REALTORS® recommend devoting no more than 1/3 of your monthly income to housing. According to the US Bureau of Labor Statistics, the average annual income in King County is $82,264. With King County’s median single-family home hitting a new high of $650,000 in June 2017, we have an increasing problem of affordability.
In the short term, there are some simple steps we can take to improve this unbalanced market. One example is sanctioning mother-in-law cottages and other accessory dwelling units (ADUs) to increase supply without impacting a neighborhood’s character.
In the long term, we need to enact some big-picture changes to make sure our children can afford to live here. That includes increasing the types of homes available (more condos would be nice), increasing buildable land via the Growth Management Act, and improving transportation systems. The best way to ensure that these changes actually happen is by getting involved! So be sure to vote, attend community meetings and write to lawmakers so your voice is heard.
“The debt-to-income (DTI) ratio consists of two components:
For manually underwritten loans, Fannie Mae’s maximum total DTI ratio is 36% of the borrower’s stable monthly income. The maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements reflected in the Eligibility Matrix.
For loan casefiles underwritten through DU, DU determines the maximum allowable DTI ratio based on the overall risk assessment of the loan casefile. DU will apply a maximum allowable DTI of 45%, with flexibilities offered up to 50% for certain loan casefiles with strong compensating factors.”
Home ownership is the primary way lower- and middle-income Americans amass wealth. That’s because buying a home is kind of an automatic savings account, both for the down payment and for the principal every month. In addition, buying a home with a fixed mortgage acts as virtual rent control, providing a buffer against rising rents. And eventually, you’ll pay that house off, at which point you have rent-free living and loads of equity, a great way to accumulate wealth! According to the Federal Reserve in a 2017 bulletin, a typical homeowner’s net worth was $231,400, while that of renter was $5,200. This means a typical homeowner will be 45 times better off over their lifetime. These data hold true even during tough times like the ’08 recession.
“…for LMI households with carefully underwritten mortgages, the choice to buy a home yielded more economic benefit than the financial choices made by a comparable set of renters. After balancing renters and owners on observed characteristics and eliminating extreme cases, we find that LMI homeowners experience greater short-run change in net worth, assets, and non-housing net worth than do renters. The result is of particular importance because the period of the study coincides with the downturn in the housing market termed ‘The Great Recession.’ Given that the LMI population was hardest hit by the recession, that LMI households saw gains in net worth attributable to homeownership during a period of historic declines in housing prices is remarkable. This finding shows the potency of homeownership as a pathway to asset security.”
See all those big yellow cranes? We’re sorry to say that they’re probably not building your next home. Our current regulations make building offices and rental units more appealing to developers than condos, townhomes, single-family homes and mixed-use properties that serve the middle class.
Even if they were building homes to put on the market, we’re so far behind demand that it will take much, much more construction to catch us up. But it’s worth making the effort now: a study by the California Legislative Analyst’s Office has shown that building enough supply would result in lower prices. As more proof, Tokyo has not seen rapid home price appreciation because it meets all new demand by building more housing.
If you’re curious about all the construction, you’re not alone. Seattle in Progress is a free map tool that shows what’s being built all around Seattle. Explore the map
The supply of homes in King County is now measured in weeks, rather than months. As of May 2017, there was only a three week supply of homes for sale.
“As of April 2017, a 0.9-month supply of homes was available for sale, down from a 1.3-month supply in April 2016 (Redfin). By comparison, the available inventory of homes for sale reached a peak of 9.3 months’ worth in January 2010. During the 12 months ending April 2017, 53,400 existing single-family homes, townhomes, and condominiums (hereafter, existing homes) sold, up 7 percent from a year ago, which is the most existing home sales since 2007 (CoreLogic, Inc., with adjustments by the analyst). By comparison, an average of 59,850 existing homes sold annually from 2003 through 2006, as the economy expanded following the dot.com bubble. Despite strong economic conditions in 2006, home sales began to decline, and from 2006 through 2008, existing home sales declined by an average of 12,650 home sales, or 25 percent, annually, and then averaged only 25,850 sales a year from 2009 through 2011. The economic recovery began in 2011, and by 2012, the effects were evident in the home sales market. From 2012 through 2016, the volume of existing home sales increased at an average annual rate of 15 percent, or 5,325 homes, per year, to 52,450 home sales in 2016. The average existing home sales price was $519,900 during the 12 months ending April 2017, up 8 percent from a year earlier, marking the fifth consecutive year of increasing sales prices.”
