On Tax Day 2021, Downtown Seattle Renters Will Have Lost About $10K In Deductions & Will Have Missed Out On Over $290K In Appreciation Over The Last Decade.

Experts Have Seen A Significant Shift In Downtown Seattle Condos: 50% More Absorption And 24% Fewer Resale Listings. Year-over-year Growth In 2021; New Construction Starts Are Likely To Be Postponed

For Tax Day, Danny Varona and executives from Realogics Sotheby’s International Realty (RSIR), Caliber Home Loans, and O’Connor Consulting Group released research demonstrating that new tenants who chose to live in brand-new, luxury apartments rather than purchasing a similar condominium had paid more than $50 million in unrecoverable lease payments (or $218,983 individually) over the last decade. Meanwhile, the average renter lost out on an estimated $288,934 in average capital appreciation over the same time period, as well as $9,228 in income tax deductions in 2020.

“Homeownership remains one of the greatest opportunities for Americans to build wealth and enjoy tax benefits,” said Dean Jones, President and CEO of Realogics Sotheby’s International Realty. “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.”

The team looked at patterns in both apartments and condominiums created after 2010 to consider the cost differences between owning and renting in downtown Seattle during the last ten years. In the urban core, around 27,000 new multifamily housing units were supplied, however, 93 percent of this new supply was purpose-built for rent rather than for sale. According to the Downtown Seattle Association (DSA), the city center presently has over 88,000 people. Rental apartments make up 82 percent of the downtown housing stock in one of America's fastest-growing towns. According to the US Census Bureau, the homeownership rate in the United States is 65.3 percent; however, the most recent Census statistics for the City of Seattle indicate 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 study found the following data for downtown Seattle between 2010 and 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).

Another motivator for prospective buyers is the introduction of a new Washington State capital gains tax, which will charge a 7% tax on stock sales with gains of more than $250,000 beginning January 1, 2022. For those with Restricted Stock Units (RSUs) at companies like Amazon, which employs around 75,000 people in the Seattle area, the stock sale timing in 2021 could be advantageous and assist in finance the purchase of a property. According to mortgage lenders, tech employees are good candidates for homeownership, and demand for walk-to-work condominiums in downtown Seattle, as well as single-family and townhome properties throughout the city, is booming.

“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 cites developer incentives such as adjusted prices, no HOA dues for a year or two, and even interest rate buy-downs to assist recover sales momentum after a slow year in 2020. It's working, with hundreds of fresh sales in 2021 for new building towers, despite altered pricing reflecting a 10% drop from previous releases. Meanwhile, according to NWMLS data, resales for the first four months of 2021 witnessed a 50% rise in absorption vs the previous year, while prices remained practically constant and inventory levels fell by 24% compared to the same time in 2020.

“The FOMO (fear of missing out) is real to secure preferred selection, lockdown today’s record-low interest rates, and start benefiting from both price appreciation and tax advantages,” said Tadashi Shiga, Executive Director of Realogics Sotheby’s International Realty’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.”

According to market analysts, developers are digesting 6-8% rises in construction hard costs, which increased even more during the COVID pandemic as a supply chain bottleneck impacted 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.”

In the meantime, apartment demand has been surprisingly robust in the first quarter of 2021, as many renters who may have relocated to exurban areas during the epidemic appear to be returning to the city, with some deciding to buy rather than rent this time. According to O'Connor, vacancy rates will continue to climb in 2021, as apartment deliveries will increase by 2,195 units by the end of the year, and by 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.”

The median age of a downtown Seattle resident is 37 years old, according to the Downtown Seattle Association. Millennials, contrary to popular assumption, are the greatest cohort of homebuyers in the United States, according to 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.”