Puget Sound MultiFamily Real Estate Blog

By Melanie Kershaw

Let’s face it, Seattle isn’t about to land itself on any hottest lists of affordable places to invest any time soon. But a lack of bargains doesn’t mean that there aren’t opportunities to be had. For those who own Seattle property or find a suitable investment in this area, homes attract high average rents and opportunities for consistent returns and appreciation. With single-family homes enjoying similar returns to the stock market without the same level of volatility, stable “Tier 1” markets like Seattle could be an attractive option for your portfolio. 

Late last year, Redfin reported that Seattle was the fastest-cooling market in the U.S. As an already expensive city to buy into, the extra heat in the market turned out to be unsustainable as interest rates and inflation began to bite on large mortgages. The good news is that more bargaining power was finally available to those that do have the capital to get into the Emerald City.

Only you know your financial situation and what you can take on, so this report is designed to support your research with an indication of average rents and the current state of the rental market in Seattle, including:

• Are Seattle’s cooling real estate prices enough to lower the barriers to entry?
• How does the median price of homes in Seattle compare to similar Tier 1 cities?
• What kind of rental income can I expect from a property in Seattle?
• When is the best time to list a Seattle rental to achieve the highest rate?
• Will the tech downturn affect real estate in Seattle? What are the other macroeconomic factors to consider?

Are Seattle’s Cooling Real Estate Prices Enough to Lower the Barriers to Entry?

Like most Tier 1 markets, investing in Seattle can be challenging due to high entry costs, especially for those needing a mortgage. This is why the market is cooling, with debt costing twice as much as in recent years. A price reduction in a hot area should be a cause for celebration for would-be investors, but not in this instance. Even a 5% drop in prices isn’t going to make the area more affordable if you need to take out a mortgage at a 6% – 7% interest rate. 

Additionally, demand exceeds supply, making Seattle a seller’s market with low inventory. Homeowners with good fixed interest rates are unlikely to sell unless necessary.

How Do Median Prices in Seattle Compare to Other Tier 1 Cities?

According to realtor.com, the Median Listing Home Price in Seattle is $780,000, with the Median Sale Price of $750,000. Most homes are selling for close to ask, indicating a seller’s market. 

If you look at other Tier 1 west coast cities like San Francisco, the Median Listing Home Price is $1.3M, some $520k higher than Seattle. 

Although Seattle may not offer a quick profit, it’s a viable option for investors who can’t afford other Tier 1 cities. With stable renter demand and long-term growth potential, owning a home in Seattle could be profitable, but less so for short-term cash flow.

What Kind of Rental Income Can I Expect in Seattle?

The ROI and cash flow of a Seattle property depends on mortgage expenses, appreciation, and tax benefits. Despite recent fluctuations due to the pandemic, Seattle properties have generally appreciated very well over time. 

According to NeighborhoodScout, Seattle real estate has appreciated by 137% over the past 10 years, with an average annual home appreciation rate of between 5.69% and 9.02%, placing Seattle in the 10% for appreciation in the U.S. 

With interest rates still climbing at the time of publication and some areas hotter than others in terms of demand, you will need to run a new cash flow analysis on any rental property or potential purchase to get an accurate view of your ROI. Below we have compiled some averages across the Seattle metro area to get an understanding of what you might expect to see. 

Belong, who partners with owners of single-family homes, apartments, and condos, has seen average rental rates between $2,476-$3,305/month for the Seattle market over the last 12 months. 

How does this compare to other Tier 1 markets? Looking at San Francisco again, single-family homes and condos on the Belong Bay Area network rent for an average of $3,754. When you consider that the average price of a home in S.F. is around $520,000 higher than in Seattle, it highlights the favorable cap rates and potential for a strong return on investment. In the Bay Area, you would be hard-pressed to find a neighborhood with SFHs that average for less than a million dollars, whereas Seattle still has cheaper entry points around the $500k – $600k mark.  

According to Belong partner, Zumper, median rents are up 6.2% YoY in March 2023, trending up from last month. The breakdown by housing type is:

• Studio: $1,477 (+14% YoY)
• 1-Bedroom: $2,021 (+7% YoY)
• 2-Bedroom: $2,795 (+4% YoY)
• 3-Bedroom: $3,330 (+0% YoY)
• 4-Bedroom: $3,700 (+6% YoY)

According to the latest U.S. Census data for Q4 2022, rental vacancy rates in the Seattle/Tacoma/Bellevue area are sitting at 4.7%, down from 5.7% in Q1. This is consistent with neighboring cities of Portland/Vancouver/Hillsboro, with a vacancy rate of 4.8%, down from a high 6.1% in Q1. 

When is the Best Time to List a Seattle Rental?

Like most cities along the west coast, Seattle rental prices are seasonal. As the chaos of the pandemic cools off, we’re seeing a return to peaks and troughs of seasonal pricing that weren’t experienced during the up-and-up rent climbs. 