It’s really quite simple: if workers can’t afford homes, new businesses will not want to locate here. It’s tough to track which businesses didn’t set up shop here due to the high cost of living, but there is a clear relationship. High home prices prevent employees from settling in our region, making it harder for businesses to find top talent and impacting their growth decisions. It might seem like a chicken-and-egg situation, but researchers have delved a little deeper.
In one study, the findings showed significant negative effects of unaffordable housing on local employment growth. For US metropolitan areas and counties, a small increase in the housing affordability ratio reduced employment growth by about 10% over the next ten years.
In Seattle, houses are getting less and less affordable for average workers. A recent paper from the University of Chicago estimates that between 1964 and 2009, output in America was 13% lower than it might have been because high housing costs encouraged people to move away from productive job centers.
“Fast-growing housing prices until 2006 did inspire some recent studies on this topic. However, most focus on the supply side of local housing markets. 4 Saks (2008) investigates how housing supply regulations affect housing and labor market dynamics in metropolitan areas across the United States. She argues that land-use and other government regulations can lower the elasticity of housing supply, which in turn can change the geographic distribution of housing prices and alter the pattern of labor migration. As a result, employment growth will be lower in places where the housing supply is more constrained. Saks presents some empirical evidence that supports that hypothesis. First, we want to develop a simple model to clarify why housing affordability varies among cities, and under what conditions unaffordable housing could have negative effects on local employment growth. The model reveals two insights: (1) Different levels of amenities in different cities drive the variation in housing affordability; and (2) cities with unaffordable housing could experience slower employment growth, because land rents are so high in those cities that they have already reached the very inelastic portion of their land supply curves.
Second, we want to test whether unaffordable housing indeed negatively affects employment growth. We use data on California municipalities, U.S. metropolitan statistical areas (MSAs), and U.S. counties to empirically measure the effects of unaffordable housing on employment growth. Given the potential endogeneity and omitted-variables problems in OLS regressions, we use climate amenity variables to instrument for housing affordability, a solution suggested by our theoretical model.”
In a congested region like King County, there is quite a premium placed on getting to work efficiently. One analysis found that New Yorkers will pay $56 a month to trim one minute off their commute. According to the US Census, Americans ranked having a short commute second only to low crime rates when it came to determining where to rent or buy a home.
Living close to job centers can be pricey—but fear not! Public transit can make living farther away much more affordable while still providing a reasonable commute. Significant improvements to our transit system are already underway, but we need to look even further ahead at the demand 30–50 years in the future. Foresight is the only way to ensure that mixed-used and multifamily housing options are built near transit stations and along planned light rail routes.
The following graph shows that we’re willing to pay more for a home if it offers an easier commute. Areas in King County with shorter average commutes generally have higher home prices. Good public transit options can help change this relationship by shaving time off the average commute in areas with affordable housing.
“The idea of a ’transit premium’ is an extension of location theory, which has a long tradition going back to work done by Johann Heinrich von Thünen early in the 19th century. Basically the idea of location theory as it applies to transit is that property values are increased by the directness of connections to other properties with synergistic land uses. The amount of this transit premium appears to be strongly influenced by several factors, including:
Local Regulatory Framework. The nature and extent of the relationships between public transit and nearby land uses depends greatly on the regulatory framework, including local government zoning ordinances, subdivision regulations, and other administrative requirements. In particular, the potential for transit-oriented development patterns and associated benefits for land values can be negated by inappropriate zoning such as single use districts…
Regional Connections. Research indicates that as the size of the area and population directly connected by transit to a given station location increases, the potential value added to nearby property increases. Regional high capacity transit networks provide fast, direct connections between workforce populations and employment centers, and commuting is the largest category of urban transit ridership, especially on rail lines. Such networks also provide many other kinds of connections that generate business volume and increase property value proportional to the total area and population served. So single transit lines serving a small city or a small portion of a metro region will have less impact on property values than an extensive network of transit lines connecting an entire metro region.”
