Bubble shouldn’t burst: Spokane home prices may decline but nothing like the Great Recession

The last time Spokane had a major run-up in home prices, it didn’t end well. The area suffered a four-year stretch during which home values dropped.

But observers of area real estate and the local economy believe the economic underpinnings of the current surge in prices won’t suffer the same fate as the local housing market during the Great Recession.

That economic disaster followed a flurry of loans by lending institutions that rushed to lend money without checking whether the borrowers had the ability to repay the loans, said Grant Forsyth, chief economist for Avista Corp.

“I would say the biggest thing, from what I’m being told from the banking sector, there is a big difference in loan quality and loan standards than there was in that 2004 to 2006 period,” Forsyth said. “It’s not as easy as it was during the housing bubble to lend money to people who have apparently dubious ability to pay.”

David Flood, chief lending officer for STCU, agreed. He said during the run-up to the Great Recession “there was a lot of pressure for more people to make more loans. They were making loans that weren’t necessarily in the best interest of the owners.”

Both agreed that the current increase in Spokane-area housing prices largely is driven by a lack of inventory. Because of more people moving to the area and fewer homes on the market, it has created a seller’s market in which home owners are often receiving several bids that exceed their asking prices.

“We just have so many people moving in that we can’t keep up,” Flood said. “I don’t think we have a bubble – that we will have this big collapse like we did in 2010. The prices may come down a bit, but I don’t think they’ll come down to where they were just a couple years ago.”

Rob Higgins, executive vice president of the Spokane Association of Realtors, said he expects current market conditions to last a couple of more years “and then it will start to level off.”

“Real estate is a cyclical business,” he said. “The prices generally don’t go down. They do moderate.”

The one big surprise was how local housing prices continued to increase during the coronavirus pandemic, Higgins said.

“We were headed this way anyway,” he said of the higher home prices. “What COVID-19 did, it just accelerated that. ‘Heck, I’m living in Seattle. I’m tired of the traffic. I have a job where I can work from home. I’m coming to Spokane and buying something with cash. I’ll just keep bidding it up until I get it.’ ”

The downturn

Joel White, executive director of the Spokane Home Builders Association, is more pessimistic about the current situation that has led to record home prices.

“We are still seeing people moving in. That’s what’s driving us. But there are clouds on the horizon,” White said. “What happens when that stimulus runs out? The (Federal Reserve) intentionally held interest rates down. That can’t continue forever.”

Even a 1% increase in interest rates will have a dramatic affect on the amount of home someone can purchase, he said.

“There is going to be a kick. We are going to feel a pain,” White said. “Hopefully, the vaccines work and people go back to work.”

He noted that housing permits in Spokane County have started to decline. Multifamily homes and apartment complexes are being built “because that’s what the average home income can afford,” he said.

Forsyth agrees with White about the potential for the interest rates and with Higgins that the housing prices likely will not continue to see the double-digit percentage increases of the past year.

Since the mid-1980s, the average price increase of Spokane homes has been 4.5% a year, Forsyth said, referring to charts that graph the price of local homes over time.

But home prices declined from 2008 to 2012 during and following the Great Recession.

“We didn’t start to see positive price growth in these homes, tracked by this index, until 2013,” he said. “I don’t necessarily anticipate that kind of prolonged of adjustment” to the current prices.

Forsyth said he would have expected the pandemic to force local housing prices down, but it didn’t.

“The COVID-induced recession did not curtail in-migration like recessions did in the past,” Forsyth said. “That outcome has definitely increased the demand.”

Cheryl Stewart, executive director of the Inland Northwest Associated General Contractors, agreed with the others that the current housing prices tend to have better financial backing than during the period of questionable loans years ago.

“Residential is crazy busy, but we are not crazy busy,” said Stewart, whose organization represents all contractors except homebuilders. “With the coming of the Amazons of the world, I think (the local economy) is going to continue to grow.”

She, too, expects housing prices to eventually dip.

“While we are expecting it to slow down, we are not expecting the ‘hockey stick’ down,” Stewart said. “It will be more gradual.”

Forsyth was teaching at Eastern Washington University when the housing bubble collapsed from the Great Recession. He said he had a student at the time who was working for a lender that was approving loans without asking for proof of income.

“My sense is there is a lot less of that going around,” he said. “That being said, I don’t necessarily expect home prices to continue with double-digit rates.

“I could imagine that we see a correction in the market, but not like the correction we saw in 2008, 2009 and 2010. A lot of that reflects the underlying loan quality.”