While Seattle is famous for its rain, it’s also famed for its incredible outdoor lifestyle and walkability, which sees a peak in demand across summer when there’s plenty of sunshine and blue skies. Seattle enjoys the same peak in rental pricing around August that we witness in other Tier 1 markets across California. In fact, August is the best time to attract top dollar for your property in Seattle, according to Belong data (pictured below), with the average rent peaking at $3305. Seattle is also home to many desirable school districts, so larger family rentals in these areas attract hot competition and rents in the lead-up to Semester 1 in September.  

Comparing Belong’s data to a wider data source such as Zillow (which includes multifamily and apartments in their numbers), their market trends show the same peak in Summer, with average rents peaking between $2,450-$2,461 in the August/September period.  

That’s not to say that investors renting out a Seattle home in winter will take a huge hit. Even as the average rate dips seasonally, Belong homeowners still get an average monthly rate of $2,500-$3,000 during low months like December. 

March is also a strong month for rents, and if this trend continues, rents will remain stable before peaking in August. If you plan to enter the market, you have time to prepare and benefit from higher prices in a few months. 

What are the Other Macroeconomic Factors to Consider?

Interest rates aside, what other macro factors should be considered before investing in the Seattle metro area?

The Seattle metro is:

• One of the top five cities for household income.
• A city with a low unemployment rate but is experiencing anxiety around layoffs.
• Being hit harder by inflation, with rates higher than the national average.
• Still experiencing low rates of mortgage delinquency and foreclosures.
• Investing in transportation to close gaps and improve accessibility.

Seattle is an affluent area, with residents earning a median household income of $105,391, according to the latest Census data. This ranks the city fourth among the 100 largest metro areas in the U.S.

This is largely fuelled by a lucrative job market. If you look at the Redmond area, median income jumps to $147,006—unsurprisingly, given it’s where Microsoft is headquartered. It’s hard to look at macro factors influencing the Seattle real estate market without discussing the current tech downturn. Could industry layoffs put pressure on homeowners or lead to distressed inventory on the market? 

Microsoft, Amazon, Meta, Salesforce, and Google have all made employment cuts affecting Washington-based workforces. In fact, Seattle is said to have some of the highest layoff anxiety. But while tech has driven much of Seattle’s growth in recent years, the local economy isn’t vulnerable to this industry alone. 

U.S. News recently examined the Seattle unemployment trends and found that the rate of unemployment in Seattle is lower than the national average and that the rate of foreclosures remains low. Only 1.5% of mortgages are reported to be delinquent in the metro area, and 0.1% have active foreclosure filings. 

The Economic and Revenue Forecast Council released their March 2023 results, stating that while the overall unemployment rate began to rise earlier than anticipated in 2022, employment also increased by 16,300 in November and December—3,800 more than forecasted. They also noted that consumer price inflation in the Seattle metro area continued to exceed the national average in the year ending in February 2023, adding to the cost of living pressure for residents.

For existing landlords, this high inflation, layoff anxiety, and uncertainty in the market may cause workers in the industry to postpone trying to buy a home and rent for longer. Seattle is already home to more renters than owner-occupiers, sitting at 55% renter-occupied in the last Census. For those looking for an in, these layoffs haven’t yet created a flood of distressed housing stock on the market. That may change if economic conditions worsen, but it’s worth noting that the tech industry typically employs skilled workers and gives generous exit packages, which softens the blow to the local economy. 

Another notable factor is transportation. The SoundTransit system expansion will see improved accessibility across Seattle, impacting the value of local real estate as it becomes easier for people to get into the city. Investing in real estate in these areas (such as Lynnwood, Shoreline, Everett, and Marysville, for example) before the transit system is completed could provide a lower entry point with an opportunity for higher rent and home appreciation over time as access to amenities improves.

By Chelsea Shapiro, Sr. Broker

Seller Solutions: "I've sold my property... what now??"

We are frequently asked about post disposition investing and tax strategies, and the answers have become more complicated recently. Here's a few strategies that we've been diving into lately and have compiled resources for our seller clients: 

Exchange into a DST (Delaware Statutory Trust): These count as a 1031 Exchange and often offer better returns and a hands-off investing experience.  It is a ownership structure with multiple investors, but investors still maintain an undivided fractional interest in the holdings of the trust.  The benefits include tax benefits just like other real estate investments, passive income potential, access to larger deals and asset classes that usually are not accessible to the average solo investor.  We do not facilitate these deals inhouse at Sound Realty Group, but have relationships with several reputable companies who do.  We’re happy to share more info on DSTs and/or connect you with exchange strategists who can go over the details more in depth. 

