Which Pandemic Real Estate Trends Are for Real?
It's no secret that Seattle's real estate market has been wild. After the initial wave of coronavirus cases came and went in 2020, prices soared as buyers submitted offers well above asking to win sellers' approval. Other trends, like suburban flight and home office additions, have also emerged in the year-plus since. But will they stick around in a less socially distant (one day!) world? Earlier this summer, we asked three local real estate experts to lend their predictions. The conversation, held over Zoom, has been edited for clarity.
► Nicole Bascomb-Green, owner, Bascomb Real Estate Group
► Matthew Gardner, chief economist, Windermere
► Meredith Hansen, operating principal and founder, Keller Williams Greater Seattle
Obviously, the pandemic has not only changed the process of buying a home, but also what people wanted in a home. What real estate trends from the past year or so are likely to stick around long term?
► NBG: I think that we are going to see a continued migration to the suburbs and exurbs out of the city. We now have a capacity where a lot of employees and their employers are finding out that they can work from home, so they don't have to be as close to the central business hub, and they have opportunity to flex time. So that'll allow them to be further away from the city, buying larger homes, larger lots. So I think we'll see a continuation of that as we move forward and having more buyers come into the market because of that. That’s one of the trends I think that we will probably see as we continue.
► MG: Piggybacking on what Nicole said: She's absolutely right. I think this is the reemergence of the suburbs again, and as much as over the last 30 years plus, we've seen this kind of push closer and closer in mainly because of traffic congestion and the like. Now as she said, working remotely is going to help a lot of people to look further out possibly to afford a house. [It's just a bit] more than that. I don't expect anyone to leave Seattle and go to Yakima. It's not going to be a black-and-white situation. And the reason I say that is that for a majority of workers, it will be working part-time in office and part-time from their homes. So what they'll do is they'll put up with a lousy commute a couple of days a week if they have to. And therefore the markets that are going to benefit from this? Pierce, Snohomish, and Kitsap counties, without a doubt, are the three.
Now we're also finding that there are people here who already own in King County. And because of work from home, they're saying, ‘I'm going to cash out of my $1.1 million townhouse in Queen Anne, go further out, either pay all cash or put down a massive down payment on a house,’ and they'll put up with a lousy commute for a couple of days a week. So that's one of the biggest things I think we're going to see.
Work from home, we tried it back in the early '90s. It's a panacea, solving all problems of congestion, climate, and the like. And it failed. And it failed for two reasons. One of which was the employers were thinking, Well, hang on, you're watching daytime TV all day long, and not getting the work done. But from the employees' perspective, they didn't like it because they thought it'd be great to kind of roll out of bed in your bunny slippers and go to work. But they missed that symbiosis of discussions around the water cooler. Now, today is different. Employers, they certainly know you're working, thank you, Zoom. But productivity is an issue. Say, for example, if I was in my office and our CEO had a question, he'd walk up to my office door, speak for two minutes, and then that was it. That is now a 30-minute Zoom call. So it's an issue. And also training. But as far as the employees are concerned, it's the same thing. We're social creatures. We want to be around each other. And having spent a year and a half staring at the same four walls there, they want to get back to work at least part time.
The final part would be, it's going to allow some of those urban renters who are working for Amazon, for example, that would like to buy, but could never afford King County. And if they're told now, again, either a couple of days a week or permanently they can work from home—and I know this because my oldest son, both he and his wife work for Amazon downtown, dropping an ungodly amount of money and rent—Amazon said, you don't ever have to come back. They've gotten out of their lease. They went down to Portland, bought a house, and their mortgage payment is considerably lower than their rent. So the big thing is for these younger first-time buyers, millennials—and there's a big wave of them coming over the next two years—it might give more of them the opportunity to actually buy, and they certainly can't afford King County.
► MH: Well, I think there are industries where you have to work as a team. And so what I've seen lately is—at least commercial friends have told me—that in order to get people back into the office, a lot of employers are taking their commercial spaces and really remodeling them and turning them into real luxury spaces in order to get their employees to come back to work. And I don't know if either of you have heard about that. But that's just something I've heard recently. It seemed like the commercial market would really tank. But now more and more companies seem to be taking commercial space, which I think is kind of interesting, especially on the Eastside, which is not very affordable, by the way.
