Why you should NOT rent a Luxury Apartment in Seattle


Median Home Price of Downtown Seattle Condos Rose 13.36% in 2016; Renters are “Vying and Buying”

A report by Realogics Sotheby’s International Realty (RSIR) in collaboration with Caliber Home Loans and real estate appraisal firm O’Connor Consulting Group determined an aggregate $60 million in income tax deductions were missed in 2016 by 12,562 tenants that occupied newer apartment units built since 2010 in downtown Seattle alone.  This new rental supply compared to just 866 new condominium units delivered during that same period, all of which are sold.  Rising demand to own a downtown condo and tight supply spurred a 13.36% year-over-year median home price increase last year.  Had these aforementioned tenants owned their homes they might have enjoyed equity gains of more than $600 million, says experts.

“Capital appreciation offers a 10:1 benefit ratio over interest deductions right now,” said Dean Jones, President and CEO of RSIR.  “As rents and condo values rise, renters are further motivated to become homebuyers.”

Jones admits that condo selection is anemic – especially at attractive price points where mortgage payments are similar to prevailing rents.  By example NEXUS, a 382-unit condominium high-rise experienced sales on 286 units by its public sales debut weekend on March 18 and 19, promptly selling out of inventory priced below $900,000.

The buy vs. rent analysis assumed an average apartment rental size of 750-sq. ft. and explored a like condominium having a median value of $625,000.  Assuming a 5% down payment, which is possible for approved credit and conforming loan limits, the principle and interest on a typical loan would average about $3,200 per month excluding HOA dues.  Now provided the borrower had a taxable income of $100,000 per year and approximately $25,000 in interest payments were deducted, the average tax savings would be around $5,000 per annum over renting a similar home.  Researchers acknowledge every tax payer has a different profile so numbers provided therein are subject to change.  The report also trended more modest equity gains of 8% year-over-year, or $50,000 on a typical $625,000 one bedroom home while the broader market posted even greater gains at 13.36%.

“Fear of inflation is prompting prospective renters to explore ownership,” said Carese Busby, a Mortgage Loan Consultant with Caliber Home Loans. “Rates remain historically low and many of our borrowers can fix their total monthly housing costs similar to what they were paying in rent.  They also enjoy income tax deductions instead of facing rent increases or moving every few years.”

To be sure, many prospective homebuyers are residing within apartment towers. Meteoric job growth in markets like downtown Seattle is drawing thousands of new residents a year, creating unprecedented demand for rental housing at first.  Brokers say it typically doesn’t make sense to buy if you are not committed to staying put for more than three years, but Jones notes the apartment boom began five years ago so many tenants are now vying and buying in today’s competitive market.

Heightened demand to own is creating multiple offer environments at price points below $800,000 throughout the metro area.  As of March 2017, the Northwest Multiple Listing Service reported the median home price in the City of Seattle reached $700,000 for the first time, doubling in value over the past five years.

“Apartment owners will lose tenants to home ownership but these units are quickly filled by new tenants and typically at even higher rents,” said Brian O’Connor of O’Connor Consulting Group. “This will continue provided consumers see appreciation in home prices.  The challenge, however will be finding affordable options to purchase as it’s difficult for developers to pencil large volumes of units at lower price points. Both land values and construction costs are rising.”

A recent CNBC article quoted self-made millionaire David Bach as encouraging Millennials to prioritize homeownership noting it’s “an escalator to wealth”.   Specifically, he warned: “If Millennials don’t buy a home, their chances of actually having any wealth in this county are little to none. The average homeowner to this day is 38 times wealthier than a renter.”

In his book The Automatic Millionaire he writes: “As a renter, you can easily spend half a million dollars or more on rent over the years ($1,500 a month for 30 years comes to $540,000), and in the end wind up just where you started – owning nothing.  Or you can buy a house and spend the same amount paying down a mortgage, and in the end wind up owning your home free and clear!”

Bach says a good rule of thumb is to make sure your monthly housing payment doesn’t exceed 30% of your take home pay.  That makes things easier for local consumers in the Seattle region, especially for well-funded tech workers.  They concluded that Seattle techies retain 21-30% more of their income after housing when compared to Portland, San Jose or San Francisco, helped in large part by higher incomes, the lack of state income tax and lower housing costs.

“The downtown Seattle housing market flip-flopped to rent from a for sale market a decade ago,” adds Jones. “Between 2005 and 2010 we saw almost exclusively condos being developed with 3,671 units delivered, albeit 777 were reverted to an apartment use given the credit crunch after 2008.  A decade later we’ll be lucky to see 3,757 units delivered for sale and that’s assuming some new projects decide to go condo. Instead we’ll see an estimated 19,597 new apartments delivered – more than five times what’s built to own. It seems demand to own new condos is rising faster than the development.”

 SOURCE: O’Connor Consulting Group and Realogics, Inc.

SOURCE: O’Connor Consulting Group and Realogics, Inc.

Thank you for reading! 

Austin Schneider | Realogics Sotheby's International Realty | 206.910.2324 | austin.schneider@rsir.com

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