Fair or not, the discussion of home affordability throughout Puget Sound usually focuses on those at the bottom rung of economic classes and homelessness. The city of Seattle budget for 2021 includes a record amount of $167 million to combat the ever-growing homeless epidemic. Conversely, we read headlines of affluent tech workers flushed with cash, and untethered to office commutes, turning resort towns to Zoom towns.
But lack of affordability is also hammering the middle-class workers: teachers, rank-and-file corporate, nurses, trade workers, police, and countless others who are vital for a functioning city. Recent government action, and inaction, is stifling home builders’ attempts to restock supply, which would go a long way in relieving the upward pressure on home prices.
Local news stories covering our housing market trumpets the insane growth of price appreciation throughout the Puget Sound region.
The March S&P CoreLogic Case-Shiller Index shows a 18.3% YOY increase for home prices in the Seattle metro. The rate of appreciation is even faster in many of the submarkets throughout King, Kitsap, Snohomish, and Tacoma counties.
S&P CoreLogic Case-Shiller Index
Clearly, home prices have skyrocketed across the nation, but for well over a year Seattle has consistently ranked in the top three metros for the Case-Shiller Price Appreciation Index.
Along with historically low mortgage interest rates, we find ourselves in this unsustainable rate of price gains because of the fundamental law of supply and demand.
The pandemic has accelerated the demand for housing throughout the nation, with our emerald backyard included. The robust demand is evident by multiple bidding wars, sales over listing price, contingencies waived, and most homes sold within days of being listed.
The demographic tailwinds of millennials reaching their prime years for family formation, and the expanding value of a home as a social refuge and workspace, have only added fuel to the healthy demand already present in Seattle pre-COVID.
For now, the demand is not speculative, it’s real. But as prices continue to climb, more and more home buyers will be elbowed to the sideline.
The supply side of the housing equation has gone to the same extremes as demand. Home builders, still licking wounds from 2007 to 2008, never built enough homes in the last 10 years nationally and here in Washington state.
The chart below illustrates the deficit of residential construction by comparing job growth with construction permits. A healthy equilibrium is subjective, but the consensus is around 1.2 jobs per housing unit built as a healthy ratio for balanced supply.
Despite sizable gains in employment growth throughout Seattle MSA (counties of King, Pierce, and Snohomish), there was only one building permit issued for every two jobs added to our region. The Seattle MSA averaged 2.1 jobs/permit ratio between 2011 to 2019, leading to a growing deficit in housing supply, years before the frenzy of today’s red-hot demand and limited inventory.
Looking beyond the labor pool, Seattle MSA has added over 112,000 households from 2014 to 2019. During this same period, there have been 54,000 construction permits issued for single-family housing (townhomes included). Similar to the jobs/permit ratio, the pace of adding homes to our market is well behind the trajectory of households added to our region on a yearly basis.
The resale home market is also at historic lows, with weeks of supply in Central Puget Sound since summer 2020. To put that in perspective, a balanced housing market will have four to six months of supply.
Many homeowners have been reluctant to put their home on the market amid a pandemic. And those who might be tempted to capture their equity in a seller’s market, have to be weary to reenter the same fray on today’s losing team (the buyer).
The supply woes will continue for at least the next couple of years in Seattle, and, while demand may already be softened due to price appreciation, there’s little evidence of a correction on the horizon to recapture those currently priced out of the market.
So, how can government effectively address the affordability crisis that is causing distress to the middle class and their search for a home?
First, the antagonistic reproach to businesses, property owners, and developers can be dialed down a notch. The Hippocratic Oath, “first do no harm,” should be applicable when policy decisions are made to address attainable housing. Some legislation, while laden with good intentions (the road to hell is paved with them), results in worsening the affordability predicament.
The Washington Condominium Act was implemented under the guise to protect the condo buyer from a developer’s shoddy work. However, this law became exploited by frivolous lawsuits for the tiniest of defects by unscrupulous lawyers and condo owners. As a result, the development of condos plummeted for decades until sensible modifications were made to the law in 2019. We now have a dramatic resurgence in condominiums to market, which traditionally are a more affordable route to homeownership.
A bill recently passed by the Seattle City Council bans any evictions of an educator, or tenants with school-aged children, during each school year. This law should’ve been amended to protect the mom-and-pop landlords or provide some sort of financial assistance to the property owner. Instead, housing providers have another reason to think twice before investing within the city, further diminishing supply and raising the cost of rentals.
County and local municipalities should strive to streamline the permitting processes that’s been problematic pre-COVID, and now prolonged even further because of the pandemic. Many home builders have experience elongated construction timelines, often months long, simply because they do not have a permit in hand to finish a family’s home.
Perhaps the highest priority for governmental action, to most effectively address supply of housing units in our region, is rezoning. Seattle proper is zoned 70% for single-family only. Suitable land for development is tightly constrained by our beautiful bodies of water and steep topography. We need to go vertical for higher-density housing, providing more options for the home buyer.
We don’t have far to look before finding affluent Pacific coastal cities (Vancouver, San Francisco) to see our affordability crisis has plenty of runway to get worse. But with a more concerted effort among public officials and home builders, we can implement policies that foster responsible development and help the middle class hold to the American dream of owning the place they call home.
