Condo prices climbing even faster than houses

The path to homeownership for Dominick Pham and Sarah Cheung was short. Two blocks, actually.

The engaged couple, Maryland transplants in their late 20s, had forked out rent for two years at a new, luxury apartment tower on First Hill. This summer, they noticed the Luma condominiums being built nearby and jumped at the chance to buy a one-bedroom unit on the lower floors.

“Why pay rent when that could go toward a mortgage?” thought Pham, a software engineer. “This is the perfect opportunity.”

Across the region, home prices are zooming skyward, driven by new buyers like Pham and Cheung, a record-low inventory and expectations of higher interest rates.

In August, the median price of single-family homes in King County was $499,950, 14 percent higher than a year ago. Condos fetched a median $299,250, a 20 percent gain over last year, according to the Northwest Multiple Listing Service. In both, the gains were the biggest 12-month jump seen so far this year.

The biggest jump occurred in Seattle, where the median single-family-home price was $575,000, a 15 percent annual gain, and median condo price was $395,000, 32 percent more than a year ago. A big factor in the soaring Seattle condo prices is the handful of new downtown projects, where units can cost $600,000 or more.

In Snohomish County, August’s median single-family home price was $366,825, or 11 percent higher over the year; in Pierce, $255,000, up 6 percent; and in Kitsap, $259,975, or 6 percent higher.

In the four-county region, there were 7,792 pending sales — mutually agreed sales contracts that haven’t closed yet — the highest level for August since 2005, the MLS said.

While the inventory of homes for sale has ticked up steadily since March, the region continues to suffer the worst shortage in more than a decade.

But prices haven’t risen enough to jump-start new-home construction.

From January to July, building permits were issued for a total 5,103 single-family homes in King, Pierce and Snohomish counties, down 4?percent from a year ago, according to the National Association of Home Builders.

But permits were issued for 9,938 multifamily units, a 45 percent jump over a year ago, with the vast majority being apartments.

Builders are opting for apartments over condos, experts say, because they don’t face the liability of being sued under the state’s condominium act. Some condo builders still bear fresh memories of multimillion-dollar settlements with homeowner associations.

“You’re finding developers saying, ‘Why take the risk of building a condo?’?” said Matthew Gardner, chief economist at Windermere Real Estate. “Whereas in today’s environment, you can build an apartment, get it half leased up, sell it to an institutional investor and walk away.”

Salt Ballard Condos, a 38-unit project being built at 5601 20th Ave. N.W., had sold seven units before the developer, InHaus Development of Vancouver, B.C., decided to switch to apartments and issued refunds to the buyers.

InHaus principal Dave deBruyn said he was left with no choice when nearly all the contractors he sought bids from declined.

“Everybody has so much work building apartments, they didn’t want the potential long-term liability of building condos,” he said.

In Canada, condo builders have full liability in the first two years and partial liability after that. “Because the warranty program isn’t well-defined in Washington state, there’s far too much room for litigation,” deBruyn said.

Such concerns didn’t stop Canadian developer Nat Bosa from building the two-tower Insignia complex in Seattle’s Belltown neighborhood.

Of the 698 units for sale, over 75 percent are sold, according to a Bosa spokeswoman. As is customary with new construction, buyers who had put down deposits began closing on their homes when the units were ready for occupancy.

Sales of 222 units have closed in the South tower, which opened in July. The North tower will open next summer.

“I cannot figure out how he’s making any money,” said Brian O’Connor, a Seattle consultant who conducts feasibility studies for developers. “New condos don’t pencil. They’re not selling for a high enough price.”

Besides Insignia, the only other new condo projects in or near downtown are Lowe Enterprises’ Luma, a 168-unit tower slated to open next summer; and Daniels Real Estate’s Gridiron, a 107-unit mixed-use project next to CenturyLink Field.

Suzi Morris, a Lowe spokeswoman, says there aren’t more condo projects popping up because “there is not enough of a spread on investment returns to a developer between selling a new high-rise apartment and new condos to justify taking on the additional risks and costs associated to develop condominiums.”

From the consumer’s perspective, O’Connor said that by his calculations it’s still cheaper to rent downtown than to buy an equivalent downtown condo.

In 2015, his firm forecasts that 57 percent of new households will choose to rent, compared with only 13?percent a little over a decade ago, mostly because they can’t afford the high price of owning a condo downtown and don’t want to live in the suburbs.

Pham, 29, and Cheung, 28, definitely wanted the urban life. After moving here from Maryland to take high-wage jobs, they could afford to pay the $1,900 monthly rent for an apartment on First Hill.

“I think millennials want to be more free and have less ownership,” Pham said. “We sold my car. We don’t own a car now.”

Still, owning a condo didn’t seem like a big commitment since he wasn’t saddled with painful memories of the housing bust.

Except for downtown Seattle, Capitol Hill and West Bellevue, median condo prices so far this year in all submarkets of King County are below their peaks in the last housing boom, according to MLS data. In many parts of South King County, prices are still more than 25 percent below their peak.

Pham bought his first home in Maryland in 2011 when prices hit bottom and has been renting it out at a profit since he moved to Seattle.

“I’ve never experienced a housing crash,” he said.

The couple recently bought a 720-square-foot unit at Luma for $465,000, he said. They only needed to put down 5 percent; the sale won’t close until next summer when Luma is scheduled to open.

They hadn’t wanted to buy a home until after a few years of marriage, Pham said, but they saw the Luma unit as an opportunity to build equity in an investment. If they end up leaving for another city, they figure they can rent it out.

“I know quite a few people around my age group who really do want to buy property,” Pham said. “People just need to be more educated in how easy it is to own a property. In my opinion, it doesn’t tie you down.”

The couple haven’t locked in an interest rate yet. They plan to do so next spring.

“If they haven’t locked in a rate, they run the risk that rates go up and they no longer qualify,” said David Floan, executive vice president at Evergreen Home Loans in Bellevue.

Buyers at Luma who cancel their contract forfeit their deposit.

The upswing in condo prices will benefit buyers who can’t afford the newly built ones, too.

“You can’t get inventory until people have some equity in their home, so they have some net proceeds for a down payment on their next purchase,” Floan said.