This blog originally appeared on rsir.com.

On October 23, 2024, over one hundred Realogics Sotheby’s International Realty (RSIR) brokers attended a bi-annual Market Maker panel and discussion at the Bellevue branch. Led by RSIR leadership, the featured keynote presentation was made by economist Matthew Gardner of Gardner Economics. To follow, a pro-panel of experts on the topic of the $90 trillion “Great Wealth Transfer” included Amy Mutal of Prevail Wealth Management, Jolene Messmer of Movement Mortgage, retired developer and investor, Trevor Jones, of  T. Jones Group, and Gardner. The event concluded with a hosted luncheon by Jocovine Bistro and an interactive presentation by Jeff Walters of HINES Global Wealth Strategy on the topics of 1031 exchanges and 721 capital gains tax deferral strategies, amidst political pressure on tax policies with upcoming US presidential election.

Here are the biggest takeaways from a morning packed with industry insights:

1. The US Presidential Election Is a Distraction, not a Derailment, of Improving US Housing Trends

Gardner suggested that Wall Street investors are expecting a Trump victory but was quick to share his hopes for the House and Senate to be split between the two parties – which would impact the likelihood of any extreme policies being enacted. He did suggest that both parties had similar views on housing.

• He added that, over the past 14 elections, home prices rose during the year of the election as well as the year after. The only exception was seen in the first Obama term (2008/09), during the global financial crisis.

• Mutal encouraged long-term investors to stay focused on their financial goals, rather than reacting to short-term political noise. Historical data shows that elections have had little direct impact on markets, which are more influenced by corporate earnings, economic data, and monetary policy.

• Markets have historically performed well over time, regardless of which political party is in power. A balance of power is important because congressional outcomes could affect key issues like taxes, tariffs, and the federal debt ceiling, which impact investors.

• A separate survey by RSIR brokers also confirmed the view that the US presidential election would amount to speed bump for some “wait and see” consumers, but the overwhelming perspective is buyers will increasingly step out in early 2025 with increased consumer confidence, and enjoy increased selection and lower mortgage rates, regardless of who’s in the White House.

• Three years ago, Washington state lawmakers passed SB 5096, imposing a 7% tax on capital gains income of $250,000 or more (now $262,000) to fund K-12 education (excluding real-estate transactions). This quasi-income tax is known to have caused capital flight with wealthy citizens (most notably Jeff Bezos of Amazon moved from Hunts Point on Lake Washington to Florida and subsequently sold several billions of dollars of stock, sidestepping the 7% capital gains tax). Gardner said that current polling suggested that it will not be repealed with a majority of democrats wanting to retain it – and republicans equally split.
  
  

2. The US Economy Is Set for a “Soft Landing” as Fed Policies Hit the Target for Inflation Rates

Gardner illustrated that the Federal Reserve raised the key Fed Funds Rate 11 times since mid-2022 but cut it in September by 50 basis points (bps). He sees one more cut this year, followed by four more in 2025.

• He does not see a recession on the horizon as rate increases have slowed US inflation with it trending down toward their 2% target rate. He sees US GDP showing sustained growth and averaging in the low 2% range through 2025.

• An RSIR broker survey indicated the expectation of a brief economic recession as that would have likely caused a quicker series of cuts in the Fed Funds Rate, albeit the housing industry charged through a sustained “higher for longer” mortgage rate reality, which slowed home sales to 20-year lows.

3. Mortgage Rates Are Falling and Expected to Average in the High 5% Range by Year End 2025

Gardner expects that Increased consumer confidence, more attainable mortgages, and greater inventory options will combine to drive sales volumes up in 2025.

• With the City of Seattle currently having more renters than homeowners, Gardner stated that 95% of all new construction housing is purpose built for rent and not for sale. With limited options for would-be buyers, it has created a “forced renter” marketplace, which is further driving up prices on for sale inventory.