Invest out-of-state: We've been tracking the best markets outside of WA to exchange into. Here’s our list of top 5 growth and recession-proof markets with cash flow opportunities: 

• Ohio - Columbus and Cleveland 
• Kansas City, Missouri 
• Florida - Jacksonville, Tampa, Miami
• Birmingham, Alabama
• Myrtle Beach, South Carolina 

We have an extensive network of out-of-state agents and brokers and have developed relationships with agents in each of these markets.  We’d be happy to put you in touch with any of them and/or pass on details about deals they have shared with us in their markets.  Here’s a short list of articles and data that helped us pinpoint these specific markets. 

https://www.biggerpockets.com/blog/best-housing-markets-in-demand

https://www.biggerpockets.com/blog/best-recession-proof-markets

https://www.biggerpockets.com/blog/states-without-property-taxes

Seller Financing: a great way to spread out the cap gains tax and get an additional return on your equity.  We’ve structured several deals that had either all or partial seller financing and there are so many creative options in this space that range from short term scenarios to notes lasting for several years.  With higher interest rates it often creates a scenario where a buyer could enjoy a lower interest rate than what a bank will provide therefore enabling them to pay a bit more for the property.  For the seller it means they can spread out their gains over more than one year and typically seller carried interest rates will be higher than returns they would see in other assets.  

State of the Market: 

We’re sifting through the data for 2022 and looking ahead at 2023 and wanted to bring you the stats, takeaways and predictions of the multifamily market in the Puget Sound Region.

Our Team: had a great 2022 with lots of highlights:

• Ranked #1 in closed multifamily transactions in the tri-county area
• Onboarded a Rockstar Operations Manager and welcomed 2 new associate brokers
• Relocated the Seattle office to West Seattle and opened an expansion office in Woodinville
• We’ve mapped out some great goals and strategies for 2023, so despite market conditions we are ready to help you with your next investment!

The General Market:

Real Estate in 2022 nationwide can be described as a tale of two markets with everything hinging on interest rates. January through June was very much a Bull market with buyers flocking to the market to take advantage of the last chance at low rates. Bidding wars, escalating prices and waived contingencies characterized the frenzied seller’s market.

• In Jan 2022 the 10 year treasury was at 1.63% and interest rates for most buyers hovered in the mid to high 3% range.
• June’s rate increase hearkened a much different market which has drastically changed the landscape and is indicative of a more Bearish market.
• The 10 year treasury finished the year at 3.8% (after peaking at 4.25%) landing interest rates in the 6 and 7% range for multifamily purchases.

The Tri-County/Puget Sound Region:

The tale of two markets was apparent in the stats from King, Pierce and Snohomish Counties. (For reference, inventory is measured by months with 3-5 months deemed a “balanced market” and anything lower is a “seller’s market,” anything above that metric would be a “buyer’s market”).

• Jan 2022 had just 1.1 months of inventory available
• This ticked up sharply in June following interest rates and peaked in October with 4.9 months
• Dec 2022 ended with 4.1 months of inventory, not quite enough to be a true buyer’s market, but a vast difference from the extreme seller’s market that characterized the first half of the year.

Similarly, the ratio of list price to sold price is a good indicator of market trends.

• Jan 2022 saw multifamily listings selling for 112% of the list price
• This dropped below 100% in June
• Dec closed out the year with listings selling for 95% of the list price.

• Creative solutions will become more prominent in 2023 such as seller financing, assumable mortgage and wraps. At SRG we’ve been boning up on these tactics in order to help our clients find innovative ways to make deals workable.
• Office and retail do not have rosy outlooks according to industry experts, but the Industrial and Multifamily sectors are projected to weather this uncertainty much better. Considering the housing shortage and affordability crisis in the Puget Sound Region, fewer builder starts, and the fact that rent rates have held steady we would project the local multifamily market to hold its value well overall in the coming years despite the current downturn.
• Considering inflation, possible recession, turmoil in crypto and the stock market we still believe MF real estate to be a good bet for all the usual reasons. With prices dropping, many sellers willing to sell for less and/or offer concessions, and some creative financing back in the game, we foresee 2023 as a promising year to find solid deals without the competition of yesteryear.

By Taylor Marr

By Chelsea Shapiro, Senior Broker

We live in a 24/7 real time, instantaneous kind of world, but in the real estate industry most things operate on a 90 day cadence.  Why?  That’s often the timeframe it takes to get a property ready for market, under contract and closed.  It’s also deemed a market cycle and when data from consecutive months becomes meaningful.  All Summer, we have been noting the shifting forces in the market (primarily driven by interest rates increases and the responses they trigger). We've been feeling buyer and seller trends dramatically change, and now seeing the data that backs up and codifies a different real estate market than 90 days ago.  

In the tri-county area, the average "Days On Market" has increased, the number of sales have dropped, and the months of inventory has gone up dramatically (see data below).  Depending on the County we are in a “Balanced Market” and trending in the direction of a “Buyer’s Market.” 

Interest rate increases have been the driving force behind this shift, and the Federal Reserve has promised more rate hikes this year and into next.  To illustrate how that impacts pricing, we’ll dissect a 4plex deal we sold last Spring.  See below for the difference between then and now.  

