After moving to Seattle in 2009, I became a first-time single-family-home owner AND a first-time car-owner around the same time. In Taipei and Boston and Chicago and DC, most of my friends and I lived in apartments and relied on public transit.
I LOVED my little Ballard house: the wonderful neighbors, the many grocery stores and restaurants within walking distance, the wonderful neighbors wondering why I walked these distances when I had a car. The fact was, in the time it took to back out of my driveway onto our narrow street crowded with parked cars, I could walk 10 blocks and back!
I’ve since moved to Lynnwood, because Spot, my arthritic cat, needed to be in a single-story house that’s very close to a 24-hour vet. My colleagues often ask, how long did it take you to get to the office this morning? The answer depends. I’ve made the trip in as little as 30 minutes, but there are days when it’s more than an hour.
The thing is, the residential streets in Lynnwood are really, really wide, by Ballard standards. I’m usually on I-5 within 5 minutes after locking my front door. So for me, at least, it doesn’t feel like the door-to-door time to reach most places (except Ballard, of course) has increased.
In any case, the commuting time that matters most to me is this: a few months back, when my Max kitty had an early morning health crisis, we got to the vet’s in 6 minutes! If we had been back in Ballard, I would still be inching out of my driveway.
I’d never heard of the term, but here’s how UW professor Diana Pearce explains it: “If you can imagine a graph where wages are going up very, very slightly, and expenses are going up larger, that’s like the alligator jaws, getting wider and wider and wider…”
Yesterday SeattlePI reported that our region had the highest wage growth in the nation over the past year. Yay us! Except that growth rate is only 4.1%. Not enough to keep up with rising house prices and rents. Or utility price hikes. Or property tax increases.
I was surprised to find that 18 of Mount Baker’s 62 existing home sales this year involved sellers who’ve owned their houses for fewer than 5 years. The situation is similar in Madrona and Montlake. My guess is, many of these folks are ambitious professionals who’ve found next steps on their career ladders in other cities… where they may be less likely to be eaten by alligators?
Let’s say you put your house on the market at a very appealing price, with the hope that huge numbers of competing buyers would bid the price way up. Unfortunately the highest (and perhaps only) offer you get is at your asking price. Would you have to let the house go for much less than you expected?
Last weekend the Seattle Times wrote about a West Seattle family who found themselves in such a situation. Rather than live with disappointment, they asked the buyer to pay $35,000 more. I know. What?! After a week of negotiations, the two sides came to an agreement in which the buyer paid $20,000 more.
Believe it or not, during this past week alone, SIX colleagues from my office encountered similar seller demands. The market seems to be shifting, but over the past couple of years, everyone has been conditioned to take intense buyer competition for granted.
Perhaps demand will heat back up during the winter or spring. Or it could taper off more, too, so that sellers who make “I want more” counter offers end up empty-handed. The more reason for careful consideration before making real estate decisions.
1. According to the National Association of Realtors’ 2017 Q3 Homeownership Opportunities and Market Experience (HOME) Survey, 77% of Americans think that now is a good time to buy a house. 23% disagree.
But according to Fannie Mae’s August 2017 Home Purchase Sentiment Index, only 55% think the time is right to buy. 37% disagree. The net “yes” response is just 18% for Fannie Mae, versus 54% for NAR. Who should you believe?
2. Every month, Windermere compiles a very informative stat called “cost of waiting”. For instance, in August, 2016, the monthly principal and interest payment on a median-priced Seattle home was $2,670. A year later, the median price has increased by $90K and the interest rate has bumped up by 0.53%. The monthly payment on a median home is now $3,277. The cost of having waited was $607 per month – multiplied by 30 years.
But will the same hold true if we look forward to 2018 and beyond? When you buy mutual funds, their brochures warn that past performance is not a guarantee of future results. Doesn’t the same go for housing? Just ask the folks who bought their homes in 2007.
3. ATTOM Data’s Q3 Affordability Index shows that in some markets, wage growth has outpaced home price growth over the past year. Seattle is NOT one of them. In addition, as Zillow points out, our “hidden home ownership costs” (which include property taxes, utilities and maintenance) are among the highest in the nation – and will continue to rise. For instance, Seattle Public Utilities stated in its strategic plan that the average annual rate increase to maintain baseline operations in 2018–2023 is 5.45%.
This is a problem, even if you can comfortably afford the home you have in mind. If you ever needed to move, you’d want to have access to a steady base of potential buyers. If our wage growth isn’t keeping pace with the cost of home acquisition and ownership, we’re relying on newcomers to keep the market going. But as a recent Seattle Times survey shows, nearly half of newcomers (<5 years in Seattle) aren’t planning to stick around for the long haul.