► MG: Yeah, I hope Meredith's theory is right. I mean, the amount of sublease space on the market has dropped down significantly in the last two quarters. So the view that downtown's going to go away, that's not the case. We're also going to see office hoteling as well. Whereas, traditionally, you had your own space. Now, it's yours for the days you're there. It's gonna be somebody else's the days that they're there. And so ultimately, companies can certainly improve their spaces as Meredith said, but I also expect to see some scaling down. Because as companies continue to grow, it's likely that they're not going to increase the size of the mothership. They'll go to what's called a hub and spoke model. A hub and spoke model is you'll have your central location, but as you grow, you'll send spokes out into other markets and create subordinated offices there. So I think we're also going to see an emergence of suburban office space as well.
There was an increase in demand for having multiple home offices, or at least one home office. Do we think that's something that folks are going to continue to look for in the years to come?
► MH: Well, they'll put air conditioning in next time.
► MG: Ha, yeah. Less than 50 percent of all homes in the city of Seattle have air conditioning. But I think, well, yes. One of the demands that I'm hearing our brokers saying is that, if they're looking for a home, it's got to have a space, either a home office, or at least a dedicated Zoom space. Also, high-speed internet access is increasingly important. And that's going to be a demand of theirs as well. And on the new construction side, homes have actually been getting smaller up until the pandemic hit, and now they're getting bigger. So less open-floor plans, and certainly the old home office...they're now coming back, [as is] more separation in rooms.
You mentioned, Matthew, some folks who were renting becoming buyers, but on the whole this has been such a hot market, and it's been really hard for first-time homebuyers, especially, to get in. What will it take for Seattle to become a more buyer-friendly space? How long will that take?
► MG: If there's one thing that keeps me up at night, and has been for years, it's housing affordability. If you look at median income for a first-time buyer, let's say in King County, he can afford to pay just under $400,000. There's about 28 single-family listings in King County at that price, or below. It's woefully inadequate. So how to address it: Seventy percent of the residential land in the city of Seattle is zoned single-family, which is ridiculous. It made sense in 1937, when zoning was founded. It made sense through probably the mid to late '60s. It makes no sense now. So we can't make any more land, we know that. Water, mountains—it just doesn't work that way.
So in order to effect change, we need to do two things. One of which is: look to change the way zoning works in the city to the model which is already in Minneapolis, which will be in the entire state of Oregon by next May, where you can build duplexes, triplexes, or four-plexes, in any single-family zoned area....But even then that's not going to be the panacea. And the reason for that is that that only works we have no land left, if the value of the land is greater than the value of the houses on it. And then that's going to be a problem. So a shorter term measure would be for the city to look at land that it owns, land that the [inaudible] owns, and land that the county owns, which you can effectively repurpose, rezone. And that is land that's available. The trouble is, Dow Constantine tried to do with the Duwamish corridor, but you're going to get a big push back there, from the blue-collar industries and say, well, you're shutting us out. But that is the way it needs to be done.
Zoning is just remarkably inappropriate. And I always use the same analogy. If you take a map of Seattle, overlay a map of Paris, for example, you'd fit Paris into North Seattle and a bit of Kirkland—that's meaningless, cities come in different sizes—the population of Paris: 2.2 million. Population of Seattle: 780,000 [editor's note: maybe a little bit less than that, but not much]. And there's really very few high rises in Paris. But we need to embrace density, but this NIMBYistic mentality that's out there, it says that people don't want change. And they like what they've got. They don't want to change it. And that creates that exclusivity, and it's remarkably prohibitive for people to come in.
Now, ultimately, what's going to happen is businesses looking to move into our market. Well they're going to take a look at two things. Is there a talented workforce I can hire? In the city of Seattle, we are wickedly smart, check that box. Well, the second piece of the puzzle is, how much do I have to pay people? The biggest component of salaries: cost of living. And at what point are they going to say, I've got to pay people how much? Well then markets like Spokane, like Boise, and believe it or not like Las Vegas, become appealing. Why those four markets? Well you can buy a brand-new, never-lived-in single-family home for $300,000 [editor's note: much tougher to find that now]. Well, good luck finding a shoe box in Seattle for that. So I think ultimately it's going to be, we need to fix it, or we're just going to start losing that competitive edge. We've rode on the coattails of Amazon and Google and Microsoft and Tableau, etc. at what point would it just become too expensive for them to be here.
