluctuations in some government employment sectors that should be ironed out by year’s end. I will, however, be closely watching the figures over the next couple of months.

As previously stated, between September of 2011 and September of 2012, the area added 50,000 jobs—a 2.3% growth rate, which comfortably exceeded the state and nation. In our region, eight counties expanded their employment base, one remained flat, and seven showed modest contraction (a total of 3,620 jobs were shed in these counties).

Year-over-year, Whatcom County (+4.2%) grew at the greatest rate—I believe this to be due to the value of the Canadian dollar versus the “greenback”! This was followed by Snohomish and King Counties, which both expanded their job base by 3.1%. Job losses in other counties were modest, with San Juan (-5.9%), Grays Harbor (-4.2%), Kittitas (-4.1%), and Jefferson (-3.7%) Counties suffering the largest percentage losses.

When we look at the unemployment rate across the region, all counties—with the exception of San Juan County—saw the unemployment rates drop from a year ago, a trend that we have been seeing since early this year. Inasmuch as this is certainly pleasing, I do note that we have not been seeing any expansion in the civilian workforce which, undoubtedly, is having an effect on the overall unemployment rate.

The latest data is positive but the expansion appears to be losing some steam. As a result, I am going to leave the economy with the “B” grade that I gave it in the last quarter.

It is not unusual that, in an election year, the private sector tempers its hiring until it knows who will be occupying the White House. I believe that this is the case here in Washington as much as it is anywhere else. Whether we will see marked improvement in the fourth quarter is uncertain, however, I feel optimistic that our market will continue to outperform other West Coast markets as well as the U.S. as a whole.

The market has registered 40,270 home sales year-to-date in 2012—an impressive increase of 15.3% over the number of sales seen in the same period in 2011. In the third quarter, there were close to 15,500 transactions completed—another impressive figure.

All but two counties exhibited improving sales velocities over the same period in 2011. The counties where there were fewer sales, Grays

Harbor and Cowlitz, are an anomaly as both are small areas and the absolute contraction was equally small.

Of the 16 counties contained within this report, half reported doubledigit improvements in sales volumes when compared to the same period a year ago.

From a transactional standpoint, the data is positive but we are starting to see a slowdown in aggregated sales. The second quarter of the year showed an astonishing improvement of 44% in transactions when compared to the first quarter. The growth rate in Q3 has slowed to 6%. As I stated in my last report, “Choice in many markets has become limited which, if it does not improve, will likely lead to a slowdown in transactions in the second half of 2012.”

I am afraid that my fears appear to be turning into reality. I believe it unlikely that we will see much improvement as we move through the fall months, and I am now looking for signs that we will see a strong spring market relative to new listings. We certainly need it.

Regional Real Estate

The market has registered 40,270 home sales year-to-date in 2012—an impressive increase of 15.3% over the number of sales seen in the same period in 2011. In the third quarter, there were close to 15,500 transactions completed—another impressive figure.

All but two counties exhibited improving sales velocities over the same period in 2011. The counties where there were fewer sales, Grays Harbor and Cowlitz, are an anomaly as both are small areas and the absolute contraction was equally small.

Of the 16 counties contained within this report, half reported doubledigit improvements in sales volumes when compared to the same period a year ago. From a transactional standpoint, the data is positive but we are starting to see a slowdown in aggregated sales. The second quarter of the year showed an astonishing improvement of 44% in transactions when compared to the first quarter. The growth rate in Q3 has slowed to 6%.

As I stated in my last report, “Choice in many markets has become limited which, if it does not improve, will likely lead to a slowdown in transactions in the second half of 2012.” I am afraid that my fears appear to be turning into reality. I believe it unlikely that we will see much improvement as we move through the fall months, and I am now looking for signs that we will see a strong spring market relative to new listings. We certainly need it.

As is shown in the chart to the right, 13 counties saw the average sales prices at levels above that seen a year ago (up from 10 in my last report), just two were lower, and one was static. In aggregate, prices of homes sold in the counties analyzed have turned around with prices 6% higher than those seen in September of 2011. This figure excludes the volatile San Juan County. If we include it, prices paid for homes grew by a whopping 17% year-over-year!

Excluding San Juan County, of the counties that saw appreciation, the most pronounced gains were seen in Clallam (+18.5%), Island (+15.8%), Snohomish (+15.1), and Kittitas (+14.5%). Declines were seen in Jefferson (-21.5%) and Whatcom (-0.4%).

I was also pleased to see that there are some counties where sale prices are now higher than they were two years ago. This is important, as the early summer of 2010 represented the end of the First Time Homebuyer tax credit that functioned to artificially (but temporarily) support home prices.

The choice of homes available to purchase is woefully low across the region and does not look as if it is likely to increase any time soon. Because of this fact, and regardless of the solid price growth that we are witnessing, I cannot raise my grade above the “C” that I gave it last quarter.

Conclusions

There were a lot of interesting data points in this latest report that certainly gave me much to chew on. It is human nature to think positively about the future but to still keep an eye on the past. The economy and real estate market in Washington continue to exhibit positive growth, but the rate of growth has started to taper.

Now, some of this can certainly be attributed to seasonal fluctuations, as well as the current political environment, but it is important to put this into context. Our region continues to outperform not only all other West Coast markets, but also the United States as a whole. The headwinds that do exist, mainly in the form of low levels of housing for sale, are likely to be temporary.

I mentioned that it is in our nature to be of a positive disposition while, at the same time, waiting for something to go awry. Much has been talked about the “shadow inventory” of distressed housing that could flood the market and cause prices to start to sink again.

Inasmuch as there are certainly a substantial number of homes that are in this predicament, I do not see that it is likely that the banks that own these assets will list them en-masse. The market needs homes to buy and there are certainly more buyers than sellers in the market. Distressed inventory will actually play an important part in the housing recovery.

About Matthew Gardner

Mr. Gardner is a land use economist and principal with Gardner Economics and is considered by many to be one of the foremost real estate analysts in the Pacific Northwest.

In addition to managing his consulting practice, Mr. Gardner is a member of the Pacific Real Estate Institute; chairs the Board of Trustees for the Washington State Center for Real Estate Research; the Urban Land Institutes Technical Assistance Panel; and represents the Master Builders Association as an in-house economist.

He has appeared on CNN, NBC and NPR news services to discuss real estate issues, and is regularly cited in the Wall Street Journal and all local media.