In 2019 it’s not unusual to see modest (sub 2ooo sqft) homes in Seattle going for $1 million or more. In fact we have more homes over $1M (42% of our inventory!) than any state in the US, and no signs of slowing down. While some local politicians like to point blame at big tech and in order to further their own agendas, it is in fact the product of many things, including a booming tech industry, restrictive zoning, massive appreciation in older properties, confusing rental policies, geology/geography, a history of red-lining (and it’s new ugly cousin red-timing), as well as shifts in priority and buyer’s criteria.
The tech industry and it’s marketplace effects
Employers have changed their view of employees from “hire for life” to “hire for a few years and turn over”. Unlimited lifelong pensions aren’t an option for people anymore, and they’ve been replaced with more limited IRAs/401ks. This has shifted homeownership from not just a convenience, to an important part of a retirement strategy for most people. Employees in tech know that they will be outpaced by younger engineers at some point, and so the stress to buy soon and buy homes that have potential for duplex/AirBNB/DADU etc has driven them to make big offers. Buying is now seen as insurance against future cost of living increases, and buyers are willing to throw in money on top of the value of a home to land in a perfect neighborhood. Combined with the practice of delaying worker’s compensation in the form of bonuses (to keep them at high stress jobs), lots of people have large sums to throw at a problem, that problem being a limited supply of good houses in a place where new construction is hindered by slow permitting, limited area, and 88k people moving in every year.
Many people blame the tech salaries for the increase in rent, and some of that is true, but property taxes represent the majority of rent increases over the past few years.
Zoning and the need for less restriction
Seattle has long needed to allow more square feet per lot, and multiple units per lot. Only a year ago did homeowners get the right to have both a mother-in-law (ADU) and a detached ADU (DADU) on the same lot, and then only in some places. The Seattle permitting process can cost 100k or more, making it untenable for a developer to build small homes. Only large, luxury homes or rental units can realize profit when permits are time consuming and expensive.
The hunger for profit
Banks are beholden to shareholders to turn increasing profits every year. A few years ago, an individual could only spend 30% of their gross income on a mortgage. As the years have passed that number has gone to 35% and more. (This number is called a DTI or debt-to-income ratio, and it’s a danger signal for market bubbles, as people cannot sustainably afford high portions of their income toward housing if they become unemployed or have a personal emergency.)
With interest rates as low as they are, the amount that a buyer CAN offer on a home has increased. Buyers have become eager to “get in” on the market before it gets too expensive, so they max out their budgets to do so, and this drives up prices.
The proliferation of discount real estate agencies have encouraged buyers to make offers with escalation clauses, going to their max budgets in order to get more deals done is a short amount of time. If you use agencies that offer discounts, then those agencies must make up for their pricing with volume. For instance, a full-service agency might encourage a buyer to make an offer based on a CMA, recent sales, etc while a discount agency may encourage a buyer to go in with a nearly unlimited escalation clause.
Rental policy and it’s devastating effect on cost of living
High rental prices push more people to buy, as a way of protecting themselves against future market progression. When local policy places limitations on landlords, the inevitable effect is that we get fewer, lower quality, less scrupulous landlords. For instance, if a landlord can’t evict a tenant for non-payment for many months, then they may either raise rents to hedge their bets, or they may get out of land-lording altogether. We already see large up-front payments, outrageous credit score requirements, and even borderline legal practices like preference of certain employers. Mom-and-pop landlords are an important ingredient in a healthy price spectrum, as they can often forgive credit issues or offer more flexible lease terms.
Geology / Geography
Seattle has mountains, rivers, a sound and multiple lakes, locks and more. We have environmentally critical areas, steep slopes, and areas that are unbuildable for one reason or another. If we were a perfectly flat city with room on all sides, we would just naturally grow in each direction that we could. But since we are bordered, this exacerbates the whole supply-and-demand conundrum that is the basis of price progression outside of fixed costs.
Quality of Life
Along with the progression of income, Seattle has gained a moved from a Tier 2 city to being considered a Tier 1 city by some. We’re an attractive place in terms of being a climate refuge, a stable place to protect investment, and good bet for long term appreciation
- Year round, we have very nice weather, often between 40and 90 degrees (f).
- Good public transit
- Good museums
- Great public schools
- Outdoor festivals
- Access to hiking, biking, and outdoor sports
- More than one airport (the new Everett airport is going to dramatically improve travel)
- Great universities
Red-lining is a practice banks had many years ago of literally drawing a red line on a map and saying that certain neighborhoods would or wouldn’t be loaned to on the basis of their racial demographic. While in practice it is currently illegal (as it is a deplorable practice) its effects are still felt in Seattle. Certain neighborhoods became blighted because banks would not invest in them, and developers were able to buy up the land cheap and redevelop it into expensive homes, or renovate the homes they had purchased at a large discount. People were also able to buy up these old homes, and watch them appreciate exorbitantly and then use those proceeds to make large offers on larger homes, thus progressing the market.
Part of our code of ethics as Realtors, (and our credo as people) means that we in no way support these practices.
Buyer’s criteria has changed
One undeniable fact about the way people purchase homes is that short commutes and walkable amenities are much higher on people’s list. Like many people, I grew up in a suburban tract home, and there was no such thing as a walkable grocery store or coffee shop. This isolation is a deal-breaker for many. The fungibility of tech workers who move in and out from SF, NYC, and populous Tier 1 cities from around the world mean that the demand is there for closer, more urban feeling neighborhoods. We also observe that people cook less and want to be near grocery and eating options, and being near a gym is more important for knowledge workers that sit much of the day.
Seattle didn’t predict its growth happening as fast as it did, and highway / public transit infrastructure is not nearly what it should be with respect to the population. Commutes that took 15-20 minutes just a few years ago can take over an hour on an average day, and many people find this unacceptable either because of family commitments or because of a desire to be more mindful of their carbon footprint.
Giant homes which were once in fashion are now seen as too expensive to heat, too hard to clean, and costlier to maintain. Buyers look for better finishes (like cool kitchens), great outdoor spaces, views, and other things that we refer to as “Instagram-able features.” In fact, outdoor cooking spaces are the number one most requested home feature right now.
What does the future hold?
Hopefully the solution to housing in the Puget Sound is multiple approaches. We’re excited about the up-zoning opportunities which will allow two and three units to be built on a lot. Some initiatives, like limits on square footage don’t make as much sense to us, since we think that multi-generational housing is one piece of the puzzle for making our city livable and affordable to all. We are supportive of multiple options for commuting, including more rapid ride buses and more light-rail expansion. The new rapid commuter ferries to are opening up a whole host of possibilities in Bremerton, Vashon and Bainbridge are very exciting too.
If you’re feeling pushed out, check out our articles on So you wanna buy a house in a year and house-hacking, which can help you to get on the property ladder and claim a piece of Seattle land for your own. We believe housing needs to accomodate everyone, so please check out some of our friends at Facing Homelessness, and support sensible affordable housing measures around the Seattle metro. The only way our city succeeds is if we are able to pursue multiple approaches to building housing for all. No one solution will do this, so it’s important that we are open minded to the needs of all.
As always, let’s have coffee if you’d like to explore your options and see if home-ownership is right for you.