► NBG: And I also think there's a reimagining of how we do housing in the city, working with our nonprofit partners who are very focused on home affordability. And to Matthew's point, working through scalability and density, providing the community land trust model, there are so many different opportunities that we could invest in, particularly including that zoning piece, to help to increase the capacity to buy because Seattle is just prohibitive for so many people.
Now, on a regional scale, yes, I have many first-time homebuyers who are getting into contract. It's really about how you, as a broker are supporting your clients, but the city of Seattle, although it's changed, because, and I'm sure Meredith could speak to this too, being in Seattle, the change of Seattle now being a hot spot, now the rest of the region being the hot spot. And if you have people in Seattle, it's not as challenging as if you have people in the region, but they still can afford to live in Seattle. It still hasn't changed the dynamic that it's really super expensive.
So I think if we reimagine what housing can be, and start to bring in more players to the table, not just the municipalities, or just those of us who are in the space, either residential, even commercial, perhaps, but also bring other people who work in the housing space to help facilitate some change in the city. And it can be done. Like you said, in Minneapolis, it's happening. It's happening in other parts of the country. It can be done. We just have to make it real here in the Seattle area.
► MH: Well, the other problem is that a lot of sellers are afraid to sell in Seattle, because if they're not moving out of the state, you know, moving to Idaho, or moving to Arizona—even though our weather seems to be like Arizona now—they can't afford to stay in the city. I mean, they could sell, but where are they going to go? And I think that's a question on a lot of sellers' minds. And I hear that a lot from sellers: 'Well, I can sell, and I'm sure there's going to be a bidding war on my house, but then I'm going to have to go bid on a house. So I might as well just hang on to it.' And I think that's true of a lot of Baby Boomers that are just not selling. It's because they want to stay in Seattle, and it's just not affordable.
► MG: In the last 20 years, the average tenure of a homeowner in Seattle has doubled. It's gone from five years to an average of just shy of 10 years, for Meredith's exact reason. And it's absolutely true. And you can talk about multifamily. First of all, to what Nicole said, yeah, the trouble is you look at some of the low-income housing providers, they're having to compete with market-rate developers. They just can't play that game. Then you overlay construction costs, which are astronomical—yes, timber is starting to come down a little bit—but it's still ridiculous. Land prices, labor costs, regulatory things, which are horrendous. And so you overlay all these things. It is very, very hard to get anything done.
But at some point, we have to do something. And then you can look at some potential adaptive reuse, which is possible, and not necessarily inside the city. But I look at strip malls. We're not over developed, we are under demolished. So...you could convert those. The other things would be regional malls as well, I think have potential. Office buildings don't because of core depth and various other things.
But let's look at what's there: Can that get changed? In terms of new construction condos, well, high-rise type one construction, it's going to cost a developer $1,000 a foot to build it. They're gonna have to sell those units for $1,400 a foot to make a margin. They will still get sued, irrespective of changes to the Condominium Act. So that's why you've only got a handful of them on the market being built now. And even those projects, the prices of the core units are coming down dramatically. Again, a lot of concern over what's going on in downtown, city council, and various other things like that. But it's just remarkably elitist. We've got $1.5 million dollars for a 1,000 square feet. Yeah, great.
► MH: Well, so many retailers have gone out of business. I mean, there's some big malls, like the Everett Mall, there are so many retailers that have left that mall. It's almost like it's deserted...Macy's closed. Maybe they could turn those into condominiums [laughs].
► MG: For the past several years, I've said this: In the next decade, we're gonna lose 50 percent of our regional malls in the country. Half will be gone. So there is potential there on that reuse, but the issue is here we're topographically constrained, and that might be great in some respects, but too much water, too many mountains, still a lousy mass transit infrastructure. You can look along light rail routes and transit-oriented development, which was a massive opportunity, which we didn't do well at all, because I think that the zoning changes that were done in the station areas, which is not big enough, not broad enough. And so we've lost out there.
And now the next phase of light rail, who knows when that will happen, when there's no federal money for it. We know the first out to Lynnwood, which is looking amazing right now, by the way, is going to happen. But going beyond that, it's going to be hard, because people still will need to get into the city for the better part.