4. As of Q1, 2017, Zillow’s Breakeven Horizon showed that it would take 2 years and 3 months before it would make more sense for someone paying Seattle’s median rent to buy a house at the median price. But according to Dupre + Scott, an apartment investment research firm, 7,000 new rental units have come on the market since April and 62,000 more are slated for 2018-2020. Already rental vacancy rates are at their highest point since 2010. How will this affect transient newcomers’ break-even math?
5. No, I’m not advocating against house buying. I just think there are lots and lots of factors that you should consider. Let me know if you’d like someone to talk them over with.
1. Imagine that on your way into a grocery store, the manager tells you that today’s median produce price is $1.50, which represents a year over year increase of 50%.
For the sake of simplicity, let’s assume that the store sells only 3 items: bananas ($0.20 each), apples ($1 each) and dragon fruits ($5 each). Apples would be the median-priced produce, as there are equal numbers of cheaper versus more expensive products.
$0.20 bananas, $1 apples, $5 dragon fruits = $1 median price
$0.05 bananas, $1.50 apples, $2 dragon fruits = much higher median price
If you were shopping for apples, the median price change would affect you greatly. But if you were interested in anything else, the median price might not have any relevance to your experience.
2. Suppose the grocery store manager says that the median shopper age at the moment is 20. You expect the store to be filled with college students, but instead, the one and only median-aged 20 year old is surrounded by equal numbers of toddlers and grandmothers.
3. Let’s say you ask every disembarking passenger at a bus stop how old he or she is. After surveying 50 people, you find that the median age of the group is 30. You repeat your survey the next day and the median age is 20.
Has the bus-riding public gotten younger overnight? Or could it be that the 100 people you spoke to don’t accurately represent the entire population of bus riders?
I HATE how readily everyone throws out median home prices or days on market in real estate discussions. It’s misleading!
Median is not an indication of what you’ll most likely encounter. I’m almost certain that you will NOT buy a house or sell your home at the median price after it’s been on the market for a median number of days.
Median shows you nothing more than what’s happening at the midpoint of the market. As with my grocery store example above, prices for waterfront mansions could completely tank even as median home values rise.
And most importantly, when all you have on hand is a small number of examples, knowing their median tells you nothing about the universe beyond your handful of examples.
Attom Data Solutions’ Q2 Loan Origination Report showed that 39.1% of Seattle home purchases involved co-borrowers, compared to 22.8% nationwide. Co-borrowers are defined as non-married individuals applying together for a mortgage.
As Windermere Chief Economist Matthew Gardner explains it, this is because high prices are forcing borrowers to consider options such as parental assistance. But he adds that Seattle’s relatively substantial (14%) average down payment “can act as a cushion in the unlikely event that home prices start to reverse their substantial gains.”
(9/20 update: I ran the Seattle co-borrowing percentage by HomeStreet Bank’s Mark Hannum and he thinks it seems high, as most Jumbo and FNMA lenders don’t allow non-occupant co-borrowers. He does agree that with Matthew Gardner that borrowers often rely on parental assistance – for down payments. FHA does allow non-occupant co-borrowers, but out of Seattle’s 1,500+ single family home sales that took place in the last 60 days, only 22 involved FHA loans.)
This juxtaposes uncomfortably with Northwest MLS director George Moorehead’s assurance in NWMLS’ August press release that the quality of local home buyers will insulate us from real estate fallout. Apparently a significant proportion of these “quality” borrowers aren’t able to obtain loans without help.
As Mark Hanson points out, it takes 8-10% of equity to put a house back on the market, so a 14% average down payment isn’t as substantial of a cushion as it seems. It doesn’t take much downside before a homeowner is left with limited – or negative – available equity.
The question is, just how “unlikely” is it for home prices to recede?
Every quarter, Zillow surveys huge numbers of economic experts on their expectations for home price performance. The Q3, 2017 results are in. Between 2017 and 2021, the median expectation among 99 experts is a 19.33% increase in housing prices, but a handful of pessimists forecast declines. Mark Hanson, for instance, predicts a 24.47% drop!
Chief economists at Wells Fargo and PNC Bank are somewhat cautious: 14.02% and 16.57%. Windermere’s Matthew Gardner, too (14.43%); I was surprised by that. Equifax is upbeat (29.93% – but can we believe a word they say?), as is Professor David Wyss at Brown University (32.55%). But Professor Albert Saiz from MIT, my alma mater, has very conservative growth projections: just 5.47%.
What’s sobering is that 95 out of 99 respondents expect slower growth in 2018, and 93 expect the market to further worsen in 2019. By 2020, just one-fifth of the experts expect growth to re-accelerate. On the the bright side, 90% see an improvement for 2021.