Our lovely region, with its roaring economy, lots of nature, and plenty to do, makes us attractive to lots of newcomers. We all compete for a limited number of homes, which contributes to higher prices. In fact, the National Association of REALTORS® estimates that our region is 70,000 units short of meeting the need. Looking in a wider area, or scaling down your square footage requirements, can expand your options until city and county policy makers adjust zoning regulations so more housing can be available at all income levels.
“Sales housing market conditions in the HMA are currently tight, with an estimated vacancy rate of 1.2 percent, down from 2.6 percent in April 2010. During the 12 months ending April 2017, new and existing home sales totaled 60,350, up 6 percent from the previous 12 months, and the average sales price increased 9 percent, to $537,600 (CoreLogic, Inc., with adjustments by the analyst). During the forecast period, demand is estimated for 33,500 new homes. The 3,250 homes currently under construction and a portion of the estimated 28,000 other vacant units in the HMA that may return to the market will satisfy part of the demand.”
Current Washington State condo construction liability laws are stricter than they are in other states on the West Coast. For example, condo developers are on the hook for building-related issues many years after the project is completed. So, being rational creatures, when faced with choosing between building apartments or condos, developers have found that apartments provide them with more profits and fewer headaches. Attempts to reform our condo law and make construction more attractive stalled in the 2018 Legislature. That’s unfortunate, because condos are the most affordable option for many homebuyers.
Adding some common-sense provisions to our state’s condo liability laws, as suggested by a recent University of Washington study, would go a long way toward increasing the number of condos available.
“A judicial proceeding for breach of any obligations arising under RCW 64.34.443, 64.34.445, and 64.34.450 must be commenced within four years after the cause of action accrues: PROVIDED, That the period for commencing an action for a breach accruing pursuant to subsection (2)(b) of this section shall not expire prior to one year after termination of the period of declarant control, if any, under … RCW 64.34.308. Such periods may not be reduced by either oral or written agreement, or through the use of contractual claims or notice procedures that require the filing or service of any claim or notice prior to the expiration of the period specified in this section.”
Backyard cottages add affordable housing, provide income streams from renters, and create space for multigenerational families. And they’re cute! But in Seattle, a judge recently delayed a new city ordinance that would have made these detached accessory dwelling units (or DADUs) easier to build and permit. It will be a few months before this issue is decided.
You might be surprised at the number of duplexes, triplexes, and backyard cottages that are already in your neighborhood. The Sightline Institute created an interactive map revealing nearly 10,000 non-single-family units (including 1,500 accessory dwelling units (ADUs)) in Seattle’s single-family zones.
Explore the map.
City of Seattle Resolution 31547 directed the Department of Planning and Development (DPD) to explore policy changes that would increase the production of attached and detached accessory dwelling units (ADUs and DADUs), including regulatory changes, incentives, and marketing and promotion. Currently, only about one percent of single-family lots have an ADU or DADU. Resolution 31546 established the Seattle Housing Affordability and Livability Agenda (HALA). The HALA Advisory Committee released its final recommendations, one of which was to boost production of ADUs and DADUs by removing specific code barriers that make it difficult to build them.
Buying is one of the primary ways people build wealth in this country, and a 30-year mortgage acts like permanent rent control! Check with your local REALTOR® to see how to best search for, bid on, and buy a home.
