Seattle Market Trends and Challenges 2023: Impact of Rising Interest Rates on Puget Sound Real Estate

A brief dip in mortgage rates from November to January sparked hopes that the housing market might loosen up, but new data shows that both the Seattle and Puget Sound real estate markets still face challenges. Buyers and sellers remain at odds on pricing, with many homeowners holding off on selling due to high financing costs, which has been a significant factor in both areas.

In the new home market, builders across the U.S., including the Seattle and Puget Sound regions, are holding significant inventories. To attract buyers, developers have been offering incentives such as mortgage rate buy-downs. This has proven somewhat successful, as January saw a 7.2% increase in new home sales nationwide, reaching an annualized 670,000 homes. In the Puget Sound region, where new construction continues to be in high demand, these strategies have likely contributed to keeping sales momentum up, especially as buyers took advantage of the brief drop in mortgage rates. However, with rising construction costs and limited land, the benefit to the local market might not be as strong as in other parts of the country.

Existing home sales tell a different story, both nationally and in Seattle-Puget Sound. The National Association of Realtors reported a 0.7% decline in existing home sales in January, marking 12 consecutive months of decline. This drop mirrors trends in Seattle and Puget Sound, where high mortgage rates have led many potential sellers to stay put, creating a tight inventory situation. Homeowners locked into low mortgage rates are unwilling to sell and take on new, more expensive loans, further reducing the supply of homes in the market.

While new home sales saw a modest increase, the larger share of the market—existing home sales—continues to struggle, driving up prices due to limited inventory. In Seattle and Puget Sound, this dynamic is evident as homebuyers continue to face steep prices despite declining affordability. Buyers are hesitant to enter the market due to high mortgage rates, contributing to the overall slowdown.

Even though mortgage rates declined briefly, they resumed their upward trend in February as inflation persisted, impacting Seattle and Puget Sound just as they did the national market. In these regions, where affordability has long been a challenge, rising rates have pushed many potential buyers out of the market. Higher rates, coupled with inflated home prices, make it difficult for first-time buyers and middle-income families to afford homes, further slowing activity in both the urban and suburban real estate markets.

Applications for mortgages have also plummeted. Nationwide, the Mortgage Bankers Association reported an 18% drop in mortgage applications during the week ending February 17, a pattern likely mirrored in Seattle and the surrounding Puget Sound region. Fewer buyers are applying for loans, leading to a broader slowdown in the market. This decrease in buyer activity could further soften the real estate market across the region.

While the median single-family home price rose 1.3% year-over-year in January, prices have been falling steadily since mid-2022. In Seattle and Puget Sound, home prices peaked during the pandemic and have since begun to cool, reflecting the national trend. The S&P CoreLogic Case-Shiller Home Price Index, which tracks repeat sales, has shown six consecutive months of price declines. However, prices in Seattle remain higher than in other areas, which limits affordability despite these recent reductions. This cooling in prices might provide some relief to buyers, but with high mortgage rates still in place, affordability remains a significant obstacle.

Affordability has become one of the biggest issues in Seattle and Puget Sound’s real estate markets. The National Association of Realtors’ affordability index has stayed below 2006 levels since May 2022. Although there was a slight improvement in December, the recent rise in mortgage rates means that affordability is likely to worsen. For Seattle and Puget Sound, where home prices are already well above the national average, the erosion of affordability may continue to limit buyer demand, especially among first-time and middle-income homebuyers.

Supply constraints continue to affect the market. While the number of homes on the market has increased slightly nationwide, many homeowners are reluctant to sell. This trend is particularly strong in Seattle and the surrounding areas, where many homeowners hold mortgages with rates below 3%. The National Association of Realtors reported that 980,000 homes were on the market in January, up from 850,000 a year ago, but still 40% below pre-pandemic levels. In Seattle and Puget Sound, this tight inventory situation continues to support elevated home prices, even as demand slows.

Looking ahead, February’s employment report will be critical in determining the health of the economy and its impact on the Seattle and Puget Sound real estate markets. The Federal Reserve is focused on jobs as a precursor to wage growth, inflation, and consumer spending. Despite recent layoffs in Seattle’s tech sector, the broader labor market remains tight. If job losses increase, it could further reduce demand for housing in the region. However, if employment stays strong, the continued wage growth may support housing demand, particularly in Seattle, where the tech industry continues to play a dominant role in the local economy. Either way, persistent inflation and rising interest rates are likely to weigh on the real estate market across Seattle and the Puget Sound region for the foreseeable future.