Prominent Seattle-based real estate economist Matthew Gardner shares his predictions for residential real estate in 2025 with Seattle Agent Publisher Anne Hartnett.

Transcript: 

Anne Hartnett: Hi, I’m Anne Hartnett with Seattle Agent magazine, and it’s my pleasure to welcome Matthew Gardner for our 2025 Real Estate Predictions feature. Matthew Gardner is a prominent Seattle-based real estate economist. His housing forecasts are relied upon by Reuters for their U.S. housing market forecast, and by Fannie Mae for their Home Price Expectations survey. He also sits on the Washington State Governor’s Council of Economic Advisers and is an advisory board member of the Runstad Department of Real Estate Studies at the University of Washington. And, coincidentally, he was Seattle Agent magazine’s 2023 industry MVP.

Thanks for joining me today, Matthew. 

Matthew Gardner: You’re welcome, Anne. Thanks for asking me.

Anne: I’d like to start out with what I think is a question that’s on every real estate professionals mind. What impact will a second Trump presidency have on residential real estate?

Matthew: Oh boy. That’s a question, as you can imagine, I’ve been asked a lot. So let’s break it down to a couple of different sections. Firstly, deregulation and certainly he’s been professing that a lot. His first proposal is to open up federal land for development. Well that’s great, freeing up more land you can build on. However, if that land is so far away, that it doesn’t make financial sense for a builder, they won’t do it. And that’s certainly the case, in a lot of the country. Big areas of space tend to be in the middle of nowhere. And that’s really not helping any. So I think the impacts going can be somewhat limited and certainly very limited here in Washington state. 

Secondly, removing barriers to development. Now that is good because regulatory fees, quite frankly, are out of control. But it’s too early to say whether we will actually see significant reform or not. That’s obviously going to depend on who becomes HUD secretary and who’s made director of the FHFA. You know, again, assuming those departments exist. So in theory, it could be good, but I’m still going to hold my judgment for the time being. 

A couple other things. One, tariffs, the 60% tariff on Chinese goods, 10 to 20% tariffs on other imported goods. That’s very worrying because all economists agree that that would stimulate or re-stimulate inflation. The impacts on housing would be very significant. Almost one-third of the materials used in this country to build homes, they’re imported, so that means that builders borrowing costs will rise. Immigration reform as well, the goal of launching the largest deportation program in history, that’s inflationary. Think food costs going up, which it would. But also I think it would hit the housing sector because immigrant labor, that accounts for 31% of the construction workforce. And finally, mortgage rates, that’s the big thing that people want to hear about. Now, more spending, because we know that increasing deficit spending is what Trump wants to do. More spending means more debt. That debt needs to be financed. That could lead bond yields to to rise, and that would hurt mortgage rates. Additionally, if we do see inflation kicking in, the Fed could slow the pace of rate cuts or even reverse them. And again, that can have an impact on mortgage rates as well. So, it might sound terrible, but I would say let’s just wait and see. There’s always certainly through the last administration, a lot of bluster, and a lot of saying, well, I will do this and actually not doing it. So I think time will tell.

Anne: When it comes to interest rates, it seems everyone predicted rates would fall earlier and faster in 2024. Do you see that happening in 2025?

Matthew: Well, Anne, you’re right. A lot of economists did get that wrong. And I will tell you, I was a little bit more pessimistic, shall we say, than my colleagues out there. I certainly can’t say I got it right. For the most part, analysts got their mortgage rate forecast wrong, primarily because most of them believe that the U.S. was going to enter a recession, and recessions, generally speaking, function to lower mortgage rates. However, as I was forecasting, there was no recession. Therefore, we saw rates stay higher because of just that one fact. But additionally, something else that we all got wrong, was understanding that lenders, well, they were going to what’s called front load that fees. Now, let me explain that. Generally speaking, a 30-year mortgage, well the rate’s fixed by calculating the yield or interest rate on a 10-year treasury and adding on a premium. Generally speaking, 1.7 to 1.8%. However, at the spread today it’s closer to 2.8%. Why is that? Well, banks realized that at some point mortgage rates will fall. People will refinance and they can potentially lose out on that income. Therefore, they’re trying to get more money up front. And that, quite frankly, is what’s keeping rates at the level that they are. Now the spread it’s big. I think that that will come down. I do expect to see mortgage rates modestly drop, but I’m afraid, nothing to the extent that buyers or indeed more mortgage brokers or real estate agents would like.