To calculate the cost of renting, start with the monthly rent and add renter’s insurance and a refundable security deposit. To calculate the cost of buying, start with the purchase price and calculate the initial down payment and buyer closing costs; the monthly mortgage payment and other recurring costs like maintenance, property taxes, and insurance; income tax deductions for mortgage interest and property taxes; and the final mortgage payment, sales proceeds, and seller closing costs. These costs depend on numerous assumptions, like mortgage rate, income tax rate, how long you stay in a home, and local home price appreciation: Use a net present value (NPV) calculation to compare the total costs over time of renting versus buying.
Yes, and this is one of the reasons many people buy a home. Some of the tax incentives currently available to homeowners include deductions for mortgage interest, interest on home-equity loans, and property tax. Additionally, the IRS allows first-time homebuyers to withdraw up to $10,000 from their IRAs penalty free to help with the purchase of the home. And when it comes time to sell, many owners can avoid taxes on up to $250,000 of gain for each owner if they’ve lived in the home as their primary residence for two of the last five years.
“You can deduct home mortgage interest if all the following conditions are met:
“You file Form 1040 and itemize deductions on Schedule A (Form 1040).
“The mortgage is a secured debt on a qualified home in which you have an ownership interest.
“… Mortgages you (or your spouse if married filing a joint return) took out after October 13, 1987, that are home equity debt but that are not home acquisition debt, but only if throughout 2016 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home.”
While it may feel like there is a lot of development going on, it’s not enough to keep up with demand—the Seattle area is adding more than 350 new jobs every day! To decrease demand would require cutting jobs. Oh, you don’t want that? That means we have to create more homes, which means considering changes in zoning so that home-builders can make the most of existing space, or changes to the Growth Management Act so we can build on undeveloped land. We also have to continue to invest in our transportation infrastructure so people aren’t forced to “drive to qualify,” that is, move farther away from the urban centers to find a less expensive or larger home. REALTORS® support a balanced approach. This includes allowing more multi-unit development along urban transit corridors, greater incentives for condominium construction, and flexibility for accessory dwelling units in single-family neighborhoods.
The City of Seattle Comprehensive Plan includes a range of housing strategie: “Strategy R.1 – Mandate that affordable units be included in new housing developments and that commercial developments contribute fees towards affordable housing, and provide an associated upzone or floor area ratio (FAR) increase 2. Strategy MF.1 – Devote more land to multifamily housing particularly in areas near transit, services and amenities. Strategies MF.2 and MF.3 – Further the Urban Village growth strategy by expanding the boundaries of Urban Villages to reflect walking proximity to transit, services and amenities and by converting Single Family zoned land within Urban Villages to a more intensive use. Strategy MF.5 – Increase height limits and modify building and fire codes to maximize economical wood frame construction.”
For every quarter point interest rates go up, the cost of a $500,000 mortgage goes up $30,000 over the 30-year fixed loan. Another way to think about it is that a rise of one percentage point in mortgage rates reduces your purchasing power by 12%. Interest rates are still at historic lows, but signs point to them going up soon, so many experts recommend buying sooner rather than later. REALTORS® agree.
“… the Fed’s initial 25-basis-point increase on a traditional 30-year fixed-rate mortgage might slow home appreciation by 1 percent more than expected without the rate increase. This would cause existing-home sales to slow by about 2.5% on annualized and seasonally adjusted basis. That’s about 150,000 fewer sales over the course of a year.”
Paradoxically, no. Rent control causes some big shifts that make the problem worse. Suddenly the income from a rental home is capped, so there is less incentive for landlords to create more units. This means the total number of available homes doesn’t keep up with demand. Landlords often begin doing bare-minimum repairs, so the homes become undesirable places to live and can impact the neighborhood. Apartment builders also begin developing in non–rent-controlled areas, which may be out of the job core, increasing traffic and congestion.
“If rents are established at less than their equilibrium levels, the quantity demanded will necessarily exceed the amount supplied, and rent control will lead to a shortage of dwelling spaces. In a competitive market and absent controls on prices, if the amount of a commodity or service demanded is larger than the amount supplied, prices rise to eliminate the shortage (by both bringing forth new supply and by reducing the amount demanded). But controls prevent rents from attaining market-clearing levels and shortages result.”
