Seattle Real Estate Leads The Nation In Price Growth
/In The News...
Here is a list of the major U.S. cities where housing prices have grown by double-digits over the past year:
1. Seattle
2. Portland
That is the list.
Across the country home prices are up +5.8% annually, according to the national average supplied by the latest S&P/Case-Shiller housing report. Seattle and Portland have doubled that mark, up +10.8% and +10.0%, respectively. The West Coast has benefited most from the housing market recovery, thanks to a strong job market and technological growth. However, whereas cities like San Francisco have cooled off a bit in the past six months, the Pacific Northwest continues to surge.
Businesses, namely tech firms, have found Seattle to be a great supplement to comparably pricier areas in California. Google, Facebook and Salesforce are among those that have expanded north from the Silicon Valley, taking advantage of cheaper real estate. Add that to an already robust foundation created by Amazon, Boeing, Costco, Microsoft, Starbucks, etc. and any additional business migration is icing on the cake for the greater Seattle area.
As the housing market thrives in Seattle the question becomes: If the price-gap narrows between Seattle and metropolitan California, will Seattle real estate similarly begin to slow? One interesting statistic I found is that Washington is one of four states where the most common job title is "Software Developer". Not even California can say that.
(source: NPR)
Does this mean Seattle is more sensitive to a tech slowdown than other parts of the country? Sure. But notice that the most common job title is "Truck Driver" in the majority of states, so it might be an easier conclusion to draw if Truck Driver was exempted so that we could see the next-highest job classification in those states.
It is not news that Seattle and Portland real estate are strong. What is news is that these areas have consistently led the nation over the past few years and the gap between these cities and the rest of the country has widened. Here is a look at the complete list of 20 major cities.
In The Market...
The S&P 500 fell -0.3% last week. Let's look under the hood:
The six-week winning streak for the S&P 500 came to an end. It was a worse week than the -0.3% decline implies, as the majority of stock sectors were negative. Technology led the way, while Energy and dividend-paying sectors lagged (Real Estate, Utilities).
If you recall my suggestion from two weeks ago that the bond market may be poised to break out, that clearly has not been the case. It was the worst week for the bond market in recent memory. I have a close eye on the bond market given our positions in both high-yield bonds and preferred stock. High-yield bonds often foreshadow what is to come within the stock market. If last week is an indication, it could be a bumpy couple weeks ahead for stocks.
In Our Opinion...
Investor sentiment worsened sharply last week. The percentage of respondents who feel positive (bullish) about the market looking ahead dipped from 38% to 30% in the latest AAII survey. The percentage of those who have a negative (bearish) market outlook spiked from 35% to 47%.
The 16% spread between the 46% who are bearish and the 30% who are positive is the largest negative gap in over a year. A bearish jump of that magnitude is pretty rare and is usually followed by a sell-off. I don't like speaking in absolutes, but the data bears that out pretty consistently when I look back at how the S&P 500 has reacted following similar spikes in Dec. 2015, Aug. 2015, May 2013 and May 2012. Then again, pessimism has helped fuel this rally dating back to last fall.
The AAII investor sentiment reading is just one subjective indicator. We do not emphasize it. Since respondents are effectively asked how they feel the market will perform in the future, the recent rally may provide context for them to assume the market is "due for a drop". (I intentionally use quotations because it is a common phrase I hear all the time.) Oftentimes though a rally has legs much longer than most realize. Market rallies tend to beget bigger rallies. So even if we do see a market decline in the near future, it could be short-lived.
Let's see how the next few weeks plays out.
In Our Portfolios...
Stocks: No changes.
Bonds: No changes.
Q&A / Financial Planning...
As I review 401k accounts for many of you and others this spring, one thing I see is misalignment between someone's tax needs and how they contribute to their 401k account (pre-tax vs. Roth). If your 401k plan does not offer a Roth option, this likely does not apply. But if it does, take a look at your contribution choices.
Pre-tax 401k salary deferral: Your contributions avoid taxes today. In exchange you defer taxes on those dollars, plus earnings, until you begin taking withdrawals in retirement. At that time you pay taxes on any distributions.
Roth 401k salary deferral: Your contributions are taxed today. In exchange, any earnings grow tax-free. When you begin taking withdrawals in retirement you pay no taxes.
On its face the Roth option seems like the better bet. No one likes paying taxes and tax-free is better than tax-later. But that is not necessarily true. If you are in a high tax bracket because you make a lot of money, it may be wiser to use the pre-tax/tax-deferred option. If your tax bracket will be considerably lower in retirement (an unknown, I know) it might make sense to avoid taxes today and instead pay them on the back end.
I mention this because I do see some people overload on the Roth option when their greater need is for tax reductions today. You can contribute up to $18,000 into your 401k ($24,000 if age 50), which is sheltered from taxation. Also, if you switch jobs or retire, you have the option of converting those tax-deferred funds into Roth funds. I often recommend this for clients who experience an unusually low income year because it allows them to convert at a lower tax rate, reducing their tax burden and providing tax-free growth from that point forward.
If you feel your 401k contributions may not align with your tax needs, contact Gale or myself. (Note that this applies if you own a 403b or 457 plan and a Roth option is offered. I just say "401k" for simplicity.)
What's New With Us...
As a reminder, if I haven't spoken with you about the change from Scottrade to TD Ameritrade, don't worry, I will be in touch soon.
Enjoy your week everyone!
Brian E. Betz, CFP®
Principal