Anne: Listing activity is very much tied to rates. Are we still going to see low levels of activity? 

Matthew: I’m afraid, in general, I’d say the answer is yes. And why is that? Well, the so-called golden handcuffs that households have, because they either bought or they refinanced in that wonderful period in 2020 and certainly in 2021 that made it historically low, quite frankly. Now, most people have got those remarkably low rates, therefore,.are they going to give them up? Looking at where rates are today, which are somewhere just south of 7%. Now, I think we will still see transactions for three of the four major reasons we do. One is job change. Two is death and three is divorce. But what we’re not seeing is the fourth, and that is discretionary, the choice for people to move. And to give you an idea, nationally, 74.6% of homeowners have single-family homes, have got a rate at 5% or lower, and 21.6 have got a rate at 3% or lower. 

Here on the West Coast in Washington, about 23.5% of us have rates at 3 or lower. We’ve got a long way to go before people are going to feel more comfortable in giving up the rate they’ve got. Now, I would say that they do not have to get exactly the same rate, but once we get to within 1 to one-half percent of somebody’s current rate. Well, then it’s less compelling for them to feel that they have to stay. So I do expect to see listing inventory rise modestly next year. I think sales 2024, we certainly saw them up locally more than we did in 2023. Same thing nationally, we’ll see increases there. But they nationally won’t be above the 5 million mark that we’d like. They’re going to be coming in probably around 4.3 or 4.4 million. 

Anne: So it sounds like Seattle area home prices will continue to rise due to the lack of inventory and rates. 

Matthew: I believe that they will, and here’s why. We’re still creating new households. People are still moving here. As we saw through COVID, that’s continuing specifically from California, where they think our housing is cheap. But I think, the bigger picture is this, and that is the fact that we have an economy that’s doing, still, remarkably well. We’re in an area that people want to move to. We have a lack of supply, not just from the resale market, as we’ve talked about, people with very low mortgage rates, but we’re not building enough. All these things really scream to me that we will see prices rise again here in the Washington state market western Washington certainly, in 2025, but they won’t be to the same degree that we saw this year. So I think price growth will taper, but it will still be positive. And the biggest concern I’m going to have, quite frankly, is affordability. It is remarkably difficult, not so much for those of us who have owned our homes for a long time, build up a lot of equity. First-time buyers, they are still going to have a hard time, I think, in 2025.

Anne: Well, there still seems to be a general lack, as we discussed, of new-home construction affecting supply. Do you see any increase in new construction homes or condominiums?

Matthew: I think that it’s going to be interesting to see. Obviously we had numbers that just came out showing a massive decline in new home sales, nationally. But a lot of that was because of the way they calculated them. A new home is counted as being sold by when the contract was written rather than at closing. And obviously in October, we saw mortgage rates jump up by almost 8/10 of a percent. Big drop in the South. Why? That was hurricanes.

So I think in general, we are hearing from builders, they are somewhat more optimistic about the future. The HBI index came out a while ago, suggesting that the belief that sales would rise over the next six months. Yeah, it’s there. We’ve got a lot of inventory, though. So when we talk about new home construction, are we going to see as much construction? Probably not. The reason being is that there is a lot of new homes out there ready to buy. So I see them rising, sales rising, to about 760,000 next year from 694,000. Actually, my forecast for this year, again reflecting increased demand, but demand or lack of supply in the existing-home market, but also builders are still offering a lot of incentives. So I think we will see sales rise and, in terms of actual throwing up more sticks and bricks, probably not until we see the level of existing inventory in the new home market start to drop. I think it’s going to have to drop fairly palpably because we have as many homes available today in America, new construction, the last that we saw this level was in 2008.