Good question. The average parking space adds $35,000–$50,000 to the price of a housing unit, decreasing affordability at a time when we really can’t, ahem, afford that. Luckily—particularly within Seattle city limits, where this practice is most common—many residents are finding that they don’t need cars, what with car sharing, transit and walkable neighborhoods. Advocates of smart growth say this trend is the future.
High parking requirements “can prevent development or incentivize development in low-density areas where land costs are cheaper. Standard uniform parking requirements disproportionately dampen urban development because of higher land values in urban areas compared with suburban locations. In residential areas, the cost of building parking is passed on to the resident, increasing housing costs for all users, regardless of car ownership.”
More homes are necessary, but there are ways to add them without reducing our noted quality of life. Smart growth experts and REALTORS® agree with the following:
All of these preserve neighborhood character while adding housing options. It’s all about balance.
Growth pressures demand tradeoffs between accommodating growth through outward expansion, or accepting the social implications of failing to build enough new housing. With neither outward expansion nor meaningful densification, U.S. cities cannot provide enough housing to prevent equally unwelcome changes to their social character.
Since 1990, Washington State has had a law—the Growth Management Act (GMA)—that requires local governments to plan for and manage Washington’s growth. While it’s been great at protecting nearby open space, it’s been less successful at predicting and meeting the housing and transportation needs of our increasing population. A few changes to the GMA would make it both more realistic and successful at ensuring that everyone can find a good housing option they can afford that’s not too far from where they work.
“The GMA provides a framework for regional coordination, and counties planning under the GMA are required to adopt county-wide planning policies to guide plan adoption within the county and to establish urban growth areas (UGAs). Local comprehensive plans must include the following elements: land use, housing, capital facilities, utilities, transportation, and, for counties, a rural element.”
While there are often federal taxes when you sell a house, local jurisdictions also get in on the action with excise taxes. In our region, these are currently 1.78% of the sale price. And while legislators are considering adding more, through something called Real Estate Excise Tax 3 (REET 3), Seattle King County REALTORS® think additional taxes unfairly burden sellers by reducing their equity and limiting their options for another home purchase.
“Washington State levies a real estate excise tax (REET) on all property sales.
This state tax rate is 1.28% of a property’s full selling price. A locally-imposed tax is also authorized, though the rate and uses of the funds differ by population size and whether the city or county is planning under the Growth Management Act (GMA). All cities are allowed to levy a 0.25% tax on property sales (REET 1), cities and counties that are planning under the GMA may also levy a second quarter percent tax (REET 2). For non-GMA planning entities, REET 1 can be spent on any capital purpose identified in a capital improvements plan (streets, parks, sewers, swimming pools, etc.) or acquisition of lands associated with such improvements. Cities operating under the GMA must spend their funds solely on capital projects listed in their comprehensive plan.”
Housing demand in our area is driven more by strong job growth than foreign investors. We have a very different market than in British Columbia, where foreign investors have created a problem because many of the purchased properties remain vacant, rather than serving as primary residences or rentals. It is the vacancy rate in Vancouver, BC that is the problem, which is why the city recently adopted an additional tax on property owners who do not occupy their units or make them available for rent.
Vancouver, BC recently implemented a foreign buyer tax. Vancouver, BC’s Bill 28 amends the Property Transfer Tax Act, imposing an additional property transfer tax of 15% on all residential property transferred to foreign buyers. The tax will be payable on all transfers that are registered with the Land Title Office on or after August 2, 2016. This change “may affect the liquidity of land assemblies, development land and multi–unit residential real estate, at least in the short term, as the additional property transfer tax will decrease the attractiveness of such properties to foreign buyers.”
Our problem is not that we have too many vacant units like Vancouver, BC. Our challenge is that we don’t have enough homes for everyone who needs a place to live. A vacancy tax is not going to solve our local housing challenge.
