The Seattle PI wrote a nice summary of the general local market conditions. Some good county-wide data in there. I thought I’d share what I’m sensing in the downtown condo market.
I’m seeing many buyers – especially first time homeowners – waiting on the sidelines out of concern that prices will fall soon after they buy. At the same time, many of my selling clients are only adjusting prices by a few percent (if at all) or deciding to lease their properties to an increasing pool of renters before putting their units on the market in 2008.
So who is left in the market today?
The most active buyers I’ve seen are experienced investors who are finding choice units at relatively reasonable prices and renting them out the day after closing. The next group of active purchasers seem to be well-heeled cash buyers delighted to have their pick of the litter without too much concern about multiple offers.
Everyone else seems content to play a game of chicken. Most buyers are waiting for major price reductions and most sellers are holding firm (some are making symbolic price reductions of 1-3%) or taking their units off the market in favor of renters. Seems like many owners prefer to try and sell in the spring instead of race to the bottom in the fall.
Another reason we aren’t seeing lots of big markdowns is it seems like many buyers have decided to sit it out till after the new year no matter what the prices are today. Even those listings with more material price reductions remain on the market several weeks later.
At the end of the day, I suspect the long-term investors / primary residence buyers will do well — especially if they pick a great unit / building and get it at a good price (a combination that was unheard of last year). The most impacted will likely be sellers who can’t afford to wait till next year to sell – they may need to make a big whack to the prices if they can’t afford to carry the negative cash flow of renting (assuming they bought so recently with little down payment that they don’t have a lot of equity).
Come next Spring, we’ll see how it actually plays out. I can think of 3 potential outcomes:
(1) pent-up buyer demand from a dormant winter leaps into the market all at once in March making all the buyers wish they had bought while the competition was soft in the winter;
(2) sellers cry "uncle!" and make big time (~10-15%) reductions off of 2007 prices;
(3) the market slowly gets it’s rhythm back and prices end up about where they are today +/- 2-3%.
If I were a betting person, I’d image door number 3 is most likely given the strong underlying strength of the Seattle economy and the owner safety net of a firm rental market.
What do you think?
I’m with #3 and expect it to grow 3%.
How are purchasers going to get the financing to buy condos at current prices?
Given the massive post-August (and continuing) tightening of lending standards, door #2 seems real optimistic…
most people aren’t having problems getting mortgages — unless they have sub-prime credit. The rest of us can still get a mortgage based on tech, professional services, and healthcare salaries not to mention downsizing baby boomers. So the question isn’t who can get mortgages but who is willing to pull the trigger and at what price? My bet is door #3 with flat pricing compared to now but i think it will be april / may before most people come back in to the water.
I agree with Ken. From what I have researched, it is only the subprime mortgages that are off the table. Other, more stable mortgages are available for buyers still. Lots of people seem to be confused about this. I also think that a lot of people are trying to wait out the market until prices “drop significantly” which, I don’t think will happen. They will probably remain flat however, possibly with small decreases.
The reason why people are confused about the mortgage crisis is the media has completely distorted the story. If you ever watch that moron Gerri Willis on CNN’s Open House, you’ll see what I mean. To listen to her, you’d think we’re in the middle of a depression. One example is she loves to talk about foreclosures as if some % of foreclosures isn’t normal.
Dave, check out http://www.mortgagebankers.org/NewsandMedia/PressCenter/56555.htm
Delinquencies are up. Foreclosures are rising. We can talk about how they’re distributed regionally and by income group, but the current situation is definitely not “normal.” Can we use more respectful language than “moron,” especially when Ms. Willis seems in better command of the facts than you?
The really interesting part here is the interaction with the rental market. If rental demand is strong enough that investors can buy and rent and get a positive cash flow, that’ll put a floor under prices. OTOH if rental rates drop and those investors have to liquidate, prices could fall rapidly. I wonder how much financial leverage these “experienced investors” are using.
Will the current difficulty in getting jumbo mortgages prop up the more expensive end of the rental market, as buyers rent instead? Or will it mean an oversupply of unsold expensive houses for rent?
To declare my interest I’m a potential buyer who is now renting, and you can bet I’m holding off until mid-2008.
OK Colin. Here’s some local data for you. Like politics, I firmly believe all real estate investments are local.
http://seattlepi.nwsource.com/local/332120_foreclosure19.html
You wondered about the financial leverage of experienced investors. I think well capitalized investors aren’t too dependent on borrowing from mortgage companies. Moreover, they are thinking long-term (~5 years) and probably need a place to park some of their assets so I suspect they should be ok even if the rent doesn’t cover what a fully financed purchase would cost. People with means are generally looking for long-term appreciation and can cover short term operating costs.