It’s a challenging and shifting market for sure, so Why Buy?  Many successful real estate investors made their money by picking up properties during the last downturn (2008-2013).  After years of fierce competition and bidding wars, buyers now have leverage to find and/or create a good deal.  We think the next few years will be a great time for acquisitions.  It might take some ingenuity to compensate for the expensive financing, but that’s where creative lending solutions become optimal, and most lenders are predicting rates to drop after 2023 so refinancing is always an option.  The one caveat is hold time - a flip or quick value add play is tough to pull off in a receding market, but as long as buyers are prepared to hold long term buying now is great idea! 

If we’re in a down market Why Sell?  If you don’t have to sell and are primed to achieve cash flow and hold for many more years, then our recommendation is to hold.  However, if you’re needing to sell in the near future now is your last chance to capture some of the massive appreciation our region has experienced in recent years.  For context; this market downturn should not be anywhere near as bad as 2008-2012, but using that timeframe as an example, it took almost 10 years for Pierce County multifamily property values to get back up to the values they were at during the previous peak of 2007 (see graph below). That said, it could take several years for values to get back up to where they are today. “Waiting for the market to turn round” may not be the best option for anyone planning on selling in the next couple of years. We are still very close to the top of the market! Multifamily values in Puget Sound Region more than doubled over the last 5 years. If you purchased your property more than 3 years ago, selling today would still be a huge win!

Whether buying or selling, make sure you employ an experienced and knowledgeable broker!  This is a tricky market to navigate and having a seasoned broker who can suggest creative and solid strategies on your team might make all the difference in your ROI.  

By: Dave Meyer

This week, the Federal Reserve hiked the federal funds interest rate 75 basis points, which was widely expected. But there is more to Fed meetings than the headline rate hikes, and this particular meeting provided us with new data and insights that show the clearest picture yet of the Fed’s intended course.

We now have a much clearer picture of what lies ahead for interest rates, the economy, and the housing market. Below, I’ll examine everything we learned from the Fed meeting and the crucial news information every real estate investor needs to pay attention to. 

What We Learned About Interest Rates

Big Takeaway: Interest rates are up and will likely stay up for a year or more. 

The most notable announcement of every Fed meeting is what happens to the federal funds rate, a short-term interest rate that banks use to lend to one another. This is the only interest rate the Fed actually controls, but it has big implications for other interest rates like those on mortgages and bonds. 

The Fed raised rates by 75 basis points (a basis point = .01%, so a 75 basis point hike is 0.75%,) and the federal funds rate, which is a range, is now between 3%-3.25%. 

In addition to this immediate hike, we now know that rates will likely climb higher in the coming months and into next year. How do we know this? The Fed tells us! Not many people look at this, but the Fed actually releases a Summary of Economic Projections after every meeting, which tells you where they’re heading. It’s important to read, but I know most people don’t want to pour through this data, so I’ll do it for you. 

The most important chart, in my opinion, is known as ‘the dot plot’ because it shows where each Fed official thinks interest rates should be over the coming years. The dot plot itself can be a little confusing to look at, so here is a summary of it that shows the median expectations of Fed officials for the coming years: 

The Fed expects the federal funds rate to be 4.4% by the end of 2022. Then it will rise to 4.6% in 2023 before falling in 2024 and 2025. Of course, these are just projections, and the Fed will be looking at tons of economic data in the coming months to set monetary policy, but it’s important to understand that the Fed is intentionally signaling to the world that they are going to keep rates high. 

Higher rates have huge implications for the housing market, but it’s important to note that when I say “high rates,” I mean in terms of a recent context. In a historical context, rates are very low. 

But recent context matters. We’ve been in a low-interest rate environment for a very long time. These higher rates coming so quickly are a big shock to the economy. 

What We Learned About Mortgage Rates

Big Takeaway: Mortgage rates will likely rise from this news, but the pace of growth will likely slow.

If you’re expecting mortgage rates to shoot much higher than they are currently (between 6%- 6.50%), that might not necessarily happen. Rates will likely rise in the coming months, but at a slower pace than they have thus far in 2023. Some analysts even believe rates will come down in 2023. Here’s the thinking: 

First, mortgage lenders are forward-looking. They don’t wait for the Fed to raise rates to increase mortgage rates. They set mortgages to the rates they think are coming over the coming years. Even though the rate hike was announced in late September 2022, mortgage providers have been expecting this for months and have been setting rates for borrowers based on what they expect the Fed to do in the future. So rates will likely rise from this new data but will not likely rise linearly as the Fed raises rates. 

Secondly, mortgage rates are not dictated by the federal funds rate and are actually more closely tied to the yield on the 10-year Treasury bond. Just look at the red and green lines on the chart below. They move in lockstep (for my fellow nerds out there, the correlation is nearly .99!)

The spread between yields and mortgage rates averages 170 basis points (1.7%) and exists due to the relative risks of mortgages. If you’re a bank and can earn 4% lending to the government (that’s what a bond is, and it’s largely considered the safest investment in the world), then you need to earn more if you’re going to lend to a homeowner to compensate for the increased risk. You may pay your bills, but homeowners, in general, are less creditworthy than the U.S. government, and banks will charge you for that.