“A vacant house tax might look very similar to the law recently put into effect in Vancouver, BC. It states: The Council may, by by-law, impose an annual vacancy tax on a parcel of taxable property in accordance with this Part. A registered owner of taxable property must pay the vacancy tax imposed on that parcel of taxable property by a vacancy tax by-law. A vacancy tax, together with any applicable penalties and interest payable under section 618 (d) [permissive vacancy tax by-law powers], owed to the city is a debt due to the city and is a levy that is a charge or lien on the real property on or in respect of which the vacancy tax is imposed, has priority over any claim, lien, privilege or encumbrance of any person except the Crown, and does not require registration to preserve it.”
Yes. All 39 cities in King County are required to set housing policy. While some of the hot-button topics are largely focused on Seattle, they still impact the rest of King County. Let’s not forget that two-thirds of sales in King County are outside the Seattle city limits. Housing shortages in Seattle and larger Eastside cities make people look farther afield for housing, increasing traffic for commuters, raising prices, and driving down inventory for everybody.
In 1994, King County adopted its Comprehensive Plan under the framework of the Washington State Growth Management Act and the King County Countywide Planning Policies. Since that time, the Comprehensive Plan has guided King County’s housing efforts. The County exercises direct control over some measures such as development regulations in unincorporated areas. The County also provides direct funding for affordable housing efforts through the King County Housing and Community Development Program. In addition to direct efforts, the County works in conjunction with many public, private and nonprofit entities to promote housing development and affordability. The County is a partner with most cities outside of Seattle through the Community Development Block Grant (CDBG) and HOME Consortiums to allocate and administer affordable housing development funds. Recent efforts and strategies of the Consortium are detailed in the 2010-2012 Consolidated Housing and Community Development Plan.
HALA: The Housing Affordability and Livability Act is the City of Seattle’s plan to increase housing opportunities for market-rate units and income-qualified units throughout the city. Part of HALA implementation includes increased density in several neighborhoods in Seattle.
ADUs/DADUs: Accessory dwelling units and detached accessory dwelling units are mother-in-law apartments and backyard cottages respectively.
GMA: The Growth Management Act is a Washington State law that protects outlying open space from development and gives guidance for how to meet housing demand in our region.
REET: The Real Estate Excise Tax is an additional tax on the sale of a house, imposed by the state and a local jurisdiction.
Drive to Qualify: This means to look for housing farther away from city job centers, where it is less expensive. It refers to the ability to qualify for a specific mortgage amount. Many households can’t qualify for the higher mortgages needed to purchase in-city real estate, so they drive out to qualify.
HALA: A report with 65 recommendations to consider. The City and its partners have begun implementing the HALA recommendations, including doubling Seattle’s Housing Levy and strengthening legal protections for renters. (Source)
ADU/DADU: An accessory dwelling unit or detached accessory dwelling unit is a separate living space within a house or on the same property as an existing house. These units aren’t legal unless they have been established through a permit process. (Source)
GMA: The GMA provides a framework for regional coordination, and counties planning under the GMA are required to adopt county-wide planning policies to guide plan adoption within the county and to establish urban growth areas (UGAs). Local comprehensive plans must include the following elements: land use, housing, capital facilities, utilities, transportation, and, for counties, a rural element. (Source)
REET: Washington State levies a real estate excise tax (REET) on all property sales. This state tax rate is 1.28% of a property’s full selling price. (Source)
Drive to Qualify: The process of purchasing a home farther away from a job center to afford additional square footage.
Seattle King County REALTORS® is a member organization of the National Association of REALTORS®, the largest professional trade association in America. We capitalize REALTORS® so that our members can easily be differentiated from those agents who don’t adhere to our higher professional standards. REALTORS® are also the most successful partner in selling your home: nationally, nearly 9 out of 10 home sales are facilitated by REALTORS®. So you can see why we shout our name: our members are tops in their field.
No jargon here—it’s really not that complicated. REALTORS® have more training, higher standards, and more success for their clients. Sorry we couldn’t make it more difficult to understand.