Home Prices and their impact on Sales

As we look back on 2008 it is hard to imagine reporting anything new about the housing market. It seems that we were inundated with media reports about the ailments of housing. From financial experts, Congressional leaders, watch-dog groups, or news outlets, we heard them speak to all the issues -- except one.

Before exploring that one topic, it might be helpful to provide a picture of where real estate ended up for the year. In 2008, Thurston County experienced drops in both prices and the number of homes sold. There were nearly 3,000 homes sold in the county, which is down 23% from 2007. By way of comparison, the number sold is on par with sales in 2001, which means that 2008 was the 7th best performance on record.

The average sales price of a home dropped 5% to $283,907, which is where prices settled at the end of 2006. While 5% is modest compared to the rest of the country, it is clear that our market has come to terms with the fact it would have to give back some of the double-digit returns experienced from 2003-2006. During those years we saw the average sales price jumped 13.4% annually - compared to just 5.9% annually for the 20 years prior.

Even with downward adjustments our market still ranks near the top of the nation for price gains over the past 5 years. The Federal Housing Finance Agency's recent report ranked Olympia 12th out of 292 markets for price appreciation during that time.

The report reveals that 193 markets have experienced price drops over the past year, but only 19 have lost value over the past 5 years. The other 273 markets had average gains near 30%, which is consistent with Thurston County's long history of gains.

During our hot seller's market, however, our market brought returns twice that figure - 61%. When compared to our long, steady history of more modest price appreciation, it is not surprising that our market is now giving back some of that excess gain.

This leads us back to that one topic we do not see reported during the great 2008 debates - while we have seen some significant price corrections around the country over the past year, the vast majority of markets still have healthy gains consistent with a decades' long trend.

Price corrections will lead to healthier times by making housing more affordable to a wider segment of buyers without reliance on exotic loan products that pushes the borrower too far. Because buyers trade up and down in housing types throughout their lives, buyers are needed before a seller can buy their next home. This in turn frees up the next seller to buy that next home. This churn in the marketplace is why housing recoveries always start at the bottom price ranges.

Markets go up and they can come down. Over short runs, the stock market takes us on that roller coaster quite regularly. Fortunately for investors, the movement of stocks over the long-haul has always been upward.

Housing on the other hand never provided the thrill ride of the stock market. Instead of higher highs and lower lows, the average price of a home in the United States pursued a slow, steady rise. In fact, until the last couple of years the office of Housing and Urban Development, which has tracked prices for 40 years, had never reported a decline in the nation's average price - never.

The one thing that changed was the trajectory of prices. Earlier this decade, homes prices in many parts of the country more than doubled their normal gains. This pattern was sustained for 4-5 years. In many parts of California, prices jumped nearly 100% in five years. In normal times it would take 12-14 years to realize that same return. So even with that huge price correction last year, California's average price over the longer five year period is now back to returns that is in line with historical performances.

In our own market, homes that are priced at levels consistent with our longer-term history, as opposed to the inflated years, are selling quite well. In fact, they are selling one week faster than at the peak of our hot seller's market!

What we are seeing are buyers looking for value, and their definition of value does not mean sellers aren't making money. Sellers who have been in their homes more than 3 years are seeing 5.5% annual returns, which is close to our historic norm. As this pattern continues, the 2009 housing market in Thurston County is poised to have a great, if somewhat more typical year.


Statistics compiled by Coldwell Banker Evergreen Olympic Realty, Inc. from the NWMLS database. Statistics not compiled or published by NWMLS.