By now you may have read an article about home values falling again in King County. It is true that the overall median selling price of homes has fallen, but I would like to shed some more light on the entire outlook. Simply put, real estate in King County is much more dynamic than just looking at it as a whole lumped together.

Digging into the leading culprit of lower prices, distressed sales (short sales and foreclosure sales) of single family home in King County as a whole came in at 32% of all sales, and that is an awful lot. Lower median selling prices should be expected with a tally that high simply because distressed sales sell at discounts (though they generally are in major need of repair which offsets some of that discount). However, that 32% tally does not paint the whole picture.

There are areas within King County where there are far fewer distressed sales affecting neighborhoods and communities. In Bellevue, for example, distressed sales of single family homes accounted for only 15% of sales, and much of the year has had distressed sales below 20% of market share. As a result, prices have trended flat for over a year. Contrary to cities like Bellevue is a King County city like Federal Way, where 55% of single family home sales were distressed. So, to get to the 32% total for all of King County one can see that there is a mix of areas struggling much more than others, and as a result the county wide median selling price suffers.

Here's a breakdown of the percentage of distressed sales of some King County cities to give you an idea of where distressed sales are predominately showing up:

Looking a little deeper into Seattle the same story applies that there are some areas more affected by distressed sales. In the Wedgwood, Sand Point, Bryant, and Laurelhurst neighborhoods there was not a single distressed sale in November. However, the White Center, Boulevard Park, and South Seattle areas saw around 50% of home sales sell as distressed properties.

One of the most important things to remember is that the distressed sales that drag down prices are entirely necessary in order for prices to come back up, though they are obviously difficult on families who need to sell/move. Regardless, the faster the distressed inventory is cleared from the market, the faster prices will return to historic appreciation levels (the average selling price of single family homes in King County has appreciated on average 5.5% annually over the past 20+ years, which includes the negative appreciation of the last few years).

Working through the distressed inventory and the lower prices sellers have to compete with has kept potential would-be sellers on the sidelines, and as a result there are surprisingly few homes on the market. In King County, there is currently only a 4.22 month supply of homes on the market (supply is the months it would take to sell the current homes for sale at the current pace of sales, and analysts point to a 5-6 month supply as being a neutral market). Fewer homes to choose from increases buyer competition for the most appealing homes, and this will help offset some of the negative impact distressed sales have on home values.

Further, single family home sales through November 2011 in King County are now outpacing 2010 by 9.9% and 2009 by 14.6%.

There is certainly cause for optimism for our local real estate market in 2012 thanks to increasing sales, the ratio of demand vs. supply, growing affordability of homes, recent surge in consumer confidence, and slowly improving job market. The wildcard will be how much "shadow inventory" of foreclosed homes there is yet to be released to the market. On the bright side, foreclosure tracker RealtyTrac.com shows that the volume of notices of default has improved significantly over the second half of 2011…

- Prospera Real Estate's Bellevue and Seattle area real estate update, blog, trends, and news