September 12, 1997

Area housing market: how hot is it?

By TOM KELLY
The Real Estate Advisor

Was this the housing summer of Pac Man or Rip Van Winkle? Depending upon which counties you consider, home sales were drastically different in Western Washington. What was seething in Seattle was less than casual in Kitsap; a steady market in Snohomish was countered by a pokey Pierce. At the other end of the field are some Seattle and Eastside neighborhoods where competition for homes have been so intense that agents have used an "escalator clause" as a vehicle to retain the upper hand. This clause, also known as a "Pac Man" clause (probably because it is an attempt to chomp away any competitor) is an addendum to the original purchase and sale agreement. It stipulates that a buyer is prepared to offer a specific amount greater than other accepted offer.

For example, I fall in love with a house and do not want to lose it. I know there will be other, perhaps several, interested and able buyers for the home. So, I make my offer at say, $150,000 plus $1,500 more than any another acceptable offer, not to exceed $160,000.

Here is an example how one escalator clause is worded given our figures:

"It is agreed between buyer and seller as follows . . . $150,000 or in the event another bona fide written offer is presented to seller on or before 9 p.m. on Saturday, purchasers offer the amount of that offer plus $1,500 with the total of purchaser's offer not to exceed $160,000. Provided that as a precondition to offering this greater sum, sellers provide purchasers with a bonafide copy of a signed offer from another party."

Mention Pac Man clauses in Kitsap or Mason counties and people look at you funny. The same statement in Northgate brings a nod of acknowledgment that the clause has become common practice.

"Things got to be so crazy on some deals this year that I wondered if I was in the right business," said Larry Simonson, broker in the RE/MAX Northwest office near the Northgate Mall. "You pull up comparable sales, price the home at the place your data dictates and offers come streaming in for more. It was amazing."

Simonson said he got involved in a competitive bid situation where a home actually sold for $50,000 more than its listed price.

"It was something that came out of the blue that absolutely nobody expected," Simonson said. "But you can bet the Pac Mans were jumping all over the place." Pac Man seems to have taken a break since the kids have headed back to school. However in Bellevue, many home sellers have done all they can to keep their home and take advantage of the constant need for interim rental housing.

"We have seen a few escalator clauses lately," said Phil Sousa, broker at Century 21 Smith-Ring adjacent to I-90 in Bellevue. "But with the incredible need for homes that rent for $1,100-$1,500 a month, people are hanging on to their investments.

"It's not unusual for homes to rent for $2,000-$2,500 a month in some areas. We had 17 single-family properties in our rental pool and only two are left. When something becomes available, it's rented in a hurry."

According to the just-released August figures from the Northwest Multiple Listing Service, King County sales were up 28 percent over a year ago while Snohomish sales were up 26 percent.

"We don't really get excited about escalator clauses," said Ken Lovitt, broker at Century 21 Paul Thompson in Lynnwood. "We try to focus on who is going to be the best buyer -- and that doesn't always mean a few bucks more than another buyer.

"I guess you could say we've used those escalator clauses on and off for the past four years. The first time was probably during that hot market in 1989. The hot markets now in our area for new homes are Marysville and Arlington while there is a lot of resale activity in South Everett and Lynnwood."

Demand is what's pushing home prices up in some areas, not across-the-board inflation that we saw come to a peak in 1989. This is why some neighborhoods are up while others are flat.

But what continues to be the attractive constant -- especially to small business owners -- is the livability of the entire region. The Northwest economy is robust even though the housing market in some areas doesn't appear to be following suit.

For example, Home Depot is planning a new store near the Kitsap Mall yet the home market is not exactly gang busters.

"We are really waiting for things to pick up from where they are now," said Art Locke, broker at Century 21 Anchor Associates. "We are not attracting the buyers we thought we would have by now. There are a lot of homes on the market and the buyers still have quite a choice."

When inflation soared in the 1970s and 1980s, home prices went along for the ride too, making housing truly a quickly appreciating investment rather than a mere shelter. Now, the flip side to our deflated inflation is surfacing as a flat home market for most of the nation. Home prices in many areas are barely reaching the annual rate of inflation -- approximately 3 percent. So, homebuyers in stagnant areas, especially those who purchased in the past three years, are finding it difficult to break even after commissions and excise taxes are paid.

Despite what you read and see on television, most folks are resigned to the fact that their home will not render double-digit appreciation. However, unlike renting, it is a forced savings account and the average consumer has a difficult time saving these days.

Previous columns:

• First-time buyers need creativity, 09-05-1997
• Don't expect mortgage rates to move much, 08-15-1997
• How wired will real estate get?, 08-08-1997
• Taking a look at The Street of Dreams, 08-01-1997
• What to do about that vacation home, 07-25-1997
• Vacation homes and taxes can be a confusing combination, 07-11-1997
• Capital gains change is hot housing topic, 06-27-1997
• More lenders willing to take a big gamble on home loans, 06-20-1997