I am not quite in that income bracker but I did rent out a condo of mine recently and found a tenant the same afternoon I posted it on craig’s list. Since I already had a lot of equity, my renter covers my payments while I wait for the market to firm up.
I think it’s a coin toss on whether you should buy now or wait till everyone comes back in the spring. I suppose if you expect the price of your eventual purchase to go down greater than 8 X your current rent plus 8 X the forgone tax shield you should be fine. I think the opportunistic buyers are coming back already but we won’t know till next year if they were shrewd buyers or overly bullish.
And as for Ms. Willis, if you’ve ever seen her, you’d agree she really doesn’t know what she’s talking about. Nevertheless, I respect you coming to her defence when I called her a moron (which she is.)
Without the expectation of a return at least slightly better than your costs of capital, it makes no sense to buy when the cost of buying vs. renting the same unit is higher. The differential between the cost of renting and the cost of owning will help determine the exact spread between mortgage rate and appreciation one would need to break even. (I should add there has to be some assumed investment return on mooney saved by renting) People don’t tend to stay in condos very long, so this pricing relationship is very important, especially for first time buyers w/o a large amount of equity and for whom buying a condo constitutes a major financial commitment.
So what are the odds of picking a place that will appreciate at a rate significantly higher (1-2%) than your mortgage rate over the next two-three years?? I’d say very low. I’m technically “in the market” in that have a good income and want to live in the City for a while, but the math just doesn’t work. I’m expecting the market to bottom out mid-late 2009, after the majority of ARM resets have passed. Until those pass, I think there will continue tobe downward pressure on the market.
Meanwhile, despite the push upwards in rent, I can get about anything in the city for $2.25psf, or about 65% of the cost of a new construction condo. We’d need 5-6 more years of strong rental growth and 0% price appreciation to bring that equation back near equilibrium
OK, so I ran some numbers and here’s where I end up. I’d be curious if this is similar to the numbers others are running. Chris: I think the big number you forgot in your analysis was the income tax shield from the interest deduction. Consider the case where you rent for the next 2 years at $2,000 for a 900 square foot 2BR. In this case, you spend $48,000 on rent over 2 years. Now compare that to buying a similar unit at $450k, 6.8% mortgage interest, $3k in annual tax, and $5k in annual homeowner dues with a marginal income tax rate of 28% and selling costs of 8.5%. After the interest tax deduction, you end up paying $59k over the 2 years in interest, taxes, and dues. If you sold after 2 years and the property appreciated 6% each year over the 2 years, you will break even versus renting. Moreover, if you rent for 3 years versus owning and appreciating, you break even once you hit 4% in avg annual appreciation. In fact, at 6% annual appreciation, you’d net $22K in net profit (at a best case 8% appreciation, you’d net $50k). So if you think there is at least 4.3% annual appreciation over the next 3 years, buying is an attractive investment over renting. Not a slam dunk but not nearly as bad as everyone seems to make it out to be.
Dave you forgot two key parts of your calculation. You need to assume there is a downpayment for the owner, otherwise you forgot to include the PMI. If you rent, that downpayment can be put in a stock market index with an estimated (not guarenteed) average rate of 8-12% return. Furthermore, you forgot to calculate the difference in the monthly rent payments from PITI and putting that money as well into the stock market.
All these factors combined would paint a prettier picture for renting over the next few years assuming the rate of appreciation you listed.
Also note that the standard deduction is $5,000 ($10,000 if married). Unless you have other deductions that are larger than the standard deduction, a portion of the mortgage interest deduction is going to go to offset the standard mortgage amount, thus reducing your tax benefit.
Read “standard deduction” for “standard mortgage amount” in the comment above.
Good points.
I purposely didn’t count the down payment and assumed 100% financing to capture the full cost of capital = mortgage rate of 6.8%. I suppose you could imagine 8-12% opportunity cost of not putting the down payment in the stock market but that seemed too aggressive and I’d still need to deduct capital gains on the stock if I were to sell the stock next year for the condo down payment.
As for taking the savings from rent and putting that into the stock market as well, I didn’t do that but the difference wasn’t too big and again, I don’t think it’s conservative to assume you will make money in the stock market over short terms.
One other thing I should call out is I assumed no increase in rent over all the periods which I think would have favored the purchasing option even more.
Nevethertheless, it comes down to whether we think condo prices will go up or down in the future. Based on the pricing we’re seeing relative to other major metro markets, I’m betting the answer is prices will move up over the next few years but I agree if people think prices will go down, renting would be a logical option.
