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.
Quite a few temptingly-priced fixer-uppers have popped up near my office recently. (This one’s asking price was $290K. It sold for $500K.) I asked Mark Hannum from HomeStreet Bank how I could get my hands on one of these beauties. Here are my notes:
When you apply for a regular mortgage, the lender would typically want major defects – say, the lack of a roof – to be addressed before accepting a house as your loan collateral. But with rehab financing, such as the HUD 203(k), you can get one single loan to buy AND renovate a fixer.
To get a rehab loan, you first need licensed contractors to provide written bids. Your lender then appraises the property as-as, and estimates its post-repair value. This prevents you from putting more money into a project than the market would justify.
Your loan amount would be based on your purchase price, plus the cost of work to be performed, plus an added contingency for cost overruns. After closing, your contractors are paid from an escrow account. If you don’t use up the entire amount, whatever is left will be applied to the loan principal.
HUD 203(k) loans are only available for owner-occupied homes. Your down payment could be as low as 3.5%. Repair work must start within 30 days of closing and be completed within 6 months. You’d have to let the loan “season” for a year before you can refinance based on the post-repair value. You may now have 20%+ equity, so that you no longer have to pay mortgage insurance.
Fannie Mae’s HomeStyle Renovation loans may be more cost effective for borrowers with good credit scores. They’re available to owner-occupants and investors and allow up to a year to complete renovations. Unlike 203(k)s, which require all work to be done by licensed contractors, you can DIY part of a HomeStyle Renovation project (up to 10% of as-completed value).
Mark also mentioned the possibility of conventional financing with an escrow holdback. This may offer a lower interest rate. Let’s say I’m interested in a roof-less house. The seller or I could ask a contractor for a written estimate, then set aside 150% of this amount in an escrow account, so that my lender could be assured that they would have a newly roofed home as collateral.
I did some subsequent research and learned about PACE (Property Assessed Clean Energy) financing. Too bad it isn’t available in Washington State. If you live in CA, MO or FL, you could borrow 100% of the cost of installing solar panels, energy-efficient HVAC, water-saving landscaping etc with no down payment. The loan would be repaid with an assessment added to your property tax bill. Since PACE loans are attached to properties rather than their owners, if you sell your home, you could transfer any PACE balance to the buyer.
Did you see this New York Times article about a 62-year-old Stockton, CA woman who wakes up at 2:15am for a crazy commute that gets her to work at 7am?
The writer points out that the median home value in our heroine’s neighborhood is $300K, versus $1 million near her San Francisco office.
A couple of months ago, the Seattle Times also wrote about mega-commuters, such as a Rainier Valley resident who spends 90-minutes each way getting to and from Bellevue.
At the moment, there are only 12 Bellevue homes for sale with price tags under $1 million, versus 50+ listings in the 7- and 8-figures. As for $300K homes? You won’t find them anywhere near Rainier Valley. In fact, it’s slim pickings unless you’re willing to travel south of Tacoma.
Back in February, King 5 cited a Inrix ranking in which Seattle was #23 out of 1,064 cities worldwide for awful commutes. On the bright side, for now, at least, Inrix says traffic conditions are better here than in LA or San Francisco.
PS – Check out this 2016 rent price study which showed that New Yorkers were willing to pay $56 per month for every minute they can shave from their commute.
At today’s mortgage rates, the monthly payment difference between a $300K and $1M house is around $3,300-$3,500. If you divide these amounts by $56/minute, the point of fair trade-off between owners of $300K and $1M homes is no more than 62.5 minutes of additional transit time.
A couple of weeks ago, Joe and I toured a 720 SF house while it was on the market. He wasn’t a fan of the outdated plumbing and I hated that the washer and dryer are in an exterior closet. Still, it was undeniably adorable.
Last Sunday, I noticed that the house had sold for $702,000! I spent the evening feeling out of sorts. Doesn’t it seem wrong for so little space to cost so much?
Monday morning, Ted and I toured a couple of $1.3 million homes, which suddenly looked like amazing bargains.
As it turns out, the high-priced shocker was just a data entry error. The listing agent retracted the $702K price. The house is under contract, but the sale hasn’t closed. (8/23 update: it sold for $512,500.)