Anne: So it sounds like we will still continue to see builders offering mortgage rate buy downs?

Matthew: Yes, we will. I think it’s getting more difficult for them, though. And the reason for that is quite simply because mortgage rates have not fallen, as they would expect. So they can only go so far with subsidizing new-home buyers. Yeah, we’ve actually seen the share of builders offering incentives level off around 60%. So we’ve seen it move that much the last several months. I’d be surprised to see it going up. I think it will probably slowly come down. But I certainly would expect that builders are going to be quite keen to sell the homes that are costing the money because they’ve been built and sat there waiting for a new owner.

Anne: Housing affordability in the Seattle area is especially concerning for the first-time buyer. Is there any relief on the horizon?

Matthew: Oh, I’m sorry. I’m afraid not. It’s the hardest thing, as far as I can see, within our region, certainly. And, it’s mentioning numbers, which I ran very quickly to give, some of the listeners or viewers as an idea. I’m making certain assumptions, let’s say, for a first-time buyer with a lower down payment, let’s say 3.5%.

So if we look at that, and if they were to have bought a home back in 2021 and mortgage rates were 2.9%, well, they need to be making about $78,000. Now, moving forward today, it’s quite remarkable. Here in King County, first quarter 2021, prices were higher than we saw nationally, about $780,000, meaning a household would have to have made about $170,000. In October, sale price was $960,000. Therefore, a first time-buyer household would have had to have been making $291,000 a year. That’s up 72%. Now, I don’t see their incomes being up by that much in the last four years. So I think it is going to be remarkably hard. And that, quite frankly, means that we are going to create more forced renters. These are people that would like to buy, and unfortunately, they’re just watching the boat sail away. It’s going to be very hard for them unless they get a lot more help from mom and dad.

Anne: Well, what do you think should be done to address our missing middle housing problem? 

Matthew: Well, that’s the thing. The missing middle housing is really quite an interesting story. And for those who haven’t heard about it, in essence, what it means is that if you think about housing from a city going out into the suburbs. The zoning for housing should look like a wedding cake, meaning that the closer to the job centers, the more urban, the higher. So that’s why we see high-rise condominiums. And then it should gradually taper down as we move out into the suburbs, into single-family housing areas. That’s what it should look like. Unfortunately it doesn’t.

Now, the middle, which is between suburbia and the urban markets, which is where you’d see row homes, townhomes, cottage style cluster housing, low-rise, maybe mid-rise, development. That hasn’t happened. It hasn’t happened because of politicians. First, zoning occurred. Let’s say example here in Seattle back in the early 1920s. Before then, you could build whatever made sense. However, they really wanted to push single-family housing, which meant that rather than have that tapering effect urban out into suburban, we found most of our exurban and even urbanized areas be zoned to single family, and they were built out. And so we really are lacking that denser, smaller, ultimately more affordable product. 

Now we have a goal to try and reinstate it. House Bill 1110, which I was a big supporter of here in Washington, means you can build, inside single-family zoned areas, duplexes, up to six pack, housing, again, depending, across the state on population. But in a market like Seattle, where we are already built out, where 73% of the residential land is zoned single family, it doesn’t make sense because it mean a builder would have to buy existing homes, we know how expensive that is, tear them down and rebuild them. That is going to be very, very expensive. And so I’m afraid that is an issue which is not going to be solved at least in that manner. 

I think we can look at land, and I think our elected officials should look at land, which is easier to start developing. And that can be land which is not currently zoned for residential development. The problem there is you get a lot of people shouting about it saying, oh no, don’t do that because you’re removing blue-collar workers and blue-collar jobs. So I think it’s a very, very complex issue, but quite frankly, one that we do need to solve if we as a region and indeed as a state, want to maintain our competitive advantage. 