So it's a big issue. And unfortunately, you look at the city fathers, for want of a better word, they're all: Let's house everyone for nothing. Good luck with that. It's not going to work. So we are facing massive growing pains, quite frankly. And there are a lot of problems we need to be fixing, as I said earlier, or we're just not going to start seeing that, that economic vitality that what normally 350,000 people downtown every day working...It's a very, very big problem.
The trouble is we're bifurcated. We either want to do nothing, because we live in our home already, we don't want change. Or we're all for it. And those are two massively competing entities.
One of the things I heard about during the pandemic was people waiving inspections and basically engaging in a lot of buyer behavior that they wouldn't under normal circumstances because the market was so competitive. I'm wondering if we're going to enter a period of buyer's remorse in the next year or so.
► MH: That's already happened. You know, there's a lot of lawsuits, around inspections, either a buyer not doing an inspection or just relying on a seller-procured inspection. You know, people waiving financing even though they needed, even though they were actually getting financing. I mean, I'm sure you can speak to it, Nicole, because the market is still like that now, where people are waiving all contingencies and doing nonrefundable earnest money. It's just crazy, really. But I've already seen lawsuits after talking to attorneys that I know, real estate attorneys.
► NBG: And I will say, overall, this isn't really new. We saw this in the 2017 market, where they're waving inspection, we got multiple offers, and people are clamoring and need this earnest money release. So that, in and of itself, isn't new. I've seen it in several cycles, through our real estate time here in the market. Real estate's cyclical. So we'll see some things that are over that come back. So those things aren't necessarily new.
I think the extra added piece with the Covid is really that kind of clamoring because of the market situations, not just because it just happens to be a hot market, but Covid pushed it. So I think that we probably may start seeing that, maybe more in the suburbs. I think those people who moved out further, they were looking for land, really. They were looking for more room and space, that maybe we may not see it as much. But to Meredith's point, I can imagine that this is happening because I have this conversation with my clients: Okay, what's the risk behind doing these things? And do we really want to be engaging in that kind of behavior in a home that you want to stay in or even short-term? You need to have that conversation and walk into that realistically because lawsuits are expensive, and there's no guarantee that as a buyer, you knew, based on the document you signed, what you were doing, and that you can even find relief from a seller in going through this litigation space, if you will.
So I think that we will—I would like to wait to see with [what's] going to come of this because as I said, the behavior itself is not new. It is not, because of Covid, per se. This has happened before in our market. But I would be interested in now that we have a little nuance of Covid—little nuance, in quotes—if that will change those people's remorse, if you will, after the fact.
► MG: And to follow up on what Nicole said, you're right 2017, June in 2018, it slowed down. Why? Because mortgage rates jumped by almost a full percentage point. However, from that point onwards, from the end of 2018, down to today, massive, massive contraction, obviously, and the more mortgage rates drop, the more money people can spend, and every one percentage point drop in mortgage rates, people can afford to buy 10 percent more house. So that's driving a lot of it.
But as far as the owner-occupied housing's concerned, I've always been a great fan of, you've got to meet three criteria, if you should be buying a home: One, are you stable in your job, or are you working for a dotcom where you're a paper billionaire? I've known way too many of them, and none of them are billionaires today.
Secondly, can you afford that mortgage payment? Are you comfortable with it? But thirdly, are you going to live in that home for at least seven years? Meet those three criteria, I'm happy for you to go ahead and buy it.
But people do get caught up in that frenzy. And I'm not as on the ground as these guys are, but it's certainly obvious that that's going on. And when you do that, a lot of people are also now sidelining, saying, 'Well hang on, the market's gonna crash for him, we have a housing bubble. And oh, by the way, all these homes in forbearance are all going to turn into foreclosures. I'm going to wait a year, and pick up a house on the cheap.' Not going to happen. And it really won't, for a ton of reasons. So there are people who are sidelined.
But get in there and just be comfortable. It's very easy to get into bidding wars with like, we go to an auction, right? Well, listen, I want that vase, and I'm gonna pay 50 bucks for it. At some point, you just got to stop back and say when the bidding reaches 200, then grandma's vase is just not worth it.
So just don't get caught up in that, and that's the role which people are in right now. Because we've got inventory on the market today that we might—I got data going back to 1990. I've never seen anything like it in terms of the number of homes on the market for sale, either in Seattle research or in greater King County. And it's almost the same thing nationally as well.