As I said, the spread has averaged 170 basis points, but I did an analysis, and the current spread is actually much higher than that average, at 232 basis points. 

This increase in the spread is likely due to uncertainty and increased risk in the economy. But if the Fed stays course and inflation starts to come down, I expect this spread to revert to the historical average, which could help moderate mortgage rate increases, or potentially even bring them down modestly in 2023. Mark Zandi, one of the most prominent economists and housing market forecasters in the world, expects the average rate for a 30-year fixed-rate mortgage to be 5.5% in 2023. 

Mortgage rates are staying relatively high compared to where they’ve been since the great recession and will likely go a bit higher. I wouldn’t be surprised to see rates surpass 7% for a 30-year fixed-rate mortgage, at least for a time. But, I don’t expect the rate to continue upward much beyond the low sevens unless inflation takes a turn for the worse. Of course, I was really wrong about mortgage rates so far in 2022, so take this analysis with a grain of salt. 

The Fed’s Focus

Big Takeaway: The Fed cares almost entirely about inflation and is willing to risk job losses, recession, and the housing market to bring it back down. 

With this new data, and an analysis of Fed chairman Jerome Powell’s press conference this week, the Fed’s stance is pretty clear. Inflation reduction is their number one goal, and they are willing to accept economic pain to achieve it. 

During the press conference, Washington Post reported Rachel Siegel pointed out to Powell that the Fed’s own Summary of Economic projections predicts unemployment to rise to 4.4%—a rate which typically brings about a recession. Here’s how the chairman responded: 

“We have always understood that restoring price stability while achieving a relatively modest decline, or rather increase, in unemployment and a soft landing would be very challenging, and we don’t know, no one knows whether this process will lead to a recession or if so, how significant that recession would be.”

That’s the chairman basically saying that reducing inflation will very likely increase job losses and a recession and that the feasibility of a “soft landing” is very questionable. He admits he doesn’t know what will happen. To me, the intent of this response and admission is clear: the Fed is going to attack inflation even if we go into recession or see job losses. 

When asked about housing and the need for the housing market to cool, Powell stated, “what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again, and I think we, so we probably in the housing market have to go through a correction to get back to that place.” 

Again, pretty clear. The Fed is willing to risk a recession, a housing market correction, and job losses in order to bring down inflation. In fact, if you read the full transcript, it seems Powell isn’t just okay with a housing correction. He wants one. Of course, the Fed could change course, but to me, this press conference and announcement was the clearest sign yet that the Fed is going to hold the line. They are not going to change course to help the housing market or avoid a recession.

What This All Means

Over the course of 2022, many investors have been hoping for a Fed “pivot.” Basically, there was a theory that the Fed would raise rates but wouldn’t risk a recession or job losses and would keep rates around 2.5%-3%. To me, this press conference puts that theory to bed once and for all. The Fed is very careful and deliberate about what it says and the data it shares with the world. Everything the Fed is saying right now is they are going to stay aggressive in the fight against inflation, even if it causes economic pain elsewhere in the economy. 

The most notable implication of this is housing prices. We all know by now that as rates have risen over the last several months, demand in the housing market is dropping, and prices are facing downward pressure. However, the housing market has held up surprisingly well to that downward pressure. Prices have come down off their June highs but are still up year-over-year in almost every major metro. 

Knowing now that mortgage rates will stay high for the foreseeable future will be a major test for the housing market. I was confident the housing market could hold up to rising rates for a few months, but for a few years is another story. 2023 is starting to look like a flat year at best and more likely a down year for housing prices (on a national level). Of course, every market is different, and some markets will probably keep growing! 

Affordability in the housing market is just too low. And if rates are not going to come down to make homes more affordable, then housing prices are going to have to come down to make homes more affordable. 

Even given all this news, I still don’t think we’re heading for a crash (declines of more than 20%). Credit quality is still very good, and inventory is starting to level off. 

The second implication is that rent growth could slow down if there is a major recession and job loss. Job losses combined with inflation could cause some household contraction (people move in with friends or family), which lessens demand. Rent is pretty stable and doesn’t really fall much, even in recessions, but I think rent growth will likely slow. 

Third, we could see increased foreclosures and evictions, but we’re still a good way off from that. The data shows that delinquencies are very low. That could change, but it doesn’t seem likely to happen in the next couple of months at least. 

So, should you invest in this housing market? I am! These types of markets tend to present good opportunities to find value. Stay tuned in the coming weeks, where I will share my 11 recommendations to profit in this type of market. Be sure to also check out my book, Real Estate by the Numbers, where J Scott and I go over what it takes to invest successfully with deal analysis and more!

Source: https://www.nahb.org/blog/2022/08/housing-recession-deepens

In the bi-weekly newsletter Eye on the Economy, NAHB Chief Economist Robert Dietz provided the following overview of the nation’s economy and its impact on the housing market.

