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The Truth About The Spokane, WA Housing Bubble

Haydn Halsted
Feb 25 10 minutes read

The housing market crash of 2022. It seems like it’s every buyer's dream right now for that to happen so that prices will go down and homes will be more affordable. Well, I’m sorry to burst your bubble, but here’s three reasons why you shouldn’t care if we’re in a bubble or not and a couple bonus reasons why you’re probably going to be disappointment with the outcome of the crash and why you won’t actually buy when it does.

1. fixed rate mortgage

The first reason you shouldn’t care if the market crashes is because of something called a fixed rate mortgage. Now in this video I’ll be speaking about my generation who watched our parents and family members struggle through the 2008 recession and we are fearful that will happen again. So, as your fellow millennial, I hope to provide you with some comfort on why we don’t have to fear that happening again. 

I don’t know about you, but my parents definitely had no business buying their first home. They’ve told me that the banks barely verified their income, they had little credit, and not only did they qualify for a house that was $80,000 at the time, but they had to get another loan to cover the down payment on that house. Now, that house worked out well for them in the long term because they held onto it, which you’ll notice becomes a theme throughout this video, and they owed so little on it that the recession didn’t impact them so they were able to refinance a few times, make upgrades to the house, and ultimately sell it twenty years later for a solid profit. 

But the point I’m trying to make is that one of the big issues with that time was adjustable rate mortgages. This means that the interest rate that you get when you first buy the home can change throughout your ownership. This was a huge issue for people during the recession because as home prices dropped, interest rates increased and made many people who were losing their jobs, struggle even more to make their payments on their homes because those payments kept going up. 

That why we basically only do fixed rate mortgages now. The mortgage you lock in when you buy your home will not change over the life of the loan unless you refinance. This is great because you know that if you can afford your mortgage today, it’s pretty likely that you’ll be able to afford your mortgage down the road, especially if you plan on getting pay increases over time. This is why it’s important to keep your monthly payments less than a third of your income so that in the event that you do lose some income, you most likely will have a buffer to continue making that payment. So, if you are buying a home today and you can confidently say that you will be able to afford your mortgage payment forever, then there’s no reason to worry if the market drops because your payment is not going to change. 

The big fear most people run into is that will get stuck in their home and not be able to sell it. Here’s two questions for you. Do you plan on staying in your home more than 5 years and could you rent out your home and be able to cover your mortgage? If the answer is yes to one or both of those questions, then you should buy the house. 

If you bought at the height of the market in 2007, you would have had to hold on to your home for 10 years before you could break even on it. That would suck. But, I talk to many people who chose to put a renter in that house and bought again when prices were lower. The tenant paid down the mortgage for them so once they did come to sell, everything they made on it was pure profit because the tenant paid down the loan. You might not have made as much as you wanted to, but you could have still come out ahead by just holding onto the property and dealing with just one tenant. 

2. home prices going up so much

Now, I’m like you, and if you’ve even bought a home in the last 6 months, you’re pretty stoked about how much equity you’ve made in that short period of time. We as a society are getting use to making a lot of money from our investments and it's putting a lot of us in a gambling mentality. A 24% increase in home prices is huge and not normal, but are we in a bubble or are we dealing with supply and demand issue? 

Looking at 2007, our average sales price had hit an all time high of $211,317 which man that does sound nice when you say it. Today our average sales price is nearly double and we finished 2021 at $400,612. The vast difference between these two times is that there were 6 months of inventory on the market at that time and today we have 14 days worth of inventory on the market. What does that mean? You take the number of active listings in any given month and divide by the number of sold listings that month. If this number is below 3 months, your are in a sellers market and some would even say an extreme sellers market so when I say that we’ve hit as low as 10 days supply in the last year, we are experience a huge issue in the supply and demand area. In 2007, there was plenty of supply for everyone. There was no competition in the market to get these homes, people were just buying them because it was easy to get the money to do so and when the big banks went under, that caused everyone else to go under as well. So, we are not experiencing the same issue that we had in 2007 and 2008 which would lead us to believe that we’re not going to have the same catastrophic result, but let’s just pretend that we do. 

3. repeat of 2008 recession in Spokane

Well between 2007 and 2011, prices dropped a total of 22.1% falling to $167,000 at the bottom. This 22.1% drop made a difference of $40,000 in your homes value over a four year period of when the prices were falling. That’s right folks, market shifts and drops take a long time to happen. Everyone is waiting for the market to crash, but when it was crashing, there was no one that was able to predict that it would take 4 years for us to bottom out so there was no way anyone could have timed the market. But that’s besides the point. 

We said that prices dropped 22.1% over that four year time period resulting in a drop of $40,000 to people's homes. Well I see homes selling for $80,000 over the asking price on a daily basis, so if we saw prices drop by $40000, none of us would blink an eye. That wouldn’t even bring us back to our 2020 average price of $322,000 when all of us were convinced we were in a bubble that year and the prices had to drop. What if prices dropped 22% from where they are today? Well like we said earlier, we saw a price increase of 24% from 2020 to 2021. So if prices dropped exactly like they did in 2008 you would get your 2020 prices back. 

Let’s include inflation in this metric to make it a little more realistic to what would potentially happen. Inflation between 2007 and 2021 has been a total of 23%.  So adding an additional 23% of our 22% would push us to 27% decrease in property values. If the market crashes by 27% that wouldn’t even push us back to our 2019 prices of $284,000 on average.

 My big question for most people when I talk with them about this is what is an affordable price? What is the price that you are waiting for? It seems like many people think the average home in Spokane should still be around $250,000 which would be amazing, but there are two issues. I’m willing to bet that there were tons of people in 2018 saying that the prices were too high when they had increased nearly 12% that year. Secondly, prices would have to drop nearly 60% for us to get back there which I won’t say is impossible, but I will say that if home prices drop that much, there will be far larger issues in our society than trying to buy your first home. 

So, with all that information, I hope you're starting to see that it’s unlikely for us to experience a correction like we did in 2008 and before this video gets too long, I want to make one more quick point. 

Everyone says that they will buy when home prices drop but that is statistically just not true and I’m sorry but most of us, unless you’re a confident real estate investor are not going to risk catching a falling knife. In 2011, when prices hit their low after the market crash, we saw the least amount of home sales in the past 30 years. This means, that the majority of people were fearful of the market at that time and did not purchase a home. It took us almost another 4 to 5 years after 2011 to really pick back up on the number of homes sold. 

So with all that, if you can lock in a mortgage payment that you can afford, you plan on staying in your home for more than 5 years, and if worst comes to worst, you can rent out your home and at least cover the mortgage payment, there’s no reason to continue waiting to see a drastic drop in home prices because none of us are really going to even notice when it does happen. 

interested in visiting or moving to Spokane?

Please don't hesitate to reach out and I will be happy to help any way I can. 

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