Median Home Prices Skyrocket on Supply and Demand Imbalance of “For Sale” Housing
An article “Does Latest MLS Data Mean More New Condos?” by reporter Brian Miller of The Daily Journal of Commerce pulsed several real estate experts about the return of new construction condominiums in the pipeline and NEXUS, a new 374-unit condo tower was referenced as an active demonstration of demand. He’s also responding to news from the Northwest Multiple Listing Service that median home prices for condos in King County jumped nearly 18% to $350,000 year-over-year in July 2016. It’s a timely discussion considering July 2007 was broadly viewed as prior peak of the Seattle area housing market – by most accounts the region is now setting new values for home prices on tight supply. Nowhere is this supply and demand imbalance more evident than in downtown Seattle.
Dean Jones, President and CEO of Realogics Sotheby’s International Realty, anticipated this summer sales surge more than a year ago in a special editorial called “The Manhattanization of Seattle,” as published by The Puget Sound Business Journal. To be sure, specific analysis of downtown Seattle condominium sales in July 2016 reveal median home prices actually increased 32% year-over-year to $682,300 and 52% higher than July 2007, the pre-recession market peak when prices were $449,900.
In the article, economist Matthew Gardner was quick to point out that such a spike in home prices for a single month can be misleading. He referenced the significant closing activity of new construction projects, like INSIGNIA (effectively the only new project for sale with active closings since the last development cycle, which ended in 2010). This was anticipated in Jones’ analysis a year ago. However, there is still a rising trend in downtown Seattle condo values even when removing new construction completely from the equation and when taking a much broader view of the market.
According to NWMLS data, January through July median home prices sales activity in downtown Seattle without INSIGNIA closings in 2015 and 2016, rose 17% to $525,000 year-over-year on exactly the same unit volume of 302 closings. Interestingly, this is slightly less sales volume than 2007 when 324 units closed, yet the median home prices in the resale market today are still 25% higher than the previous peak even without the spike of new construction closings.
Both pundits agreed that demand remains greater than supply and Jones expressed confidence that “the market will digest it” despite an increase in new construction of condominium towers in the years ahead. The issue of limited supply isn’t so much a product of perceived demand at all, moreover the overwhelming preference of developers to build apartments instead of condominiums within a rising market. If a developer can build an apartment tower without the liability associated with a condominium and sell it profitably to a single investor instead of to hundreds of consumers then that wins the day. Since the market correction and credit crunch of 2008 only two new construction condominiums have been built in downtown Seattle including INSIGNIA – a 698-unit twin tower development, which broke ground in 2012 and began closing in 2015, and LUMA – a 168-unit tower on First Hill, which broke ground in 2014 and will begin closings this fall. In total, just 866 new construction condominiums were introduced in downtown Seattle compared with a total of 12,245 new apartment units delivered between 2011 and 2016, according to O’Conner Consulting Group – a leading research firm that tracks all housing permits in the region. That means that “for-sale” housing represented just 7% of the total new housing stock between 2011 and 2016.
“The condo market overcorrected,” adds Jones. “Prices will continue to rise because developers have built far more apartments instead of condominiums for a variety of reasons and it will take years to catch up. Unlike San Francisco where developers have built condos 10 to 1 over apartments, in Seattle we’ve taken the opposite approach. Given that our economy is starting to look more and more like San Francisco, I fear our prices may soon match as well.”
Jones is tracking new condominium projects in the pipeline but says that will have little effect on the rising home prices, in part because it’s so expensive to build the new towers. Developers will have to charge more to pencil the projects. He also believes the number of buyers will increase lockstep because an increasing percentage of new residents currently renting in the nation’s fastest-growing rental market will seek homeownership. Also, new benchmark values achieved in the surrounding single-family neighborhoods is allowing patient sellers to harvest equity from their homes and downsize.
“If it all gets built and if it’s all offered for sale, we may experience a similar boom of condominium supply between 2015 and 2020 as we did between 2005 and 2010,” reports Jones. “The difference this time is we’re in a fundamentally stronger market than a decade ago. More than a third of this new supply is already spoken for between presales and reservations.”
Another determining factor in the approaching condominium market is the state of the mortgage lending. Unlike the past development cycle when many buyers were speculating and mortgage underwriting was notoriously loose, today’s buyers are much more qualified and many are buying with all cash.
“All of our reservation holders are being pre-qualified through our preferred lender,” said Michael Cannon, Sales Director of NEXUS. “The substantial majority of our buyers are eager to make NEXUS their principal residence – we are specifically limiting the number of condominiums sold to investors.”
Cannon says many of his buyers are currently renting in the downtown area and are attracted to buy because of the low interest rates and rising real estate prices. With rents now topping $4.00/square foot per month in the city, he says it can actually be less expensive to own than lease a home, not to mention the tax advantages and the propensity for capital appreciation.
“It’s clear to me that consumers are increasingly desirous of new inventory they can own and they are willing to pay for it,” adds Cannon. “The question is whether we’ll find more developers willing to build it.”