Rising mortgage rates, high inflation, low existing inventory and elevated home prices caused housing affordability to fall to its lowest point since the Great Recession in the second quarter of 2022. According to the NAHB/Wells Fargo Housing Opportunity Index, just 42.8% of new and existing homes sold were affordable to a typical family. As more households are priced out of the for-sale market, a number of key housing metrics — including existing home sales, new home sales, single-family permits and single-family starts — have experienced significant year-over-year declines, characterizing the ongoing housing recession. Some markets are now seeing price declines as well.

The volume of new home sales in July fell to the lowest level since January 2016. Sales of newly built, single-family homes came in at a 511,000 seasonally adjusted annual pace, which is a 12.6% decline from the June rate and 29.6% below the estimate from a year ago. Sales-adjusted inventory levels are at an elevated 10.9-month supply in July. However, only 45,000 of the new home inventory is completed and ready to occupy. This count has been rising in recent months and is up 40.6% compared to a year ago. New home sales are likely to continue to show weakness in the months ahead.

Total existing home sales, as estimated by the National Association of Realtors, fell 5.9% to a seasonally adjusted annual rate of 4.81 million in July, the lowest level since May 2020. On a year-over-year basis, sales were 20.2% lower than a year ago. The July median sales price of all existing homes was $403,800, up 10.8% from a year ago, representing the 125th consecutive month of year-over-year increases — the longest-running streak on record. However, price growth is cooling quickly in most markets according to other reporting.

The softening of housing demand has led to ongoing declines for home builder sentiment, per the NAHB/Wells Fargo Housing Market Index (HMI). Builder confidence fell for the eighth straight month in August, falling six points to 49 and marking the first time since May 2020 the index fell below the key break-even measure of 50. The August buyer traffic number in the builder survey was 32, the lowest level since April 2014, excluding the spring of 2020 when the pandemic first hit. Roughly one-in-five (19%) home builders in the HMI survey reported reducing prices in the past month to increase sales or limit cancellations. The median price reduction was 5% for those reporting using such incentives.

The decline in the HMI is consistent with declines for single-family construction. Single-family starts decreased 10.1% to a 916,000 seasonally adjusted annual rate and are down 2.1% on a year-to-date basis. This is the lowest reading for single-family home building since June 2020. More declines lie ahead, as single-family permits decreased 4.3% to a 928,000 annual rate, and are down 5.9% on a year-to-date basis. NAHB is forecasting 2022 will be the first year since 2011 to record an annual decline in single-family home building.

The multifamily sector, which includes apartment buildings and condos, decreased 8.6% to an annualized 530,000 pace. Multifamily construction remains very strong given solid demand for rental housing. The number of multifamily 5+ units currently under construction is up 24.8% year-over-year. Multifamily development is being supported by a substitution effect, with frustrated or priced-out prospective home buyers seeking rental housing. Similarly, demand for single-family rental properties is rising, leading to gains for single-family built-for-rent construction. There were approximately 21,000 single-family built-for-rent starts during the second quarter of 2022. This is a 91% gain over the second quarter 2021 total.

The outlook for the housing market is now dependent on incoming inflation data and the Federal Reserve’s monetary policy. It appears, for example, that the core Personal Consumption Expenditures price index measure of inflation has peaked. And some economists are forecasting the Fed will decelerate its rate hikes, with perhaps a 50 basis-point hike in September, following the 75 basis-point hikes in both June and July. Nonetheless, the Fed will continue hiking, with the bond market pricing in the 10-year Treasury above 3.1% for the first time since late June.

Half-full glasses and optimism are hard to come by lately and so often cynicism rules the day when it comes to economic forecasts for our country. Despite all that, I am choosing a set of rose-colored glasses for our outlook on the housing industry, and believe there is ample data to back an optimistic perspective. My brokerage has been closely tracking interest rates and economic activity all year, but two weeks ago when the biggest single day interest rate in decades took place, we dialed in. Our team signed up for every webinar and financing class possible, researched dozens of economists' opinions and sifted through all sorts of data. Here are 7 reasons backing our optimism, and why I believe home values won’t collapse and that this is a different rodeo than the 2008 crisis.

1. Supply outweighs almost every other point to be made.  We are still in a housing supply crisis and short by millions of units.  We have not built enough to keep up with the population and demand for all types of housing in almost all markets across the country.  Even if builders ramped up production now, the delay in those hypothetical units being delivered to market does not service the demand now and in the immediate future.  This was not the case in 2008 as new construction was over-built.

2. Millennials - in 2008 I was a 22 year old college student racking up a tab of student loans and looking at a dismal job market upon graduation.  Home buying was not an option or even a desire at that point in time.  Fast forward to now and there are 18% more people between the age of 25-34 since 2006, over 46 million strong- this is a huge crowd.  These millennials now want to, and are ready to buy homes.  Many of them need to as they get married, have kids and rent rates are becoming burdensome.  Millennials create the demand that was lacking in 2008.  