Zillow gives out Crystal Ball Awards for experts who consistently offer accurate predictions. Jack Kleinhenz of Kleinhenz & Associates won big last year. He’s betting on consistent annual growth with only a slight tapering off in 2019 and 2020, with cumulative 5-year growth of 18.65%. Fingers crossed that he’s right again!
I’m amazed by Seattle King County Realtor’s Association’s prophetic powers. On Monday, they sent out an email titled “Why Do High Home Prices Hinder Growth”? As if on cue, Amazon announced on Thursday that it plans to build a second headquarters in another city, which will serve as the home base for 50,000 employees.
Housing is the reason. According to Zillow’s Home Value Index, Seattle’s median home price has increased from $350K to $700K over the past 6 years. Back in 2011, the interest rate was around 4.75%. The monthly payment on a $350K mortgage (I’m being lazy and assuming $0 down for the sake of simplicity) would have been around $1,800. Today, mortgage payments on a $700K loan would be in the $3,000 range.
Similarly, Seattle Times reports that local renters are now paying 57% more compared to 6 years ago.
Have average salaries at Amazon increased at the same rate as housing prices? If not, today’s new hires are getting a worse deal than colleagues who joined Amazon 6 years ago. Unless Amazon is willing to keep upping its compensation packages to match housing price growth, with time, the same job offer will yield less and less disposable income until candidates located elsewhere find it infeasible to move to Seattle.
HQ2 is happening because Amazon has no other choice. It needs more employees. The employees need housing. It’s not possible to lure 50,000 more new hires to Seattle without paying increasingly high salaries, which just give newcomers more ammunition to bid up prices as they compete with one another for housing. The only solution is to locate these jobs elsewhere.
This could be good news for Seattle. Our housing market needs some relief from years of persistent upward pressure.
The problem is, what if the HQ2 city becomes Amazon employees’ preferred destination because it has better schools? (It probably does. Did you know that Washington is the nation’s second worst when it comes to student absenteeism? And Seattle Public Schools is the 5th worst among 200 big city school districts in terms of black vs white achievement gap.)
Or less congested roads? (Ditto. We’re #23 out of 1064 worldwide cities in terms of bad traffic.)
Last week the Seattle Times reported that there are a great many not-wealthy people in this town. An analysis of 2014 IRS data by the Economic Opportunity Institute showed that 214,000 local taxpayers had adjusted gross incomes below $50,000.
This map from Harvard’s Joint Center for Housing Studies tells a similar story: the 2015 median income among Seattle renters was only $50,440. Coincidentally, according to HUD guidelines for King and Snohomish Counties, a single person making $50,400 is considered low-income.
As the Stranger points out, while Seattle has seen a significant influx of well-heeled newcomers in recent years, this growth isn’t enough to completely alter the city’s economic profile. So how can it be sustainable for rents and home sale prices to keep rising farther and farther beyond the less wealthy population’s reach?
But Curbed thinks that as long as Amazon keeps on hiring, the housing market will keep on skyrocketing. After all, between 2010 and 2015, Seattle only issued one unit of housing permit for every 2.3 new jobs.
This means the inevitable displacement of more and more existing residents. According to MyNorthwest, some folks are moving to Olympia and Spokane – not exactly viable options for those needing to stay within commuting distance.
Renton has high hopes for its downtown area to become a sought-after urban housing destination. Adopted in 2011 and updated this June, its City Center Community Plan calls for intensive residential construction.
In the City’s map of 2017 developments, the 101-unit Lofts at Second and Main has been given top billing. But I sifted through the list of land use applications and found no other downtown housing projects in the works.
In July, the owner of 99 Burnett Ave, a 28,048 square foot vacant lot in close proximity to public transit and retail, gave up months-long efforts to find investors for a planned 68-unit development.
Only 17 City Center single family homes have changed hands over the past year, with just 5 sellers receiving more than asking price. The area is not yet a target of Seattle builders’ old house to row house conversion frenzy.
Recent condo sale prices don’t indicate lucrative development returns. 2-bedroom units go for only $300K. But perhaps demand is on the rise. Of the 6 downtown condos that sold over the past year, 4 found buyers in less than a week.
Last month the City of Renton posted a Request for Interest on the redevelopment of 200 Mill Ave, a publicly-owned 1960s office building that once housed city hall. As the RFI puts it:
With its strategic location closer to major employment and manufacturing centers than other South King County cities, the 200 Mill Avenue site offers an option for millennials or downsizing boomers to shorten their driving commutes or take direct transit connections, while being able to live in a pedestrian-friendly neighborhood that offers everyday amenities such as coffee shops, parks and eating options.