We have to have a very talented workforce. People want to move their companies here because of it. The big problem they’ve got is the amount they have to pay people, so those staff can afford somewhere to live. It’s a big issue. We’ve seen it being talked about a lot more, by our elected officials over the last two years or so than I’ve seen in the last 25. But it’s not a panacea, in terms of zoning changes. We need to keep this conversation going and make even more changes if we want to provide much needed housing.

Anne: What impact will the affordable housing measures have on the February ballot?

Matthew: Here you’re talking about, I-137, I think, the social housing payroll tax. Now, that’s a new tax, which I think is going to be on the ballot in February, that adds a 5% tax on companies for every dollar above $1 million they pay to a Seattle employee in total compensation. And it sounds like a lot, and quite frankly, it is. But there’s an alternative measure backed by city council, really, and it’s one that has passed. Now, it’s not creating a new tax. Rather it’s extending what’s called the existing jumpstart tax. And it’s similar to I-137. So I’d say, well, why are you looking to do another one when you already have one in place? But here’s the rub. This tax, the jumpstart tax, which was created back, I think, in 2020, I passed it, and it was being used, and money’s coming in. But the trouble is that Seattle City Council has been using some of those funds to address its budget shortfalls, which in my opinion, is doing nothing more than undermining its original purpose. And that’s going to leave a bit of a bad taste, I think, in the mouths of people who would be having to pay for it. So I think that could make another tax, quite frankly, untenable. But I would also add, that in my experience, the last 25 plus years I’ve been in Seattle, whenever you see Seattle City Council or government employees take on the mantle of being home builders, well, they’re not really that good at building homes. It’s not their job. And generally speaking the houses they do deliver are over budget and delivered late. So again, I don’t see it as solving our woes at all. And I’m quite frankly, if people look at this particular proposed new tax, given that we have one in place already, well I’m not so sure it’s going to meet the threshold and actually pass, all of us who are going to be voting on it.

Anne: Thank you so much, Matthew. One last question to wrap this up. When it comes to real estate and housing, what will 2025 be remembered for?

Matthew: Oh, wow. Really? It’s asking me to get out my crystal ball. I think there’s a couple of things here, specifically in Seattle. I think we’ll see sales rise again. Now, 2023 was a horrible year. We know that 2024 actually was better. And I think I expect to see modest improvement in terms of the number of transactions, for a lot of the reasons that we’ve already discussed, occurring in 2025. Pricing, I think, is going to be another story. There are people out there still, [like] Chicken Little expecting the sky to fall in and believing that we’re going to see enough another massive downward price correction. Well, they’re still waiting, and I’m afraid to say they’re going to be waiting even longer because that is not going to happen. Quite frankly, we will see price growth slow. Not going to go backwards. We’re not going to see a flood of foreclosures. And so I think that those out there that are hoping for the doom and gloom, maybe so they can afford to buy a home themselves, well, they’re going to be disappointed.

I would also say this: I expect to see a fairly significant rebound in the urban condominium market. That was one that really got hit hard through the pandemic because of work from home, people leaving to go out to the suburbs or, indeed, to the exurban markets. Well, with companies like Amazon now demanding workers return five days a week, I expect more companies to make that statement that, maybe not five days a week, but staff are going to have to come in more often. I think that’s going to act as an incentive to look again at urban condos, because if you look at where pricing is — and I like to look at asking prices as opposed to sale prices, sale prices are looking backwards — the median asking price for an urban condo right now is below the level we’ve seen last year, this year.  So I think there are some deals to be done. And, over time, I expect the upside to be higher in terms of price appreciation rather than condominiums than the rest of the market as a whole.

And finally, the Eastside: It will continue to outperform Seattle. Light Rail, we think, actually will open, and cross the lake in 2025. That’s going to be an additional benefit. And of course, mentioning Amazon again, I expect to see all of their growth occur on the Eastside. So I think the Eastside of Seattle is going to have a number of stories of its own next year as well.

So in all, I think that we will see a couple of fairly interesting moves in the housing market in 2025. 

Anne: Thank you so much for joining us today, Matthew.