• Gardner confirmed the strategy to “buy, then refi” makes sense as regional home prices continue to rise upwards of 50bps per month rendering a slightly elevated mortgage rate inconsequential if the equity gains over time for a new home continue to outstrip the higher cost of borrowing.

• Messmer advised that loan origination and even some refinancing is on the rise suggesting that the “smart money” was buying homes over the last 24 months because the rise in home prices far outweighed premiums in mortgage rates.

• More than 80% of Washington homeowners enjoy a mortgage rate at or below 5%, essentially locking them into their home and they are unlikely to move until rate cuts and equity gains make the prospect of selling more attractive. This convergence is expected to start to occur by mid-2025 which would lead to inventory growth as well as to add more would-be buyers to the marketplace.

4. US Debt and Sunset Policies Spur Upward Pressure on Capital Gains Tax Changes and Investor Anxiety

• Mutal noted presidential candidates’ tax proposals may influence financial strategies, but actual policy changes depend on legislative outcomes.

• Walters illustrated the meteoric US debt levels surpassing $35 trillion and suggested that hedging capital gains is becoming more critical, especially as the most affluent population is aging and doing estate planning.

• The Tax Cuts and Jobs Act (“TCJA”) in 2017 reduced tax rates for taxpayers across all income levels, on average. If Congress allows the TCJA to expire as scheduled, most aspects of the individual income tax would undergo substantial changes, resulting in more than 62 percent of tax filers experiencing tax increases in 2026.

• The panel reviewed potential threats to remove the stepped-up cost basis in asset transfers during estate; the unified credit that sunsets in 2026; and even the unlikely outcome of taxing unrealized capital gains.

• Jones shared a real time scenario in Canada where the Federal Government arbitrarily raised capital gains taxes by more than 10% with just one-months’ notice, fundamentally moving the goal posts with current investors and jeopardizing transactions that were caught in the crossfire.

5. The Seattle Office Market Is Resetting and Is Primed to Draw New Tenants and In-City Housing Demand

• Work-from-home policies continue to impact the office market with 35-55% of employees of single-tenant buildings in their offices daily, while 50-75% of multi-tenant buildings are in their respective offices.

• Downtown Seattle office vacancy was 32% in the third quarter of 2024, with more than 19 million sq. ft. available. Although, the percentage of businesses looking for space was up by 35% year-over-year. Even with such a substantial amount of unoccupied commercial space, Gardner says the prospects of conversions to residential are unlikely given the format of the buildings, the costs to convert, and given the existing supply of unleased and unsold residential buildings.

• After a nearly five-year work-from-home or hybrid work week schedule, Amazon is requiring all employees to return to work five days a week beginning January 1, 2025. While this is certainly going to cause some turnover within the employment roster, the much greater impact will be on in-city housing as returning workers seek to locate closer to the urban core and replacement workers relocate to fill positions lost in the transition. Amazon’s leadership is certain to be followed by other tech giants and employers in downtown Seattle.

• Unleased office space is effectively providing a runway for new tenants to benefit from lower lease rates and other incentives, slowly occupying and refilling the 365,000+ daytime office workers that once drove the downtown Seattle economy (and is set to recover in the years ahead).

• Gardner expects that some distressed office buildings will exhaust the “extend and pretend” financing hopes of current owners and be taken back by lenders or receivers who will then resell them at a fraction of the prior cost (Gardner noted that some buildings are now valued at less than the land value beneath them given the cost of operations and taxes). A lower cost basis for new owners will allow for rents to be reset and attract tenants from suburban areas to enjoy prime CBD occupancy at very attractive rates.

• Gardner warns, “don’t bet against Seattle” and cited numerous previous economic recessions where the city made a comeback. With new civic governance demonstrating modest improvement in regard to ongoing safety issues; tourism has already surpassed pre-pandemic levels, and retail businesses and restaurants are slowly returning.

• Major capital investments like the newly completed Washington State Convention Center Expansion Project, the new Seattle Waterfront, and the Sound Transit 3 light rail terminus in downtown Seattle is all converging to spur economic growth.

