Researchers at the National Association of Realtors found that in congressional districts where more than half of homes are worth $500,000+, the average home ownership rate is 48%. In areas where sub-$500,000 homes are more readily available, the average home ownership rate is 65%.
In 2013, 7,740 homes were sold in Seattle. 4,463 (60%) of these houses were purchased for less than $500,000 and 482 (6%) for over $1 million.
Fast forward 5 years and between Jan 1 and Oct 31 of this year, 7,208 homes were sold in Seattle: 1243 (17%) for under $500,000 and 1242 (17%) for over $1 million. Next year, the number of 7-figure homes will surely exceed those available for less than half a million.
The Federal Reserve Bank of St Louis offers this sad depiction of what our dwindling sub-$500,000 housing supply does to home ownership.
Inman says that according to data from Trulia, Black Friday for real estate buyers happens in August, when 13.9% of house prices will be cut. In December, only 8.3% of sellers will have slashed prices. This doesn’t jive with what I’ve seen in the Seattle market.
The chart below compares outcomes for home sales that closed during each of the past 12 months. “Poor outcomes” include listings that sold under asking price and listings that have undergone at least one price drop. “Good outcomes” represent listings that sold at or above asking price.
Since there is typically a ~30 day lag between contract signing and sale closing, it seems October, November and December offer the highest probability for a poor outcome (and therefore a good deal for the buyer).
|Month||Price Drop||Under Asking||Poor Outcomes||Good Outcomes|
If I have your snail mail address, you may get my November update soon. The theme is money in the Seattle housing market. While taking one last look before sending it to the printer, I couldn’t help noticing that the 11.46% annualized return offered by Pyatt Broadmark (in the “flippers” column below) is much higher than the average home sales ROI (65% over a 10.2-year average holding period). According to the Seattle Times, that’s the highest profit in the US next to San Francisco and San Jose.
Of course “average” does not describe everyone’s experience. 10.2 years ago, the housing market was awful. Many sellers who bought their homes in more recent years enjoyed far higher returns within much shorter time frames. But as Pyatt Broadmark says in their prospectus, past performance doesn’t guarantee future ROI, “which may be affected by changes in market or economic conditions and in legal, regulatory and tax requirements”. So it is with house purchases.
For instance, both the House and Senate have proposed lengthening the residency requirement from 2 out of 5 years to 5 out of 8 before the first $250,000 ($500,000 for couples) of home sale profits are tax exempt. The Wall Street Journal suggests that “affected home sellers should complete sales before year-end.” As if it were that easy!
Long time real estate analyst Mark Hanson points out that rising insurance costs dramatically reduce home-buying capacity. A family friend of his received notice of a $587 health insurance premium spike, which means a $120,000 drop in mortgage-paying ability.
The proposed $500,000 cap on mortgage interest deductions has the same effect on anyone buying a home after last Thursday. Wall Street responded with an immediate sell-off of home builders’ stocks. Harvard economist Edward Glaeser told the New York Times that “this effectively becomes a tax on selling a home”.
And speaking to KOMO, mortgage loan officer Duane Stenson points out that increasing property taxes, even by a few dollars, could impact home buying.
Inevitable upcoming interest rate hikes will also make homes harder to sell. Every 1% interest rate increase leads to a 10% reduction in purchasing power. As research by Harvard’s Joint Center for Housing Studies shows, even a slight rate change can have a noticeable effect on mortgage borrowing.
Sometimes, during our office Tour Days (every Monday and Thursday!), when my colleagues and I scope out all the for-sale homes in the area, I kick myself for not having bought an investment house last year or the year before. How prices have gone up! But in the face of all these real and potential obstacles to liquidity, what I regret much more is not putting more money into Amazon stocks. It’s gone up 44x since I bought 10 shares for my 1990s 401(k).
I’m catching up on my reading list. Here are a few things I came across:
1. Powerpoint was created by Robert Gaskins and Dennis Austin, both former Apple marketing managers. The first month after its 1987 launch, it booked $1 million in sales. Two months later, Microsoft bought their company for $14 million. (via Boing Boing)
2. Thanksgiving-flavored ice cream is a thing. Options include Butter Mashed Potatoes & Gravy and Salted Caramel Turkey. (via Los Angeles Magazine)
3. Crown Hill Hardware, where I often shopped, has been in business for 100+ years. Super sad that it’s closing. (via MyBallard)
4. According to research by Jones Lang LaSalle (my first post college employer!), apartments in Seattle have shrunken from an average size of 896 square feet in 2002 to just 635 square feet today. Greenlake/Wallingford apartments are the tiniest, averaging just 569 square feet. (via Curbed)
5. In the event of a nuclear apocalypse, Seattle is one of the worst places to be. Your safest bet is the southeast side of Kansas City. (via Realtor.com)
6. New York Times says we have too many restaurants: 620,000 in the US. And Restaurant count is outpacing population growth by 2 to 1. Even though we are spending 44% of our food budget on eating out, there still isn’t enough money to sustain all the eateries. (Which is why Starbucks has reported weaker-than-expected same-store sales for 3 quarters in a row.) This bodes ill for employment, as restaurants account for 1 out of every 7 new jobs since 2010.
7. Reese’s Peanut Butter Cup is the best Halloween candy, winning 84.2% of the time in randomly generated match-ups against sugary competitors. FiveThirtyEight did some super fun statistical analysis.
In this Forbes article, 2 out of 8 experts defined “good deals in real estate” as properties that fetch monthly rents in excess of 1% of their sale prices.
I took a quick glance at rental listings near my office and found a lovely 2,000+ SF house in Mount Baker with 3 beds, 2 baths and a newly renovated kitchen. The landlord is asking $4,500. A slightly worn-looking Mid-Century on Seaward Park Ave is renting for $2,750. Down by 46th & Holden, you get nearly 2,700 SF plus a lovely yard for under $2,500.
If you multiply these asking rents by 100 and go looking for reasonably move-in-ready 3-bedroom houses in the neighborhood? Good luck!
On the flip side, if Forbes’ experts are to be believed, it seems Seattleites selling their houses these days are getting spectacular deals.
ATTOM Data Solutions recently released a “Best Zips for Buying Single Family Rentals” report. The closest investor-friendly zip code to Seattle is Dupont (98327), with a gross rental yield of 10.5%. (ATTOM defines yield as estimated 3-bedroom rent divided by median sale price.)
In King County, the gross rental yield is only 4.7%. And if you’ve financed your purchase with 25% down and a 4.625% 30-year-fixed loan, your annual net cash flow would be a $12,598 LOSS, if you factor in property taxes, insurance and estimated maintenance.
The situation is even more disheartening if you compare these numbers with figures in ATTOM’s March, 2017 single family rentals report. Just 6 months ago, King County’s gross rental yield was 5.8%, and that represented a 4% year-over-year decline. In other words, house prices are growing much, much faster than rental rates.
Windermere Chief Economist Matthew Gardner thinks the situation ain’t getting better: “the single-family rental market in the Seattle area has peaked and rental rates will continue to take a hit.”
So if you, like me, have been fantasizing about investing in a rental house, your only hope is for its value to appreciate. But the more rental rates fall, the less incentives renters will have to enter the home buying market, especially as interest rates inevitably rise. And Amazon’s HQ2 uncertainty may create a climate in which Seattle’s already-transient newcomers feel even less motivated to put down roots.
This morning my friend Aaron shared an article that advocated investing money on learning computer programming rather than buying real estate. One of these days, I’m going to finish that Codeacademy Java class.
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.