All this drama reminded me of a recent workshop where an appraiser came to talk to our office about market value. As Realtors, we’re used to sifting through large numbers of offers for popular homes. In these cases, prospective buyers fall into 3 categories:
1. Optimistic bargain hunters will make super low offers that sellers will scoff at. Still, their mere presence fires up the competition.
2. The majority of hopefuls will submit offers that fall within a relatively narrow price range. This is because everyone comes to an inevitable consensus after carefully studying the same list of recent sales nearby.
3. And finally, the wildcards. These folks want the house at whatever cost and they have the resources to outbid everyone else. When multiple wildcards get into a bidding war, it’s not at all inconceivable that a 720 SF house could get not one, but several, $700K offers.
If you, as a seller, are in this fortunate situation, your Realtor will now try to convince the buyer’s appraiser that $700K obviously reflects the market value, as that’s what multiple parties are willing to pay.
However, as our appraiser friend pointed out, banks are not in the business of betting on unknowns. In the worst case, if the loan goes bad, they would be stuck trying to resell the property. Unfortunately, during any given sale, no one can predict how many “whatever it takes” buyers will come through. So to play it safe, they wouldn’t want to lend beyond the #2 range. This is why prospective borrowers end up getting dreaded low appraisals.
But because many #3 buyers have the ability to pay cash, or increase their down payment when they aren’t able to borrow as much as expected, most crazy sales do close at “whatever it takes” prices. This means the next wave of buyers will base their offers on higher reference points. I am relieved that for now, $700K won’t come up as a sale comp for 700 SF homes.
Thanks to Virginia‘s introduction, I had coffee with Ric Harter from Kiel Mortgage and learned a whole lot about HECM (Home Equity Conversion Mortgage), an FHA-insured reverse mortgage program for borrowers 62 and over with significant equity in their homes.
HECM borrowers don’t need to have any income, nor are they required to make any payments, so long as they continue living in the home. Even if the housing market completely tanks and the home’s value falls far below the loan balance, neither borrowers nor their heirs would be responsible for the shortfall.
HECM proceeds are not taxable and don’t affect social security eligibility. Borrowers can opt for monthly payments, a line of credit or a lump sum. They retain title until the property is sold upon their death, or when they move out.
Some seniors use HECMs to pay off traditional mortgages, to eliminate the possibility of foreclosure if they’re unable to keep up with loan payments*. Others leverage their existing home’s equity to purchase a new home. There’s even an “HECM for Purchase” program that allows non-home-owning seniors to borrow about half the cost of a home they intend to buy.
On the downside, HECMs can be expensive. Since they are “rising balance” loans, each month’s interest is added to the loan balance, on which the following month’s interest is calculated. And in addition to an upfront mortgage insurance premium of 0.5% or 2.5% (depending on whether the loan is under or over 60% of the appraised value), the FHA charges an 1.25% annual premium, which is calculated based on a rising loan balance.
If you’re curious to know more about reverse mortgages, drop me a line. If I don’t have the answer you’re looking for, I’ll find out for you, stat.
(* HECM borrowers can still face foreclosure if they aren’t able to maintain home insurance coverage and stay current on their property tax bills. Also, the elimination of mortgage payments means they won’t get to deduct mortgage interest on their taxes.)
Last year our office did this silly dance at the Rainier Valley Heritage Parade. We’ll be back for a repeat performance tomorrow. The parade starts at 10am sharp. If you want to catch us, come early! We’re 8th in line.
At our practice session on Wednesday, there was much discussion over those signs we’re holding. Dorothy claimed Rainier Beach. Larissa went for Hillman City. Virginia couldn’t decide between Jefferson Park and Mount Baker Rowing Center. I took Bryn Mawr.
Have you been to Bryn Mawr? If you’re looking to buy a house, you should consider going for a visit. And soon! Until recently, this still sort-of-affordable neighborhood was a well-kept secret. But while hosting an open house for Ted‘s client, I kept a tally of where prospective buyers currently live: Greenwood, West Seattle, Newcastle, Central District, Burien, Capitol Hill, Pioneer Square, Rolling Hills, Green Lake, Seward Park, Mercer Island, East Lake, Renton, UW…
$425K was the reason why all these folks made the trek. 14 made offers to buy this house, which pushed its price quite a bit higher. But for now, other nearby options at this price point do come up. Let’s go check them out! And on the way there or back, we’ll visit Elvis and the Cat in the Hat at the amazingly awesome Skyway Grocery Outlet.