A month ago, Realogics Sotheby’s International Realty (RSIR) brokers were visited by leading financial futurist Jason Schenker, who presented during the brokerage’s online Momentum event. As a keynote speaker, RSIR President and CEO Dean Jones sought to circle back with the primary learnings from Jason’s dynamic data injection and summarize a few points. Jones’ Q&A with Jason follows, and the slides from his presentation are shared below so that you too can absorb this great fodder to contemplate our market trajectory over a cup of coffee.
Q: What are the top three observations you made from your presentation that are encouraging for the regional housing market in the Seattle/Bellevue metro area?
A: Smaller cities stand to be beneficiaries of the move to remote work and remote life.
Regions where state income taxes do not exist, like Washington State, will be increasingly attractive for knowledge workers. California’s high state income tax rates provide incentives for people to relocate out of California if they can. Plus, those California state income tax rates could rise further.
E-commerce and technology companies have seen a surge in activity and valuations during and in the wake of the COVID-19 pandemic and shutdown earlier this year. This is true of two of the world’s biggest Washington-based tech companies, Amazon and Microsoft.
Q: Given the new administration (pending inauguration,) what do you believe will be the outcome of federal tax policies relative to capital gains increases and income taxes in 2021 and how will that motivate would-be sellers? (Note: We’ve seen some expedited selling in 2020 while capital gains are lower and high-income earners with large assets are particularly exposed to make their moves sooner than later, especially from CA to WA given the lack of a state income tax here).
A: Even though the presidential election has been settled, the president does not set tax policy alone. It requires support of Congress.
If Biden tax policies are implemented in 2021, it could result in higher corporate tax rates and lower corporate after-tax income as well as higher tax rates for unearned income. This could favor real estate investing for its returns as well as for the income flows of those investments that are already taxed at standard earned income rates.
Lack of state income taxes will continue to favor a number of states like Washington, as well as my own state of Texas.
Q: What are your thoughts about the sustainability of major tech companies in the Seattle/Bellevue area (Microsoft, Amazon, Google, Facebook, etc.) and the likely impacts of spiking stock prices with restricted stock units comprising a large portion of employee compensation and a likely wealth effect—when will these consumers pivot from renting to owning and what kind of incubator is that creating for future housing demand (for sale) in the region? Recall the Microsoft boom in the 1990s created 10,000 millionaires and certainly drove a housing cycle, especially on the Eastside where many early employees landed—so if this plays out again with Amazon and others, what sort of observations do we have about the next ten years in the area?
A: This is straightforward. If stock prices of major local employers (e.g., tech companies like Amazon and Microsoft) remain high, this would likely support the local economy and real estate prices.
Q: What are your thoughts about the potential for aging demographics and downsizing in the next decade to harvest equity from real estate and active investments in search of more freedom to enjoy success and seek passive investments (like Delaware Statutory Trusts) and what impact could this have for housing demands both locally and in second home markets? My hope is we can make a statement that consumers are going to shift and the time to buy may be now but wait to sell into a rising market.
A: Demographics is destiny. By the end of the century, there will be 400 million Americans. There are currently just shy of 330 million. To put things bluntly, they are not making new land. This means that even if retirees could increase their selling in the coming years, they are likely to be well outnumbered by the number of aspirational homeowners in younger generations in the decades ahead.
Q: How do you think the Seattle/Bellevue area is fundamentally well-positioned for growth (given jobs, lifestyle, tax policies, climate change, proximity to Asia, etc.) and thoughts about playing catch up to other West Coast markets that are more established and far more expensive like Vancouver, BC, San Francisco, Los Angeles, etc.)? We have seen a migration to the Pacific Northwest, why is that?
A: Costs are low, freshwater is abundant, and land is cheap relative to Silicon Valley, San Francisco, and much of California. Those are fundamentals supportive of demand.