3. Home Equity - the last few years have created the greatest surge in home equity in history.  9.9 Trillion dollars or an average of $185k per household is the amount of equity Americans have in their homes.  Even if prices level out or dip slightly most homeowners have an ample cushion of equity.  Being “underwater” or “upside down” in their home was a common trend after 2008 where the margins for equity were very narrow (in part due to loose lending practices) and the housing bubble was the trigger for the recession not vice versa.  What we have now is much different. 

4. 4 Trillion Dollars is the amount of money that is sitting in consumer bank accounts.  Chalk it up to government handouts, wage increases, lifestyle shifts with less travel, home budget awareness etc… There is a lot of money out there.  We are a consumer driven economy which begs the assumption that that 4 Trillion will be spent on something, perhaps not in 2022, but in the near future it’s a safe bet that much of that money will find its way into the housing market.  

5. Migration has been a demographic trend since before Covid, but has persisted and strengthened as many folks migrate from the top 25 metro areas to the South and Middle regions of the Country.  In the Pacific Northwest this has also included an influx of California residents relocating up the coast.  Movement is good for the real estate market. 

6. Remote Work is a driving force impacting demand for larger square footage.  Covid ultimately showed us the value of home and shifted lifestyle trends in favor of staying home, working from home, and needing bigger or better square footage.  The ongoing risk of another potential shutdown keeps home top of mind for many Americans.  Many homeowners have taken the last few years to execute remodel and home improvement projects.  This feeds into the lifestyle shifts of emphasizing home, working from home, and ultimately adds to home values across the board.  

7. The Dodd Frank Act is also a game changer in the then vs now comparison.  Today’s homeowners are more qualified and at way less risk of default than two decades ago.  Lending underwriting requirements, 30 year fixed interest rates, mortgage payments that include interest and principle are just a handful of things that protect homeowners which in turn is a bulwark in housing values and the overall housing market. 

My colleagues and I speak with investors everyday who are wishing and hoping for a housing market crash that would open the floodgates to mythical deals with excessive cash-on-cash and a guaranteed “buy low, sell incredibly high someday strategy.”  Our optimism in the housing market holding its value is often not welcomed by these folks, but that doesn’t phase us at Sound Realty Group.  There are always going to be good real estate deals out there; it just might take some ingenuity and a creative perspective to source them, and put them together - good thing we specialize in just that.  

By: Chelsea Shapiro, Sr. Broker at Sound Realty Group, Inc.

Sources - Guild Mortgage, BKCO Mortgage

Solid, turn-key fourplex with plenty of room to add value. 5.6% Cap Rate, 6.4% Market Cap Rate. Or, possible condo conversion? All units are 2bed/1bath with private patio/balcony, upper units have Puget Sound views. New owner can add coin-op machines to the shared laundry room for additional income. Rents are currently below market rates and all tenants are month-to-month. Unit interiors have been updated within the last 8 years, newer windows, and newer roof. High-demand rental close to shops and restaurants, 15-minute drive to SeaTac Airport/20-minute drive to DT Seattle.

$1,100,000 |  13244 12th Ave SW, Burien

View On SoundMultiFamily.com 

For 2020, here are our latest top 10 misconceptions we’ve found that the public has about 1031 Exchanges.

1. 1. COVID-19 pandemic 1031 Extensions 
   2. Replacing Debt
   3. The Term Like-Kind
   4. Vacation and Second Homes Qualify
   5. Reverse Exchange
   6. Partial Exchange
   7. Qualified Intermediary Advice
   8. Identification Rules
   9. Timing Deadlines
   10. Loans, Equity & Tax Basis

1. COVID-19 Pandemic 1031 Extensions

2. IRS issued extensions that were granted for the 45 day Identification and 180 day exchange period for the COVID-19 pandemic are still in place
   FALSE
   IRS extensions granted due to the COVID-19 pandemic ended July 15, 2020.  Sign up here to be notified if the IRS grants further extensions.  Be sure to check out our Coronavirus 1031 Resource page for the latest news.
   Helpful link:  Covid-19 1031 Exchange FAQs
   

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   Replacing Debt

   You must replace the debt that you had on the Relinquished Property with at least the same amount of debt on the Replacement Property
   FALSE
   Many taxpayers (and tax advisors) are under the misconception that the IRS mandates that they must have equal or greater debt on their 1031 Exchange Replacement Property (property they are purchasing). You do need to replace the VALUE of the debt paid off on the Relinquished Property. However, the debt does not have to be replaced with debt. The exchanger can always bring their own cash (from outside of the 1031 Exchange) to the closing table for the Replacement Property to offset any reduction in debt, or use other options.
   Helpful link: See examples at Replacing debt in a 1031 Exchange

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   The Term Like-Kind

   “Like-kind” is restricted to the same kind of real estate which means I must exchange the same type of property, for example, an apartment building for another apartment building
   FALSE
   The term “like-kind” refers to the nature or character of the property, not its grade or quality. For this reason nearly all real property is like-kind to all real property, meaning that you can exchange an office building for an apartment complex, a strip mall, a warehouse, single family rental properties or even vacant land.
   Helpful link: See what is qualified like-kind property?