Thanks Dave for going to the work of running numbers and to other commenters; this is very useful and clarifying. Yes, it does seem to come down to expectations of appreciation of local real estate versus other investment options, as well as whether your overall portfolio is going to be overweight in real estate with a half-million condo.
One of the things I’m noticing, somewhat like Chris, is that at current prices, to shift to owning with comparable or even slightly higher monthly payments, I’d end up in a significantly smaller, uglier, and less well-situated place.
Re appreciation it’s also a question of just how special Seattle is. On the plus side you have a mature tech sector, export industries that should benefit from a declining dollar, ongoing downtown development, and our ineffable urban charm. On the negative side tech may be due for a modest correction and a nationwide recession would still take a toll here.
Two questions: is there data on how many ARMs there are in Seattle? And in the experience of those of you who deal with these investors, are they people with varied enough assets that they can easily generate cash, or are there signs of overextended speculation?
From everything I’ve read, the use of ARMs, subprimes, etc, is almost as prevalent here as it is across the nation, but rising prices here – unlike most everywhere else, has masked the problem.
Once prices stabilize that game doesn’t work anymore.
…..Over the long haul, close in neighborhoods will do well. But my investment horizon for a condo is not long term so I can’t afford (well I could but it would suck) to put myself in a situation where I buy now and am underwater for 2-3 years. Buying and waiting out the dip when you know your at the top of the market makes little sense. So, I’m looking for a right-minded developer who knows that to sell units they need to price units with the expectation of prices being lower than – or minimally equal to todays prices in 2-3 years. I’m keeping an eye on some condo conversions where I sense the margin on cost is such that there is an opportunnity to price at a discount to market to move units.
At the risk of ranting here…Most individual sellers now are delusional. There’s a condo next door to my apartment in LQAnne that’s been on the market for 120+ days, but the price is totally out of line, IMHO. The agents need to talk some sense into the seller. …and the concept that the market will be better in the spring is absurd because a) downward pressure from ARM resets b) we can see what’s happening to our south and its steay progression up the income chain, we can see what’s happening in downtown Portland, and c) macroeconomics are not looking good with potential recession in the offing
It’s all about supply and demand.
I live on the Eastside, but work downtown Seattle, so I get to see both the condo market and the Single Family houses. The Eastside SF houses on the market are beginning to have new signage stating “4SalebyOwner”, “New Price” or “Reduced Price” and the for sale signs are cropping up left and right. It is going to be a long winter for some of the sellers.
Once the hole is dug for a condo project, the developers are going to have to complete it, unless they pull a trick like in SE Asia several years ago and stop the construction in midair. Therefore, based on the announcements and the constructions started to date, the number of condos in downtown Seattle or Bellevue will be aplenty come 2008 and 2009. The old saying about condos: “Last to go up in price and the first to come down” is generally true. The incentives being offered by the condo developers are beginning to get more and more generous, just read the newspaper ads on the weekend. While the price concessions are still small, the effective discounting is being disguised by waiver of HOA fees for year or two years, mortgage points buy down and upgrades in finishes – the usual tricks. I’d imagine that the reality of a major slowdown in Seattle will hit the condo developers come next Spring and no later than summer of 2008 when all the potential buyers will be on vacation. Most of my friends are wondering where we gonna to find all the buyers for the $500K to $1.0MM 800 sf condos? From California?
I’d vote for door #2.
I’m voting for Door #3 for condos currently less than $500k and Door #2 for prices from $501k to $1M. Maybe Door #1 for >$1M condos if the baby booming downsizers and overseas investors continue snapping it up like they have been.
If the stock market and local economy continue to grow, it might be Door 1 for everyone. I think it comes down to the Seattle business growth and overall national economic health which if strong next year, will easily drive up demand for nice condos downtown.
It all comes down to whether your bullish on NW tech, healthcare, boeing, and the national economy. If you are, buying now or later will be good moves long term (anyone who claims to be able to time the market hasn’t tried before). If you aren’t, then the only safe place for your money is bonds and precious metals (e.g. real estate prices and stock markets move up and down in tandem so if you’re bearish on property, the last place to escape is the equities market).
actually, despite all the attention msft and boeing get, it’s the healthcare sector that is driving up condo prices and the rest of the economy than any other.
http://www.cityofseattle.net/oir/datasheet/economy.htm
i read this comments and it makes me laugh sometimes…I started to buy real estate since 2003, at the age of 23 with no money in my bank account, I did 80/20 loans at the time and took a huge risk…over the past 4 years, I purchased 6 properties. So while some of you wait to buy a property and waste your money on rent, and wait to see when the prices will drop, I made more than 500k in equity. I doubt I would make that in my 401k, earning 5%. So, I will continue to invest, even though the market has slowed down a little bit, so what!!!!
