2012 Seattle Condo Market in Review – The Year of Dwindling Inventory

As we start off 2013, every year in January we like to take a quick pause to take a look back and recap the major events, trends, and milestone from the previous year and for the heck of it, make some forecasts and predictions for the upcoming year.

Trends of 2012 and Events Worth Noting

We saw our condo market absorption rates increase and inventory dwindle to the point nearly all segments of our Seattle condo market were leaning toward a seller’s market with less than three months of inventory. 

Multiple offers returned but interestingly enough we did not see a sharp incline in pricing. This is likely due to buyers who were much more conservative and resistant to overpaying in light of the recent market crash. This could also be due to more stringent appraisal review practices by lenders, which many applaud.

2200 Condominiums in South Lake Union reached the largest construction defect settlement in state history with its developer for $26 million dollars.

We saw the return of investor buyers. An increase in all cash purchases seemed to indicate investors gained confidence in spending again.

Many newer condominium buildings entered litigation with their developers in accordance with the Washington State Condominium Act’s construction warranty time frames. This further limited available condo units on the market because units that are for sale in buildings with pending litigation have a very hard time obtaining buyer financing.

Short sale process time lines seemed to have become a bit more efficient and streamlined. Some outlying deals still took up to 9 months to a year to complete but most were much shorter. We saw many short sales go from offer to close in about 75-90 days, even with two mortgage lien holders.

Developer Vulcan caused a brief shutter when it announced it was selling all of the buildings that make up the South Lake Union Amazon campus. That shutter was pacified quite quickly when Amazon decided to go ahead and buy it to the tune of $1.1 billion dollars. Amazon further calmed our post-recession concerns by saying, not only will we buy your buildings Vulcan, but hey Clise family, we need another 3 million square feet, so let’s strike a deal so we can build three more buildings. Oh and we might need more, so let’s do an option where we have the right to buy some more of your land (and no, that’s not an actual quote but does illustrate the point).

What was going on with new construction in 2012?

• Overall most buildings were drawing to the end of their sales with only a few new units remaining for sale
• Marselle Condominiums in Belltown sold out
• Fifteen Twenty-One in Downtown reached a level of 97% sold with only 4 units remaining
• Olive 8 in Downtown reached a level of 95% sold with only 7 units remaining
• Hjarta in Ballard reached a level of 97% sold with only 2 units remaining
• Escala in Belltown reached a level of 82% sold which should be about 49 units remaining
• Insiginia Tower Condominiums in Belltown/Denny Triangle broke ground and is the first post-recession new condominium community in Seattle to do so- projected to be complete sometime in 2015

What were buyers doing in 2012?

• First time and repeat buyers were taking advantage of continued historic low interest rates and affordable prices
• Investors, local and foreign, were a larger percentage of the buyer pool than in the previous several years as confidence in the rental market, low interest rates, and affordable prices were a draw to would be landlords. According to Dupree and Scott vacancy rates for all rental types in the last quarter of 2012 was a 3.06% with 81% of landlords surveyed saying they plan to increase rents. That's markedly different from 2009 where their report showed vacancy rates at 5.87% with 11.9% of landlords saying they were increasing rents. Click here for the Rental Market Report. (Courtesy of Mike at Dupre and Scott www.duprescott.com)
• Both buyers and their agents were more open to short sales and more comfortable with the process as banks seemed to become a bit more responsive – perhaps due to federal regulations requiring it
• Percentage of FHA insured loans seemed to decrease – perhaps due to the return of more flexible and lower down payment conventional financing options that are typically cheaper for the buyer than an FHA loan and also due to several condominium projects losing their FHA approval status as high rental ratios and delinquent dues seem to have caught up with a few HOA’s during the recession
• Many who decided to rent back in 2010 and 2011 were facing sharp rental increases and decided it made more financial sense to buy

What were sellers doing in 2012?

