A new study confirms what Spokane homebuyers have long suspected: The Lilac City is one of the most overvalued real estate markets in the nation.
Researchers from Florida Atlantic University and Florida International University released a list of the top 100 most overpriced housing markets nationwide.
Spokane ranked sixth with home prices more than 45% above expected value based on past pricing history.
Potential homebuyers in the most overvalued markets are paying peak prices and could find themselves later selling properties for less if there’s a market correction, said Ken H. Johnson, a real estate economist and associate dean at FAU’s College of Business.
“(Spokane) is near the peak and you don’t want to be the last person to buy at the peak,” he said.
Ken Johnson and Eli Beracha, director of FIU’s Hollo School of Real Estate, compiled the list of overvalued cities by using a 25-year history of monthly housing prices from Zillow and other public data sources to project what home prices should currently be in a given market.
They compared those projected home prices with median closed prices to determine if a market is overvalued.
The study ranked Boise as the most overpriced city in the nation.
Ken Johnson thinks Spokane will undergo a ‘Goldilocks effect,’ in which the red-hot housing market may slow and then ultimately settle into a median home price that’s neither too high nor too low.
“You don’t want prices too hot and you don’t want them too cold,” Ken Johnson said. “You want to be close to the long-term pricing trend. Right now, Spokane is significantly above that trend and it’s creating potential for a housing decline.”
Spokane Association of Realtors President Eric Johnson said it’s not shocking that Spokane is bucking a 25-year trendline of price growth but there’s other factors to consider, including the area’s growing economy and population.
With low interest rates, homebuyers are also getting more home for their money and benefitting from a mortgage payment that doesn’t fluctuate like rent, which has also been rapidly rising in Spokane in recent months, he added.
“If you are buying and are going to turn the property in a year or two, you should be weary, but that’s in any market,” he said. “In my opinion, real estate is a long-term investment.
“If you plan on staying there five years plus, you are going to be fine because the offset to that is if you are at a 2.78% interest rate today and you pay $30,000 over what (the home is worth) and you hold onto that mortgage for 15 years,” he added, “you’ve made up that $30,000.”
Spokane County households, on average, are spending more than 25% of income on mortgage and interest payments, according to the Washington Center for Real Estate Research, which calculates and maintains a housing affordability index.
The index measures the ability of a middle-income family to make mortgage payments on a median-priced home.
Spokane had an affordability index of 91 in the second quarter of 2021. When a city’s index is exactly 100, households are spending 25% of their income on mortgage and interest payments.
If the number falls below 100, it indicates households are spending more than 25% of income on housing.
For loan approval, lenders often prefer potential homebuyers to spend no more than 28% of monthly gross income on housing expenses with debt not exceeding 36% of income.
The state’s affordability index was 88.4 in the second quarter of 2021.
Spokane County’s median home price surged to a record-breaking high of $395,000 in July, compared to the $301,509 median in July 2020, according to data from the Spokane Association of Realtors.
However, a slight uptick in inventory and price reductions, along with cooling sales may be signs of a market beginning to normalize, local Realtors told The Spokesman-Review last month.
If interest rates rise, it could cause the housing market to slow.
But it’s unlikely the local real estate market will bottom out like it did during the Great Recession, in part, because there isn’t a false sense of housing demand and banks are now more conservative in mortgage lending practices, ensuring buyers are qualified to make the purchase, Eric Johnson said.
“I was here for the bubble last time,” he said. “It forced me to dig into the dynamics of why it happens and we just don’t have the same dynamics that were in play the last two times the market dropped off.”
Ken Johnson agreed, saying prices aren’t likely to bottom out as the local market is buoyed by a constant stream of demand from buyers, shortage of inventory and relatively low interest rates.
“We’re near the peak of a housing cycle. So whatever happens in Spokane will be mitigated by those three things,” he said. “I just don’t see it going through the floor. The conditions are not what they were 15 years ago.”
An influx of out-of-area buyers and increase in remote work opportunities has propelled Spokane to the national spotlight as an attractive place to live, fueling a surge in housing demand.
Ken Johnson anticipates Spokane will continue to remain one of most popular housing markets in the nation.
“The best solution to any real estate problem is population growth,” he said. “That will work out through time and I don’t see Spokane becoming less popular.”