Seattle Housing Affordability

The Seattle City Council is considering legislation that would require developers of multifamily housing to include some affordable units in their projects or pay the city to help build the units elsewhere.

The legislation would take effect in conjunction with the council approving zoning changes across the city — mostly in multifamily areas.

Those changes would allow developers to build larger and taller buildings, offsetting the cost of the requirements.

Mayor Ed Murray unveiled the broad strokes of the policy almost a year ago, saying it would help make Seattle more affordable.

But there are a lot of important details for the council to investigate, including some that still need to be hammered out. For the complete article, click here.

As a developer, I know that construction costs and market variables are unpredictable. There are parts of the city where development lags behind because of its riskiness, places like Rainier Beach - exactly where more affordable housing is needed. The city needs to consider encouraging development in these areas, without additional costs and restrictions that impede economic growth and development.

Happy Investing!

Seattle Housing Affordability

1)      In 1995, the affordability ratio was 53%

a.       Affordability was calculated by average monthly US mortgage payment in 1995/average monthly income.  Translation:  % of the average monthly income spent on a mortgage payment.

2)      In 2005, the affordability ratio was 70%...meaning homes were much less affordable in 2005 versus 1995.  BUT, thanks to some pretty lenient lending guidelines, more people were owning homes.  ICYMI, things didn’t work out with the super lenient lending guidelines

a.       NOTE:  The LEAST affordable year was 2007, when affordability was 77%!  That means in 2005, 77% of the average US monthly income was spent on a mortgage payment.  That’s CRAZY!

3)      In 2015, affordability has fallen back to 66%. 

So, homes are more affordable in 2015 than they were in 2005, but only by 4%.  So what else is going on?  Well, the largest crop of incoming homeowners are being absolutely crushed by student loans.  That’s what’s up.  Home’s may be more affordable on the metric of payment/income compared to 2005…but what that ratio doesn’t take into account is the average student loan debt.  Check out this graph below.  It doesn’t go all the way to 2015…but I think we get the point. 

In the end, homeownership is falling because the new generation of homebuyers simply can’t afford a home PLUS pay all their other debts…like student loans (car payments, cell phone bill, health insurance, credit card debt…you name it, life is considerably more expensive for the millennials than it was for generations previous). 

   

Stats and Graphs below are for Seattle proper

On to Interest Rates…

Weekly Interest Rate Recap for the week ending 2/12/16

The week started off with rates continuing their fall.  Right now we’re experiencing a very anxious worldwide stock market…the data hasn’t come out yet to support everyone’s worst fears, BUT the data is pointing towards everyone’s worst fears.  As oil prices fall, more and more oil companies are forced into bankruptcy and layoffs; European banks are getting hammered on fears over the ramifications of negative interest rates; Japan’s markets are getting crushed on GDP concerns; and lastly China…Just…China.  Enough said there. 

On Wednesday, Janet Yellen spoke and gave her testimony to the House Committee on Financial Services.  It was a different tone than the last few, but that shouldn’t be a surprise with all that’s going on in the world markets.  Instead of addressing whether or not the Fed would continue to raise interest rates throughout the year, she stated that they are not prepared to lower the rate.  “There is always a risk of a recession…and global financial developments could produce a slowing in the economy…[but] I don’t think it is going to be necessary to cut rates.”

Mortgage interest rates have been steadily falling for the last month+ as a flight to safety has investors selling out of world stock markets and purchasing US Mortgage Bonds.  However, a little bit of good news broke into the market on Friday the 12^th.  Not only were there rumors that OPEC might actually cut world oil production (which would help to raise oil prices); but retail sales for January were slightly above estimates, showing that at least on the home front the US Economy is resilient in the face of world market turmoil.  This news caused the mortgage bond to reverse trend, and it looks like we will end the week with interest rates ticking slightly higher.

Happy Investing!

Structural Shifts in Housing

BloombergTV Asks: Is U.S. Housing on Solid Ground? In Conversation with Marcus & Millichap’s Hessam Nadji:

	Why construction levels are falling short of housing demand
	Will renters buy houses, or has there been a structural shift?
	How millennials' housing preferences are reshaping the market
	Key housing market gauge suggests economic expansion should continue
	Apartment investments - why investors still see opportunity

Watch the interview here.