In my early youth, as a commercial real estate analyst at LaSalle Partners (now Jones Lang LaSalle), I’d seen many cases in which public investments catalyzed private sector development. Will 200 Mill push downtown Renton into the ranks of those successes? I’ll be keeping an eye on how this story unfolds.
In a recent interview, Windermere Chief Economist Matthew Gardner said that Seattle is not in a real estate bubble. Unlike 10 years ago, lending standards have become much more stringent.
Similarly, Windermere CEO OB Jacobi “is confident that we’re not headed in that direction” because “bubbles result from irresponsible lending practices.”
Quoted in the same Northwest MLS news release, George Moorhead, head of Bentley Properties, also thought the quality of local home buyers will help insulate Seattle from any massive real estate fallout.
But according to this Quartz report, subprime loans were not to blame for last decade’s housing market collapse. As you’d expect, borrowers whose credit scores were at the bottom 25% percentile accounted for 70% of foreclosures during the early 2000s real estate boom. BUT! Their share of delinquencies FELL to 35% following the bust.
Most of the post 2007 defaults came from borrowers with higher credit scores, and many of these borrowers had multiple mortgages. In the top 25% credit percentile, multi-mortgage borrowers accounted for 43% of the total loan balance. In the middle credit range, multi-mortgage borrowers took out 35% of the loan balance.
Multi-mortgage borrowers had less attachment to their extra homes than those with only one home. When the market tanked, they bailed en mass. The higher their credit scores, the more willing they were to cut their losses. The researchers quoted by Quartz put it bluntly: the rise in defaults was mostly attributable to real estate investors.
Now, coming back to Seattle in 2017:
In the same Northwest MLS news release mentioned above, Bentley Properties’ George Moorhead pointed out that when local homeowners move, many are choosing to hold on to current homes as investments rather than offering them for sale.
In addition, Windermere’s Matthew Gardner was quoted in this June RealtyTrac Home Flipping Report that “Seattle has such a high percentage of flippers who are financing their purchases (51.6%) relative to the U.S. as a whole due to escalating home prices in our region. The decision to finance is proof that these flippers believe the risks of financing are low due to our booming housing market.”
And according to this April King 5 story, 17% of metro Seattle home sales are flipped houses. As a case study, King-5 offers up Scott and Ann Carson, who “sometimes have up to 30 properties at once”. The Carsons say King County is so saturated with investors that they are now buying properties in Skagit and Whatcom Counties.
So, will responsible lending to high-quality Seattle borrowers insulate the region from the next housing bust?
Over the past year, I’ve been sort of, kind of dreaming of buying a fixer as an investment. Suddenly it’s not feeling like such a great idea.
Yesterday I hosted an open house for Robb‘s client, who is selling her 1-bedroom condo in Shoreline. There’s a Chinese proverb about a sparrow being perfectly complete, in spite of its small size. So it is with this place. Check it out!
The HOA allows pets, a huge priority for me, personally. The deceivingly small kitchen packs in all kinds of full-sized appliances: dishwasher, oven, washer and dryer. The unit comes with an assigned parking spot. The location is great, too: right on the bus line and a block away from Costco, Petco, Home Depot and many, many restaurants.
Let’s say you put 5% down on the $199,000 list price. At today’s mortgage rates, and after taking into account HOA dues ($258/month), property tax ($1,785 for 2017), mortgage insurance and homeowner’s insurance, your monthly ownership cost would be around $1,450.
In addition, now that you no longer have a landlord, if your fridge or washing machine breaks, you’d be solely responsible for its repair or replacement.
Are there viable rental alternatives at this price range? Curbed recently rounded up a number of options. One downside to being a tenant is unpredictable rent hikes. If you buy a home with a fixed-rate mortgage, your monthly loan payments will never rise. But unfortunately there are other costs beyond your control. Back in 2016, this unit’s King County property tax assessment was $118,000. This year it’s $159,000. At Shoreline’s $11.23 per thousand tax rate, that’s a $460 increase.
On the bright side, you can deduct both mortgage interest and property tax payments on your Federal income tax.
Anyway, you put $9,950 down and take out a $189,050 mortgage. If you decide by the end of 2018 that you’d like to move, in order to pay off the $184,294 loan balance and recover your down payment, you would need to re-sell the condo for $213,454 (I’m estimating 9% in selling expenses for title & escrow, excise tax, real estate commissions and touch-ups/repairs).
If you stay through 2022, you would be able to sell for a profit at $196,997. And by 2027, your break-even point would be $172,359.
In other words, the longer you stay put, the more profitable it would be to own versus rent. But if you aren’t sure you’ll be sticking around for long? You’d have to carefully weigh the value of tax deductions against the added responsibility of maintaining your own property.