Executives of Realogics Sotheby’s International Realty (RSIR), Caliber Home Loans and O’Connor Consulting Group have published research for Tax Day revealing that, over the last decade, new residents who elected to live in brand-new, luxury apartments instead of owning a like condominium have paid more than $50 million collectively (or $218,983 individually) in unrecoverable lease payments. Meanwhile, the average renter missed an estimated $288,934 in average capital appreciation over the same period and approximately $9,228 of income tax deductions for 2020.
“Homeownership remains one of the greatest opportunities for Americans to build wealth and enjoy tax benefits,” said Dean Jones, President and CEO of RSIR. “Those eying a purchase today in downtown Seattle will likely look back a few years from now and realize that they’ve timed the market perfectly.”
To contemplate the financial differences between owning and renting in downtown Seattle during the past ten-year term, the collaborative reviewed the trends in both apartments and condominiums that were built since 2010. Approximately 27,000 new multifamily housing units were delivered in the urban core, however 93% of this new supply was purpose-built for rent and not for sale. According to the Downtown Seattle Association (DSA), more than 88,000 residents now live in the city center. In one of America’s fastest growing cities, 82% of the downtown housing stock is comprised of rental apartments. Nationally, the homeownership rate is 65.3% per the U.S. Census Bureau, however, the latest Census reports for the City of Seattle suggest that a majority of residents are renting – for the first time since 1950.
“Despite the slowdown in 2020 due to COVID-19, political headwinds and social unrest, no other major U.S. city witnessed such population growth and percentage increases in both household prices and rents over the past decade,” added Jones. “An unfortunate result of so many residents opting to lease a downtown apartment instead of owning a downtown condominium is that thousands missed out on both capital appreciation and annual mortgage interest deductions on Tax Day.”
The report revealed the following statistics for downtown Seattle between 2010-2020:
- Typical rents averaged $1,241 in 2010 but soared 84% higher to average $2,230 by 2020.
- Newer apartments are smaller, averaging 650 square feet, and command an average rent of $2,404.
- Residents that rented newly built apartments paid more than $50 million in rent over the last decade (not including the 36,609 existing apartment units built before 2010).
- Based on a median household income of $114,000, the typical condominium owner will receive an annual income tax savings of approximately $9,228, not including capital appreciation*.
- Renters missed out on an average of $8,244 per year, or approximately $82,440 in collective income tax deductions over the past decade*.
- The average price for a condominium in 2010 was $524,842 but swelled to $813,776 in 2020.
- Typical condominiums appreciated 55% last decade, or an average of 5.5% per year.
- Renters of new apartments typically paid out $218,983 last decade, while condominium owners of similar housing gained an average of $288,934 in capital appreciation.
- Within the current development cycle, only 15 new condominium buildings were delivered (or remain under construction) in the city of Seattle since 2018, with occupancy scheduled by 2023 (a total of 2,256 units), and approximately 50% of that new inventory is either already sold and closed or under contract.
- New apartment and condominium projects in the development pipeline are currently being deferred until market conditions support the rising cost of construction (a similar situation occurred between 2008 and 2012 when no new condominium towers broke ground).
*See analysis by Caliber Home Loans.
Another motivating factor for would-be buyers is the imposition of the new Washington State tax on capital gains, which will levy 7% on stock sales with gains of more than $250,000 as of January 1, 2022. For those that enjoy Restricted Stock Units (RSUs) at employers like Amazon, which alone has approximately 75,000 employees in the Seattle area, the timing of the stock sale could be beneficial in 2021 and help finance the purchase of a home. Mortgage lenders say that tech workers are prime candidates for homeownership, who are increasing demand for walk-to-work condominiums located in downtown Seattle and for single-family and townhome properties throughout the city.
“We view those pricey apartment towers as incubating our future homeowners—at some point renters are encouraged to explore their investment options,” said Luke Easterly, Area Sales Manager for Caliber Home Loans. “We can help qualify clients with RSU’s for mortgages and given that interest rates are at near-record lows, but they are rising. The city is flush with developer deals for now, but perhaps not for long – once these towers reach their 30% owner-occupied presale requirements for conforming loan purposes, I think we’ll see the deals evaporate.”
Easterly points to incentives being offered by developers, such as corrected prices, no HOA dues for a year or two and even interest rate buy downs, to help rebuild sales momentum following a slow year in 2020. It’s working, with new construction towers posting dozens of new sales so far in 2021, although revised pricing is reflecting about a 10% discount from prior releases. Meanwhile, according to NWMLS data, resales for the first four months of 2021 saw a 50% increase in absorption versus the prior year, while prices are effectively flat, and inventory levels dropped by 24% compared to same period in 2020.
“The FOMO (fear of missing out) is real to secure preferred selection, lock down today’s record-low interest rates and start benefiting from both price appreciation and tax advantages,” said Tadashi Shiga, Executive Director of RSIR’s Land Development. “With the rising cost of land and construction, it’s an ongoing challenge to deliver new, quality housing at affordable price points.”
Market pundits say developers are digesting 6-8% increases of construction hard costs, which spiked further during the COVID pandemic as a slowdown in the supply chain affected the industry and delayed projects.
“The reality is condominiums are a greater risk for developers, so they’ve overwhelmingly preferred to build apartments and that’s been a very profitable venture given the robust job and population growth,” said Brian O’Connor, Principal of O’Conner Consulting Group. “The Condominium Act of Washington limits non-refundable earnest money deposits during presales to just 5% and the developer can’t draw those funds from escrow until closing, and then there’s construction defect liabilities. All the while the upside in appreciation goes to the homebuyer. Basically, the consumer protection legislation is so biased to the homebuyer, it discourages developers from building more condominiums, and so prices rise with the supply and demand imbalance.”
Meanwhile, apartment demand has been surprisingly strong in the first quarter of 2021 as many renters that may have moved to exurban locales during the pandemic appear to be returning to the city, and some are opting to buy instead of rent this time. O’Connor predicts vacancy rates will continue to rise in 2021 as the number of apartment deliveries add another 2,195 units by year end, and another 3,173 units in 2022.
“I think we’ll see a lot of condominium demand this year as the city reboots and repopulates,” adds O’Connor. “Consumers can take solace knowing that new condominium projects won’t pencil or break ground unless presales values are supported in the $1,200 – $1,400+ per square foot arena, and that could take a few years of appreciation to support, and so the market rates being paid today likely has upside potential.”
According to the Downtown Seattle Association, the median age of a downtown Seattle resident is just 37 years. Contrary to the belief that millennials prefer to rent, they actually represent the largest cohort of homebuyers in the United States, per the National Association of Realtors.
“Long term, homeownership is a compelling investment and the only way to control housing costs in upswing markets like Seattle,” adds Easterly. “Tax Day is a good reminder of these advantages as only owners receive the benefits while renters will miss out.”
EDITOR’S NOTES: Market data, graphs, project photography and head shots of principals available.