Lots of interesting new trends in the housing market! And what does this mean for Seattle?

Forbes lists the Seattle market as the 16th most overpriced city in 2015:
Seattle, Wash. MSA: Seattle-Bellevue-Everett, WA
Median Income: $86,027
Q4 2014 median sales price: $360,000
Housing affordable at median family income: 51.2%
Cost Above National Average: Groceries: 5.8%; Utilities: -4.1%; Transportation: 9.8%; Health: 18.7%; Misc.: 8.9%

As of this date, it looks like the Socialist incumbent on Seattle City Council has won re-election, based on her platform of affordable housing, rent control and living wages. Savvy investors will want to follow these trends to see how they play out in the real estate market.

Happy Investing!

No on Rent Control

I attended my University District Rotary meeting yesterday, held in conjunction with the Ballard Rotary, in order to hear our speakers Seattle City Mayor Ed Murray and City Attorney Pete Holmes.

The Mayor spoke about the importance of housing affordability in the city of Seattle, and I asked him specifically for his thoughts on rent control.

No, he does not support rent control. He has come completely around on this topic, since he first introduced legislation in support of rent control fifteen years ago. He has done his homework on rent control, and learned that it is bad public policy. It has the exact opposite effect on housing affordability. Examples he cited were in San Francisco and New York City, two of the most expensive housing markets in the country.

Rent control does not work.

It does not increase housing affordability, and it drives investment elsewhere.

Karen T responded this way to my post on Facebook about this topic: " I wish that landlords would talk about ways to help low income renters build wealth. What about helping renters by selling units on a rent-to-own basis? A portion of each months rent goes into escrow to build up a down payment to actually buy the unit. First step to building lasting wealth. I am tired of talking about what I am against (rising rents). I want to have more discussions about ways we can all do better."

I agree, Karen. Let's talk. 

Happy Investing!

No Rent Control

Dear Seattle City Councilmembers,

I'm writing to ask you to vote NO on the rent control resolution being brought forth to Full Council.

Rent control is a feel-good policy, but it is fundamentally flawed and negatively impacts poor people more than any other group.

Rent costs are driven by the costs of land, construction, financing, and demand. When a builder decides to build a project, they have to balance the costs with potential rent revenue. If rent potential is too low, a project won’t pencil and banks, lenders, and other funders won’t put money into the project.

In San Francisco, Census data published in 2013 by the American Community Survey shows that over 32,000 housing units sit vacant - a full 1 in 12 housing units in the city. The reason? Rent control.

Rent control is a disincentive for housing production. Less housing built means fewer units, which leads to continued higher prices. Consider that:

• Rent control doesn’t lower overall prices; if some units are locked in, the difference is made up in other parts of the market with even higher prices.
• When rent cannot fluctuate, there is no incentive or cash flow to maintain buildings, especially since costs are not controlled and continue to rise in Seattle at a rate of nearly 4% per year. These costs are actually forecast to rise even further due to utility costs.
• Rent control concentrates poverty, reduces tenant mobility, and prevents new renter from having housing opportunities; once a person is in a rent-controlled unit they end up staying there.
• The beneficiaries of rent control are a mixed bag - often wealthier households end up getting rent controlled apartments, while truly poor families don’t.
•  

What can the City Council do to create more affordable housing, and preserve existing housing which is affordable? I ask that you please consider the following:

• Lower costs and barriers to entry for housing producers, both market rate and non-profit. Fees, process, inspections, and taxes make up as much as 20 percent of housing costs in Seattle.
• Increase production of all types of housing, for all levels of income everywhere in our city. Revisiting microhousing, and expanding opportunities for infill in our neighborhoods with ADU units are two places to start.
• Identify and define the problem appropriately; does a household paying 31 percent of its income on rent need help? What about the family paying 25 percent for housing, but still struggling to make ends meet?
• When we build market rate housing for people who have more money to spend that means they are not competing for housing against poor people. This is a simple fact of economics that needs to be factored into our decisions about housing.
• We need to be efficient about subsidies and how we use our public resources for housing. There is an array of opportunities, like using our debt capacity to building housing on City owned land, an idea championed by Councilmember Sawant.