6. Migration Patterns and Housing Demand Are Putting Upward Pressure on Home Pricing

• Primary inbound population to the region is coming from California, Oregon and Colorado given the tech growth and more attractive tax policies of Washington and trends with global warming pushing people north. Conversely, outbound Washington expats are departing to Texas, Arizona, Idaho and New Mexico, in search of sunshine and no capital gains taxes.

• Snohomish County experienced the greatest population growth with 16,808 net resident increase between 2020 and 2023, in part due to affordability issues with King County. There were 72,966 fewer domestic residents in King County over the three-year Census, however 50,573 international residents immigrated as a backfill.

• Downtown Seattle actually lost 5,000 residents during the onset of the pandemic in 2020 and subsequent political and civil headwinds but has since regained its population and is now home to more than 100,000 residents. While an estimated 35,000 new multifamily residents were building in downtown Seattle, approximately less than 7% of that was purpose build for sale with most residents renting.

• Gardner anticipates King County’s population to grow again in the coming years as the office market repopulates, international immigration trends continue, and traffic patterns encourage residents to live closer to the urban core. Meanwhile, the sharper values being offered within condominium buildings combined with demographic shits and lower mortgage rates will combine to fuel increased demand for the unsold new construction inventory in the city. House Bill 1110, encouraging the use of ADU’s and DADU’s within single-family zoning will also provide more supply of housing.

7. The New Construction Market Is Pinched and Not Meeting Demand, so Housing Prices Rise

• Across the four-county region, permit activity is trending far below historic norms, and the supply and demand delta is driving higher housing prices. A lack of land within the Urban Growth Boundaries, higher financing costs, protracted permitting timelines and Mandatory Housing Affordability fees in the City of Seattle, and inflation within the construction industry are all contributing to a higher cost of delivery for developers.

• The existing high-rise zoning of downtown Seattle has not witnessed a groundbreaking of a for-sale new condominium since 2020, and dearth of new supply is likely to repeat the 4-5-year period experienced between 2010 and 2015 after the Great Recession and Global Credit Crisis.

• RSIR data reports that the last six high-rise condominiums built in Seattle in the current cycle comprise 1,924 units, albeit currently just 538 units remain available. Of the inventory, just 166 are priced below $800,000 with the majority being located in Graystone Condominiums.

• Gardner specifically called out the “residential renaissance” of downtown Seattle where newly built condominiums are being sold for 20-30% below their original presale values. He notes that average reset values are below $1,000 per sq. ft. but replacement costs for high-rise development requires about $1,500 per sq. ft. to build, and so hence, the developer would need to see more like $1,800 per sq. ft. to pencil a new condominium tower.

• RSIR is noting a significant increase in new construction sales at represented projects like Graystone Condominiums (TheGraystone.com) on First Hill (Seattle’s fastest-selling new development), and Infinity Shore Club Residences (www.InfinityShoreClub.com) on Alki Beach in West Seattle.

• Gardner does not expect to see any sort of surge in new construction. Demand will exceed supply for the next several years, allowing existing home values to continue rising. With no new multifamily development anywhere close to breaking ground – and downtown recovering – there’s opportunity to get into the urban market at very favorable prices.

• While House Bill 1110 is required to evidence municipal guidelines for the inclusion of ADU’s and DADU’s upon single-family lots through larger population centers, but Garnder is skeptical that this legislation will amount to any sizable inventory surge for attainable housing and the substantial majority will only be available for rent. In-city condominiums remain the most important and underserved housing product for ownership, albeit challenges with the Washington State Condominium Act essentially creates consumer protections that deters developers from taking the risk.

• Resale activity is increasing with listings up 61% year-over-year as median sales prices 3.9% higher year-over-year but still down 17% from the 2020 peak. There are signals that price corrections have bottomed and with the lack of new supply, an increased buyer population from lower mortgage rates could quickly deplete the existing and new inventory, leaving would-be buyers with less selection and higher prices.