Q: When do you think the urban markets like downtown Seattle will witness a rebound of demand for housing, office, retail, and hospitality? Obviously, COVID-19 has been rather unfair to the high-density, city center in most states but Seattle was first in and may be first out of the pandemic-related impacts. Do you think cities will rebound and when?
A: Cities could become more like “lifestyle choice” living destinations, rather than ROI-driven decisions based on earnings potential and proximity to the workplace. This does not necessarily portend a collapse of urban residential housing. But it could result in future urban real estate demand abatement. This means that suburban housing and lower-density urban areas may see home prices rise significantly faster in percentage terms than in the largest cities for the next few years. Commercial real estate – especially Class A – might see a return of demand, but here, too, future demand abatement is likely to be engendered by a permanently elevated level of remote workers compared to those before the COVID-19 pandemic.
Dean Jones’ Summary in a Nutshell
Jason is correct. The Seattle metro area has remained a national leader in gross median home price increases (second to Phoenix on a percentage basis) as in-bound buyers from states like California have spawned RSIR’s top sales of the year. The “Zoom Cities” that surround the higher-density markets have seen the most change as the region prepares for another year impacted by the pandemic and remote work for the foreseeable future. E-commerce proved to exceed all expectations during the Black Friday/Cyber Monday shopping cycle increasing 37 percent in Q3-2020 compared with the prior year, benefiting local companies like Amazon and is booked by record stock prices, which creates a regional wealth effect. This also spurs buy vs. rent planning, especially as interest rates are expected to remain low into 2021 and restricted stock units (RSUs) are booming in value. Brokers watching tax policies closely report would-be sellers of existing homes are motived to sell before any threat of capital gains tax increases while other tax hikes are likely, given the U.S. debt is setting all-time highs—further driving demand for tax-friendly states like Washington.
Locally, the next decade will witness a massive downsizing cycle as baby-boomers become empty-nesters and retirees seek “lock and leave” lifestyles and harvest equity for second homes in destination markets and a return to travel post-pandemic. The enviable market fundamentals of our region will keep primary residences here while attracting like-minded followers who will take advantage of the relative home values, lower cost of living, and greater prospect for capital appreciation compared to West Coast peer cities. Job losses (and likely COVID-19 infections) are much worse than the media reveals—anticipate a longer recovery for the hardest-hit business sectors like retail, hospitality, restaurants, travel, and cultural and entertainment venues. Downtown Seattle will make its comeback (and presents a buyer opportunity today), however, the COVID-inspired exploration of secondary markets and even ex-urban lifestyles may tug on conventional urban preferences, especially as being able to walk to work would become less critical in the post-COVID-era and Sound Transit 3 will soon offer 116 miles of track to connect the metro area and redistribute supply and demand amidst a likely rezone of municipalities to each of the VISION 2050 goals for population and job growth projected by the Puget Sound Regional Council.
Ultimately, RSIR’s residential real estate brokers are standing out amongst the most resilient green chutes in the economy (sales are up 60 percent year-over-year) and benefit from the best brand in the fundamentally best-positioned market in the U.S.! My takeaway is 2021 is shaping up to be another banner year, especially for those that know how to read the market trajectory and exercise their sphere of influence.
WHAT A DIFFERENCE A YEAR MAKES!
Below the Trendgraphix report illustrates supply and demand for all property types (new and resale) in King, Snohomish, Kitsap, and Pierce Counties:
Despite the COVID crater witnessed in April 2020 (typically the height of the spring sales surge), the market quickly recovered driving 30.5 percent more closings in the past 90 days compared with 2019, while total inventory levels are nearly 14 percent lower YTD as pending sales activity is now trending nearly 6 percent higher than last year. New contracts for purchase are exceeding new listings, which is working down the inventory levels and creating upward pressure on prices. A seasonal slowdown in listing activity is being witnessed but the region will enter 2021 with anemic levels of housing and sets up for an unprecedentedly competitive spring sales season as the COVID vaccine and a new POTUS administration (and potential stimulus) reboots the economy amidst historically-low interest rates.