Thank you for taking the time to hear my concerns, and for your consideration. Again, I strongly encourage you to vote NO to rent control.

Thanks to Rental Housing Association for providing the information above on the issues around rent control.

Happy Investing!

Washington Housing Affordability

January 2015
State of Washington Housing Affordability Advisory Committee has just released their report on housing affordability. Here are a few excerpts from the Executive Summary.

HOUSING NEEDS ASSESSMENT

EXECUTIVE SUMMARY
Housing affordability is a problem in Washington State. Thirty-six percent (936,260) of Washington’s households are cost-burdened. More than 390,000 households (15.2%) are severely cost-burdened. In fact, the proportion of the lowest-earning households (earning less than 30% of the state’s median family income) that are severely cost-burdened is greater than those who can reasonably afford their housing.

Obviously, homelessness is another critical affordability problem one step beyond cost burden. While homelessness is not captured in cost-burden data, it is discussed in the Housing Needs Assessment.
The Housing Needs Assessment was commissioned by the diverse, governor-appointed membership of the Washington State Affordable Housing Advisory Board to create an unbiased accounting of housing affordability in Washington. It is meant to serve as a foundation for current and future policy discussions. In future years this study can be replicated to understand trends and the effectiveness of policy decisions and investments.

This study is a snapshot of housing affordability in Washington

COST-BURDENED:
when a household pays more than 30% of its income for housing expenses

SEVERELY COST-BURDENED:
when a household pays more than 50% of its income for housing expenses

AFFORDABLE:
when a household pays no more than 30% of its income for all housing costs

Affordability varies by region. There are housing affordability problems in every county inWashington, but the size and nature of the problem varies by region due to differences in housing costs and incomes.

For example, in Pierce County a four person household needs an income of $54,160 (75.5 percent of the local median family income) to afford to rent a three-bedroom apartment. 

Although most households with incomes below 50 percent of the state’s median family income are cost-burdened, many households earning above 80 percent can find affordable market-rate housing.

Similarly, 53.8 percent of owner-occupied housing units across the state are affordable to a household earning the median family income.

What income does it take to afford the typical rent or the median valued home?
GAP
Only 28 affordable units are available for every 100 extremely low-income households.  In Washington State, 118,092 units of subsidized rental housing have been built using state, local, federal and private capital funds. In addition to these physical units, 40,169 tenant-based rent vouchers are in circulation across the state.

A significant unmet need remains for special groups with limited incomes such as seniors, people with physical and cognitive disabilities, families, victims of domestic violence.

Affordability is a considerable problem for lower-income households

For extremely low- and very low-income households, Washington State has a deficit of 327,136 affordable and available housing units. In other words, for every 100 extremely low and very low-income households, only 51 units are affordable and available to them.

The remaining 49-unit gap represents households in the state who are paying more for housing than they can reasonably afford.

Since 2000, incomes in the state have declined by 2.4 percent but median rents have increased 7.8 percent in real dollars. This means that housing affordabilty in the state has been a growing problem over the past
decade.

Washington State’s above-average economic and job growth is forecast to continue, resulting in continued population increases. Most of that growth will be driven by low-income households.

The affordable housing gap is shrinking, but very slowly.
The number of housing units priced for low-income households is forecasted to grow at a
similar but slightly faster rate than the number of low-income households.

If the current status quo in Washington remains unchanged, it will take at least 30 years for the gap in affordable and available housing to close.

Available online: You can find the report and all its components atwww.commerce.wa.gov/housingneeds.

Happy Investing! 

Real Estate Pricing

Want to know how to predict real estate prices?

Every investor wants to know how to predict real estate prices and the process is not as mysterious as it may appear.

While I focus on investing for cash flow, loan amortization, and tax benefits, I also appreciate the warm and fuzzy feeling you get as an investor when your real estate values climb!  So, what are the things I look for when figuring out how to predict real estate prices?

Prices are a result of supply, demand, AND capacity to pay.

Let’s look at these factors one at a time:

Demand for real estate is driven by population growth which is fueled by job growth.  In resort and retirement communities, you might see high demand and price growth even when the local job market is stagnant because the money to fund real estate purchases in resort areas was earned somewhere else and imported.