8. The Regional Housing Market Experiences Rising Tides and a Flight to Affordability

• Luxury listings above $3 million have witnessed 13% increase in 2023 after experiencing inventory dwindling by 15% between 2022 and 2023. Outlying counties are seeing more price elasticity with listings rising by 2% in 2023 and another 4% in year-to-date 2024. Closings plummeted by 32% between 2022 and 2023 but have made a rebound in 2024 with 17% higher sales volumes this year with 2 months to go.

  1. Listings above $1 million are seeing the most activity in Snohomish County, perhaps as the median home price is still sharper than other exurban locales in Kitsap County and consumers are willing to drive to affordability. Snohomish County has witnessed closings rise more than 500% in 2024 compared with 2019 before the pandemic, followed by Pierce County experiencing an increase of 285%, trailed by Kitsap County at just 92%.

  2. Gardner views listing activity as generally improving and expects to see this rise further as borrowing costs “release” rate-locked owners. With prices rising again in 2025, those who choose to wait for rates to fall will miss a unique opportunity.

9. The Role of a Financial Planner Is Critical when Managing a Real Estate Portfolio and Estate Planning

• Mutal reminded that elections typically don’t have a significant long-term impact on markets. Stick to your financial plan and ignore short-term noise. Markets are more influenced by corporate earnings, economic data, and monetary policy than by election results. Avoid making emotional decisions based on political shifts. Rely on historical data and solid strategies.

• Short-term market volatility can occur during election periods, but it presents both risks and opportunities for traders, and a savvy financial planner can spot the silver lining. Follow daily market commentary from experts to stay informed about how markets are reacting to election developments.

• Ensure that your investments are diversified to help manage risks associated with any potential policy changes. Assess your risk tolerance and make sure your investment strategy aligns with your objectives and time horizon. By keeping these points in mind, investors can maintain a steady course through election-related uncertainties.

• Messmer advised that strategic debt can help build wealth, even in situations when a real estate transaction could be all-cash. Drawing equity from a property can then be invested in the markets to earn multiples of the cost of the mortgage on top of the likely capital gains being enjoyed within the property.

• Mutal offered RSIR brokers’ clients a complimentary expert consultation for no obligation review of the portfolio and financial planning. Click here to redeem Gift Certificate – Prevail Wealth Management or go to: www.prevailwealth.com/gift

10. The $90 Trillion “Great Wealth Transfer” Will Significantly Impact the Housing Industry

The Silent Generation and Baby Boomers are reaching retirement age in record volumes known as the “Silver Tsunami”. An unprecedented amount of wealth was accumulated by this maturing demographic.

• The benefiting Generation X and Millennial population is set to receive a “gold rush” of inheritance, which will stimulate the US housing market and other consumer products as a waterfall of equity floods the economy.

• Real estate is by far the largest asset class owned and most residential and commercial properties will migrate in a property journey over the next 10-20 years as part of estate planning and inheritance.

• Gardner opined that US homes values comprise $48.2 trillion but have relatively little debt, with approximately $13.2 trillion, so there is more than $35 trillion equity to be harvested and potentially transferred to younger generations.

• Becoming grayer and wealthier, the 55+ population in King County is expected to grow by more than 40,000 residents over the next five years, and there will be 150,000 more households earning more than $150,000 per year. Meanwhile, an additional 35,000 more 55+ residents will be residing in Snohomish, Kitsap and Pierce Counties with a further 50,000 households above $150,000 annually.

• Jones acknowledged that many of his elder peers are migrating from active investment strategies (like being a landlord of rental properties) to passive ones (like owning a REIT that professionally manages funds from investors). There’s a conscious effort to focus on lifestyle pursuits and enjoy the sunset of life without incurring significant tax consequences.

11. Aging Demographics Will Challenge the Utility of Housing Types and Drive Demand Elsewhere

• Jones shared that he and his wife were effectively living in less than 10% of their large single-family estate, and have since downsized to a single-level, lock-and-leave condominium to age in place and permit more travel.

