Impact of Soaring Mortgage Rates on Seattle’s Housing Market

In recent times, skyrocketing mortgage rates have exacerbated the financial challenges facing prospective homebuyers in Seattle’s notoriously expensive real estate market. These elevated rates have resulted in reduced activity among both buyers and sellers, with home prices generally stabilizing in September, according to data released by the Northwest Multiple Listing Service.

During this period, the median price for a single-family home in King County was $900,000, reflecting a 1% decline from the previous month but a 3% increase from the prior year. Similarly, the median home price in Seattle was $926,250, indicating a 3% year-over-year growth. Prices also recorded gains of 4% in Southeast King County, 2% in North King County, and 6% on the Eastside. In contrast, prices decreased by 3% in Southwest King County.

Across the broader region, median prices fluctuated in comparison to September 2022. Snohomish County saw median homes selling for $749,900, representing a 2% increase, while Pierce County experienced a 1% decrease with median prices at $535,000. Kitsap County observed a 4% rise, with median homes selling for $559,995. Notably, these figures represent the median, where half of the homes sold for more and half for less.

Economists and real estate professionals attribute the primary factor behind the Seattle area’s market slowdown to the prevailing high-interest rates. Prospective buyers are grappling with the challenge of affording higher mortgage rates in conjunction with home prices that have not fallen sufficiently to offset these rates. On the other hand, sellers with low-rate mortgages on their current homes are hesitant to move.

The average rate for a 30-year fixed-rate mortgage surged to 7.3% in late September, marking the highest level since late 2000. In September 2022, rates averaged 6.7%. In the Greater Seattle area, a typical home at current rates incurs a monthly mortgage payment of around $3,900, as estimated by Zillow. To afford this payment without exceeding the recommended 30% of household income spent on housing, homebuyers would need an annual income of approximately $155,000.

The consequence of this financial reality is a decline in market activity. In King County, both buyers and sellers closed 12% fewer deals in September compared to the previous year. Kitsap, Snohomish, and Pierce counties experienced even steeper declines in pending sales. Buyers’ sentiments are marked by the expectation that homes match their high interest rate payments, or the price must be negotiable.

However, the supply of homes for sale remains limited. Despite a slight increase in new home listings in King County in September compared to August, the number of new listings remained 23% lower than a year ago. This constrained inventory has led to sustained high prices, despite some reduction in demand.

Zillow Senior Economist Orphe Divounguy notes that the limited inventory is “keeping prices elevated even though demand has fallen somewhat.” The market, while less frenzied than during the peak of the pandemic, remains tight for buyers, with months of inventory between five and eight weeks. A balanced market typically features four to six months of inventory. Some areas, like Snohomish, continue to witness competition among buyers, even though overall transaction volumes have decreased.

Sellers have responded to market conditions by reducing prices on over a quarter of homes listed for sale in the Seattle area, slightly exceeding the national average. To attract buyers, builders of new homes are slashing prices and advertising buyer credits and interest rate buydowns. While rate buydowns have been attempted, buyers have shown a stronger preference for price cuts. Some builders have lowered prices by approximately 10% from the previous year.

One notable example is a development near Northgate, where homes initially priced in the low $700,000 range have experienced multiple price reductions and are now listed in the low $600,000 range. Approximately half of the homes in this development have been sold, illustrating the challenges buyers face with increased interest rates and loan qualification requirements.

Given the market’s sluggishness and its impact on profit margins, developers are reducing land acquisition for new projects. This trend is not unique, as permit applications in Seattle have declined by 43% for detached single-family homes and 15% for apartments and condos compared to a year ago. These statistics suggest that Seattle’s housing supply could remain limited in the coming years.