Real estate supply is restricted by (1) availability of land, (2) geographic boundaries such as water and mountains, (3) political boundaries such as permit fees, restricted density policies, and (4) economic boundaries such as availability of development capital and the ability to build and sell new properties at a profit.

No matter how desirable or limited in supply something is, the price of the thing will be dictated by how many people can afford to buy it.  Affluent communities have more expensive restaurants than the poor communities.  Although the desire for food and supply of food to both of these neighborhoods might be the same, the prices in these two neighborhoods can be wildly different based on capacity to pay.  For example, a can of Coke could be $1 in a poor neighborhood and $3 in an affluent neighborhood.   The main thing driving price differences in this illustration is capacity to pay.

As a real estate investor, I am attracted to affordable housing markets because it means the price of housing has the ability to increase in price.  Just because something is affordable doesn’t mean it will go up in price, it just means it can go up in price.  For prices to rise, the other variables of supply and demand must also be working in your favor.  However, if something is unaffordable for the majority of people who want to buy it, that’s a pretty strong indicator that the price could be in a bubble and may soon come down to more affordable levels.

The ratio between median income and median home price is an effective way to gauge the affordability of housing in a particular market:

Median Home Price / Median Income = Affordability Ratio

Using data from Q3 2013, the San Francisco – Oakland MSA had a median home price of $705,000 and a median income of $76,300.  That means the median home price is 9.2 times higher than the median income; it would require 9.2 years of median income to buy a median priced house.  In terms of a monthly housing payment (Principal, Interest, Taxes, Insurance, and HOA dues), a median home in the San Francisco-Oakland MSA requires ~70% of the median income.  That’s not sustainable.  Either income must go up or housing prices must come down.  I would bet on the latter.

In Rockford, Illinois, the median home price is $88,900 and the median income is $51,500 which means the median home price is 1.7 times higher than the median income.  To put it in other terms, residents of Rockford use a mere 13% of their household income for housing.  WOW, that’s affordable.

Lenders don’t know how to predict real estate prices, but they know how to predict what borrowers are likely to pay and which are not.  Lenders know that when you use a lower percentage of your income for housing, their loans are less likely to go into default.  For example, FHA requires its borrowers to use no more than 31% of their gross income for housing and no more than 43% of their income for total debt service including housing and other loans.  It seems pretty crazy for someone in California to use 70% of their income for housing!

I’ve traveled to both San Francisco and Rockford and I can tell you without hesitation there is more demand and less supply of housing in San Francisco, CA than Rockford, IL.

If you want to know how to predict real estate prices, there is a great equalizer in this supply and demand equation: CAPACITY TO PAY.  Someone earning the median income and living on their parents’ couch in Rockford can save up all their pennies for 1.7 years and pay cash for a median level home in Rockford.  Now, I’m not saying run out and buy real estate in Rockford because it’s amazingly affordable. (Remember, if you want to know how to predict real estate prices you also need the combination of supply and demand to create upward price movement.)  However, I am saying San Francisco-Oakland prices are back into bubble territory and are poised for a downward price correction.  If you’re thinking of buying a home in the San Francisco Bay Area because you think home prices will continue to go up, just ask yourself “Who can afford to pay more than 70% of their gross income to buy this house?”  That’s right: NO ONE!

A housing price-to-income ratio less than 3 is very affordable, from 3 to 4 is moderately affordable, 4 to 5 is moderately unaffordable, and over 5 is severely unaffordable.  Here’s an example of these ratios based on a $100,000 house whose PITI is $7500/year and using variable median incomes to illustrate my point.

If the median home price is more than five times the median income, those buyers will be required to use too much of their income for housing and will not qualify for mortgages.  This affordability ratio can be comfortably higher in resort and second home areas because the income is imported from outside the metro where the property is located.  However, if you are looking for rental property in a typical metro, properties with affordability ratios over 5 are overvalued based on the measure of capacity to pay.

 

If you would like to improve your odds knowing how to predict real estate prices, look for these three indicators of success: increasing demand (jobs), limited supply, and an affordability ratio below 5.

Editor's note: Seattle's median home price is $429,600. Seattle's median household income is $64,473. Its affordability ratio is 6.7.

Happy Investing!

 

Today's guest blog is courtesy of David Campbell.