• Refinancing their homes into low interest rate loan products – loan modifications seem to have all but vanished
• Many still held onto their condos and/or are renting them out hoping prices will increase so that they can potentially recoup even a little bit of their lost values
• Many decided to keep their condos because they feared they wouldn’t be able to find anything to buy due to low inventory
• Those that did sell, in some cases, saw multiple offers and saw their condos sell for more than list price
• Velocity of sales in completed new construction condos gave condo developers much more confidence in their newly adjusted prices and led them to be more firm on their pricing last year as most were nearing the final few units remaining (and none of them offered a smart car last year as part of a marketing campaign to attract buyers)
• No condo auctions last year
• Many sellers who had to sell still had to short sell their condos as they were “under water”

Wrap Up

Before we go into the outlook and my predictions for 2013, we should take another quick look at 2012. It was a year of slow recovery for market values in most segments, but shockingly low inventory levels led to, in some cases, very short market times and multiple offers. However, the down side is that it frustrated buyers and left sellers wondering why pricing still wasn’t getting markedly better.

The usual cycle of more condo listings coming on in the spring and continuing into summer amazingly never happened as condo inventory slowly declined through the entire year. The election had less of an impact on the market than many expected. But the good news was that year over year median prices did come up in the later months of 2012, likely due to buyers motivated by great interest rates, rising rents pushing some renters off the buy vs. rent fence, and the indication of prices increasing, not to mention the strong job market locally. All and all, 2012 was a year of slightly increasing prices, decreasing inventory, multiple offers, and low interest rates.

2012 By the Numbers (for Seattle Condominiums)

• 2,199 sales in 2012 in Seattle as compared to 1,738 sales in 2011
• 704 listings in January sunk to 366 in December

  

• 2012 saw 56% less listings than we saw in 2011
  
• Median price in 2012 went from $208,000 in January to $285,000 in December but was not a consistent upward growth 
  
• Median price year over year was higher in 2012 in 7 out of 12 months
  
• 2012 saw more sales per month in every month compared to 2011 despite having less inventory 
• We also broke these numbers out by neighborhood. For those of you who love graphs, they can be found at the end of the post : )

For 2013, I'm going to take a stab and make some predictions:

• Apartments to Condos? I predict we will see some previous apartment building developers announce they will be converting to condos. The low inventory has to be getting them interested in jumping into the condo development game again.
• Recent Vulcan developments and the expansion of Amazon will boost both buyer and seller confidence in the South Lake Union and Denny Triangle areas, as well as create retail opportunities. I think we’ll see new restaurants, bars, shops, and services announced in 2013 in these two neighborhoods. And in turn, I believe that condos in these neighborhoods will be in higher demand and see the highest increase in pricing.
• I also predict Belltown will awaken from its 3-4 year slumber as a real estate market numbers leader. Past concerns of increasing crime and businesses leaving will be overshadowed by no inventory.
• Investors will continue to be a big part of the buying picture but will need to be increasingly aware of the rental restrictions and occupancy requirements in the buildings’ they buy in.
• Condominium buildings with pending litigation and construction defect warranty repairs underway will further limit our available inventory as would be sellers in these buildings will not be able to sell as easily and for as much money. This would be due to buyers being weary of potential assessments and active construction we well as their lenders saying no thank you to approving loans in buildings in litigation or under major repair. However, local Lenders who can serve the needs of these condominium owners and buyers will be in high demand. If you know a lender that is willing to loan on building under major repair and or in litigation with a developer we’d like to hear about them.
• Shadow inventory of foreclosed properties (bank owned) – Really, where is it? Not sure that this fear is founded as we did not see the “flood” of bank owned properties come to the market in 2012 and I don’t think we’ll see it in 2013 either. Although we could use the inventory honestly.
• Buyers, frustrated by lack of inventory, will still want to buy and will take advantage of loan programs, such as the FHA 203K rehab loan or the conventional rehab loan, to allow them to customize the condo to their liking instead of sitting and waiting for the perfect condo that may never come on the market.

We wish everyone a happy and successful 2013 and as our condo market slowly recovers and we become accustomed to the “new normal” market I’m sure we’ll see some exciting things develop and witness some surprises as well.

By Marco Kronen with Seattle Condo Review: A guide to Seattle Condos and Downtown Seattle Condos exclusively for buyers and sellers.