And Condoowner has summed up all that was wrong with RE. I wonder if the run-up was fueled by people with no money, 80/20 loans with huge risk, and the irrational fear of being priced out forever?
Nah, it’s because they aren’t making any more land.
condoowner: i agree real estate, especially downtown condos, are a great asset to hold. but, surely you’d agree the past four years were extraordinary and the next four will show nice steady appreciation but not the kind we saw in 2003 – mid 2007.
David, I do agree with you, it won’t be as hot as it used to be. I guess you just have to jump on the opportunity while it lasts. Amused Onlooker, I bet Donald Trump with think otherwise…
“I bet Donald Trump with [sic] think otherwise…”
Given Donald Trump’s investment record (can you say multiple bankruptcies?), I wouldn’t rely on him as an authority. His only real business skill is self-promotion.
If you want a good role model, I prefer Warren Buffet and his buy and hold strategy. Not nearly as sexy as buy and flip but almost always is the right call for most assets — especially real estate in growing metropolitan areas. When you look at it in that lens, buying a condo is like a bet on Seattle (which I personally think is good and even great if you take a 5 year time horizon).
Donald Trump never claimed bankruptcy for his personal properties, it is the companies he owns. Sometimes it’s the right thing to do.
That’s a fair point. Although I suspect a lot of condo readers won’t set up corporations to run hold condo investments (though it’s probably a great idea for a number of reasons).
All of you are overthinking. If you are looking to invest for short term profit you’ve already missed the boat. Don’t quit your day job. The second boat is here for those of you thinking about buying a condo for a primary residence. If your waiting for the third boat because you think it’s foolish to pay these prices then a downtown condo is not for you. If you think it’s too expensive then what’s there to think about. Are you in or are you out?
Gordon is right. That third boat ain’t coming and I suspect the people hoping it will come are bitter they sat out of the market the last few years. In fact, the smart second boaters should buy asap before everyone sitting on the fence jumps back in and the appreciation resumes in 2008.
If appreciation above the rate of inflation occurs next year, than this cycle will be different than previous stair-step appreciation cycles in Seattle. The tightening of credit standards is very similar to what happened when the savings & loan industry went bust in the early ’90s. There was very little appreciation between ’91 and ’95. But don’t take my word for it – go to http://www.kingcounty.gov and use ParcelViewer to look at excise tax records for the pre-1984 downtown condos as they were resold during the early 90s. You can even buy an export of the sales data on a CD (that’s how Zillow gets their data). You can load it into your favorite database server and then run SQL queries against it.
I bought my condo in 2003, so I’m not one of the bubbleheads waiting for prices to crash. I just find it very hard to imagine that this time will be different — especially given how loose credit standards became — and that the new developments will be able to charge $900+ per sq feet for non-penthouse units.
Eric, I think you may be overstretching there. $900 per sq foot sounds off. E.g., Gallery is starting at $550 per sq foot. I wouldn’t read too much into the ultra premium condo pricing. That’s like looking at first-class airline rates and concluding all air travel is too expensive.
Right, $900 per sq foot sounds like way too much. But there are a lot of units that are listed for prices near that:
* Enso 1503 is $860 (and presumably so are the other units that are available but are not on the MLS)
* most of the remaining units at Olive 8 are $930+ per sq ft.
My current condo (which I bought for $367 per sq ft) has an unobstructed waterfront view, so the only condos that I’m interested are the ones with the best water views in the new concrete-and-steel developments. Why would I take on the risk of buying another unit if it wasn’t at least an improvement over my current condo?
I’ve gutted the kitchen and bathroom in my condo, and I know how much my slab granite countertops, carrara marble tiles, and high-end appliances cost. The price per sq ft for the condos _near_ the top of the new towers is not justified based on the finishes alone. Barry Sternlicht even admits that the prices they’re charging for ‘1’ residences are heavily marked up.
It seems like most people commenting here think that the slowdown in prices will be over by the end of 2008. That seems too short given the magnitude of the appreciation, so I’m going through the extract of the data I got from King County back in 2003 to see what actually happened to downtown condo prices between 1982
and 2003.
Someone needs to do an analysis to see what prices did in the early 90s, and since I already paid for the data, it might as well be me. I’ll post a link once I’m finished. It takes a while to go through 2,500 transactions to filter out the misleading ones (quit claims, extra parking spaces, etc.)