• Messmer acknowledged that many elder homeowners own their property outright and are not “locked in” to a preferred mortgage product, and others with a mortgage that are downsizing and can retire the loan at closing and use all equity to purchase their less expensive retirement home.

• The panel agreed that elder family members are less interested in property management and family dynamics surrounding an estate sale, so increasingly second homes are being sold and affluent consumers enjoy more low-hassle travel and Airbnb type rentals vs. ownership. Yet the Cruise Lines International Association (CLIA) has even revised upward its traffic forecast for 2024 following a better-than-expected first quarter. The organization expects global cruise traffic to reach nearly 36 million passengers — 1 million more than the initial forecast and 4 million more than in 2023.

• Some maturing demographics and hybrid workweek employees will continue to commute to affordability. Major transportation projects like the $1.4 billion I-90 East Summit Expansion Project ensure reliable transfer across Snoqualmie Pass, and the Kitsap Fast Ferry offers foot passengers a 40-minute commute between downtown Seattle and Kingston. Destination master plans like Ederra and Skyline Ridge in Cle Elum and the storybook lifestyle of the Port Gamble master plan at the entrance to Hood Canal become more appealing.

• Grandparents are also motivated to acquire within lifestyle communities with amenities as a “grandchild trap” with the hopes of attracting family to visit. Resort-style communities in exurban locales with four-season attractions are becoming more popular, especially if the homes can be rented out when not in use.

• Mutal advised that Washington is known as the “Evergreen State” except in the case of death, when it would be well advised for an aging resident to claim domicile in another state that offers lifestyle advantages and no estate taxes, such as Arizona or Florida. Even California benefits from these migrating consumers because the Golden State’s income tax may not be a concern if the resident is no longer earning an income.

12. 1031 and 721 Exchanges Are Pivotal Capital Gains Tax Deferral Strategies

• Walters provided an instruction on the importance of enjoying capital gains tax deferrals while these programs exist. While the well-known 1031 exchange allows for an investment property to be sold and gains passed into a like-kind property, the lesser known 721 exchange includes the use of a Delaware Statutory Trust (“DST”) and permits an investor’s capital gains to be placed into a fund that is professionally managed. So rather than the investor being required to operate an active like-kind property, the investor can enjoy a passive interest in a larger group to own high-quality institutional property assets across a diversified portfolio to mitigate risk.

• A 721 exchange typically requires a total investment hold period of less than half that of other DST’s (access to the monthly liquidity program once the client has been in the REIT phase for 1+ years) allowing for greater access to capital sooner and also allowing the investor to withdraw some or all of their principal without a taxable event and leaving the realized gains inside the deferred tax strategy.

• Hines Global Wealth Strategy is the operator of a major UPREIT and has demonstrated a proven track record of outperforming many peers while offering monthly returns while the shares can be divided and passed down to inheriting generations with relative ease and without liquidation or tax consequence.

• The strategic platform helps investors avoid capital gains, depreciation recapture, net investment income, and potential state/local taxes on your property sale when you complete a proper exchange.

• Investors have the ability to pass on shares of the REIT which are easily divisible and offer liquidity vs. passing on a single illiquid asset while also maintaining the step-up in cost basis at death.

• Hines offers a single one-time exchange solution – no repeated and costly future exchanges to complete. For more information visit com.

Overall, the Market Maker event provided encouraging trend lines that call for an uptick in sales volumes, rising median home prices (especially in light of the lack of new construction), a rebooted downtown Seattle office (and corresponding housing market), and lower mortgage rates in 2025. It was clear that the second half of the decade would constitute a new market cycle with aging demographics increasingly spiking the US economy with their transfer of wealth. Investors will seek capital gains tax deferral strategies with a preference to enjoy more passive investments while seeking out lifestyle advantages in the sunset of life.

For more information, please contact us.