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   Vacation and Second Homes Qualify

   Vacation or second homes qualify for 1031 Exchange tax deferral 
   SOMETIMES
   You can sell your investment real estate and reinvest the gain, tax deferred, to purchase your vacation or second home, however the challenge is making sure it will qualify as a 1031 investment property. Certain requirements must be met. Click the links below for details.
   Helpful links:  Do Vacation and Second Homes Qualify?
   How to Buy Your Vacation Home with a 1031 Exchange
   Strategically Buying Your Dream Vacation Home with a 1031 Exchange

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   Reverse Exchange

   In a Reverse Exchange, it’s as simple as buying new 1031 Replacement Property first, as long as my Relinquished Property is sold within 180 days 
   FALSE
   In concept the Reverse Exchange is simple, but in execution, there are details and rules that must be followed. In a Reverse Exchange, you cannot own your Replacement and Relinquished Properties at the same time. Many do not realize that that title to their new Replacement Property must be “parked” with an EAT (Exchange Accommodations Titleholder) until their old Relinquished Property is sold. It takes considerable time to properly structure and execute a Reverse Exchange. Before you close on any property sale, reach out to IPX1031, your Qualified Intermediary, to ensure your 1031 Exchange is properly structured, timed and executed.
   Helpful links:  Reverse 1031 Solutions
   How to Initiate a Reverse Exchange

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   Partial Exchange

   It’s not possible to do a partial 1031 Exchange
   FALSE
   A 1031 Exchange does not need to be an all or nothing scenario. You can do a partial 1031 Exchange which qualifies for tax deferral under Section 1031 of the Tax Code. If you purchase property lower in value or take a portion of the cash from the closing of the sale and only invest a portion of your proceeds towards a 1031 Exchange, you will have a partially tax deferred transaction rather than deferring all of your taxes. You will pay taxes on those funds not reinvested (commonly referred to as boot).
   Helpful links: Partial 1031 Exchange
   Boot in a 1031 Exchange

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   Qualified Intermediary Advice

   A Qualified Intermediary gives tax and legal advice as part of their role
   FALSE
   While a Qualified Intermediary (QI) like IPX1031 is generally needed to create the “exchange of properties” and safeguard the exchange funds, QIs cannot provide tax or legal advice. IPX1031 cannot act as your advisor to structure your exchange transaction. While IPX1031 provides tools like our Capital Gains Estimator, always talk to your legal and tax advisors to determine what is best for your individual situation.
   Helpful link:  How Important is Your Qualified Intermediary?

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   Identification Rules

   I can change my identification after day 45 if that property has been sold to someone else and if needed, I can buy other 1031 Replacement properties that I didn’t identify
   FALSE
   The 1031 ID rules are strict and very important. We’ve seen many exchanges fail due to exchangers not following these 1031 Exchange identification rules. From the day your Relinquished Property closes, you have 45 calendar days to identify potential replacement property using the 3 Property Rule (most common), 200% Rule or 95% exception. You can change your identification at any time prior to the expiration of the identification period. If you did not identify a property in the proper time period, that property does not qualify for 1031 treatment. In the case of an identified property no longer for sale, if you have no other identified property and it’s after day 45, your exchange will fail. Remember to start your search for identification property early – even before your Relinquished Property closes – so you have a head start in the identification process.
   Helpful link: Deadlines and Identification Requirements
   Video link:  1031 Exchange Identification Requirements 

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   Timing Deadlines

   I have 45 days to identify then an additional 180 days to close
   FALSE
   The 45 and 180 day periods are not separate time periods. All must happen within a total of 180 calendar days. From the time your Relinquish Property closes, you have 45 calendar days to identify your Replacement Property. Then you must buy and close on any identified Replacement Property(ies) that you want to purchase in your exchange within a total of 180 calendar days. Timing rules are strict and cannot be extended even if the 45th day or 180th day falls on a Saturday, Sunday or legal holiday. They may, however, be extended by up to 120 days if the Exchanger qualifies for a disaster extension under Rev. Proc. 2018-58.
   Helpful link: Deadlines and Identification Requirements
   Disaster Extensions
   Video link:  1031 Exchange Time Constraints 

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   Loans, Equity & Basis

   Loan balance or equity increases tax basis in a 1031 Exchange
   FALSE
   The term “basis” is the cost of a property for tax purposes. When you sell a property, the difference between the sales price and the adjusted basis in the property will determine the amount of capital gain which is taxable. Loans or equity are typically not relevant and do not factor into basis. Click below to learn which items increase basis and the equation to determine adjusted basis:
   Helpful link: What increases tax basis in a 1031 Exchange?

Information Provided by:

Kyle Williams
Vice President - Account Executive
IPX1031
kyle.williams@sis.ipx1031.com
(425) 582-3487 - Mobile
www.ipx1031.com/williams