► NBG: Yeah, Matthew’s correct. I totally agree. You know, this too shall pass. For those who are wanting to buy, you can make an informed decision if you're in the market, and you are being responsive in that market and you're asking yourself those questions. You can get into a transaction into the home that you want, without having to give away the farm and exactly to, again, to Matthew's point, have the max of what you are going to do and not exceed that. And, they'll get into a space where it won't be as much of a look back on: Oh, I wish I hadn't, if some other factors had been in play.
► MH: Well, we have more buyers than available homes.
► MG: By far.
► MH: It's just such an imbalanced market as far as supply and demand. And this is probably a great question for Matthew: Do you think this is going to change in the next, you know, 12 months or longer?
► MG: No, I mean, statistically speaking, we're adding population. I mentioned millennials. I mean, nationally, you've got over almost 10 million millennials turning 30 in the next two years. That is the median age of a first-time buyer in America. And so what can they afford? What can they buy? They do want to buy. It's not a case that they can say, I want to be a perma renter, I want to have that ability to move on a whim. They don't want to do that. But they are becoming forced renters. Rents continue to escalate, not so right now, but they do in general. And so how do I pay my rent? Or do I save up for a down payment? Fifty percent is still going to the bank and Mom and Dad to help out. But it's gonna be hard.
So the biggest thing you need to do to address that balance is build more and go back to econ 501. Right. When you have limited supply and you have net new demand, what happens to prices? If it's housing, potatoes, I don't care what it is, they go up. And so you need to create more. My biggest concern are first-time buyers now and also move-downs. So retirees, we're not retiring when we're supposed to. We're staying in the workforce longer. So you're not seeing the move-down buyers, then those move-up buyers have got limited choice. If they've got limited choice, the first-time buyers have got no choice. So it's a big, big problem.
And also...retirees aren't moving. They've got too much stuff. And the trouble is, the kids don't want it. I mean, listen, great grandma might have bought that dresser, a cross, and a covered wagon in 1840. You try giving it to your kids, it will be on eBay in a week. So it's just not gonna happen. So the big concern I have is you just need to figure out how to build more. How do you build more with limited land supply? Then you go back to zoning. You've done the full circle of the question. So it's very, very hard for them. But they are the biggest worry that I have: Where they are going to live? Because they are getting married, they are gonna have kids, and schooling and safety are the two most important things for them. But where? I mean, Wenatchee? And not even that now. So it's very, very hard for them.
► MH: There's a hot market for people buying buses and converting those to living spaces, and RVs apparently are selling like crazy, which is just, it's interesting. So people are, they can't buy a house, but maybe they can afford an RV or an old bus and convert it. So someone just told me about this, and it's a real trend right now.
► NBG: Which is interesting, because my husband's from the South, and that's not a new concept in Georgia. People have been doing that for quite some time, particularly in the town that he lives in. So it's funny you mention that Meredith because I was talking with him about that, that this is something that we just don't do here that they very much do there. And now we're seeing this trend here. And it's because of this exorbitant amount of pricing around housing, the lack of stock.
Again, to both Matthew and Meredith's point, it's just a cycle. Sellers don't want to sell because they don't have anywhere to go. If they're not selling and we're not building, where are we going, and the folks that get hurt are really those first-time homebuyers, those people who want to get in the market. Those people who are moderate income, they're getting hit the hardest—[the people] who want to be homebuyers. They make good money, but maybe they don't have the capacity to have savings. They don't have the bank of Mom and Dad, because that wasn't their life story. They had to make their way. They may be first-generation college-educated. There could be many different factors involved. So we have that.
And then we have this historic issue of racism in housing, and combating that in the city of Seattle and in this region. Black housing is at an all-time low, lower than it was when the law was passed in '68, the [Fair] Housing Act. It's way worse than it ever was. So we have so many different factors going on in this market, that we have to continue to address these and have these conversations because it's not going to change.
Seattle is not—it isn't the days of Boeing, where the last person that leaves Seattle, turn the lights off. We're not just focused on Boeing anymore. We have a massive amount of employment here, which means we're going to continue to get a massive amount of people coming who need that housing. So, these are some just some things that we have to continue to work on, and have really these type of dialogues across sectors to figure out how to get that done.