Seattle is a unique spot on the map. Bordered by water on two sides, sliced in the center by a ship canal and constrained by zoning laws that limit building heights in large portions of the city, these are the basic ingredients – natural and manmade – to our housing dilemma.
We hear anecdotes from real estate agents every spring (or summer following a springtime pandemic): A single-family home comes on the market on a Wednesday and by Sunday there are offers numbering in the double digits laying across the owners’ dining room table. Yes, there are plenty of buyers in a hotly competitive market … and so few sellers.
Many factors are at play behind the local housing shortage – a scenario that is playing out in many metropolitan areas. Let me help provide some perspective as to why inventory is so tight.
Geographic location and zoning laws aside (and those are big asides), our housing shortage is strained by the influx of a half-million new residents over the past decade. The peak came in 2015-2016 when more than 85,000 people, luggage in hand, established residence in King, Kitsap, Pierce and Snohomish counties. Many of them, naturally, decided to rent their first home to better understand the local market and determine a desirable neighborhood to live.
A full 70% of new Seattleites are millennials (about 25-40 years old), according to the National Association of Realtors, with 29% of the city’s total population comprised of that generation. Millennials not only now make up the largest generational segment of the U.S. (about 72 million), they are also the leaders in home buying, participating in 47% of all transactions in the U.S. and realtor.com projects that figure could be closer to 50% by year’s end.
Millennials are eager to start a family, add a home office, maybe a gym area and have their own backyard. The demand is there, but the supply is lagging far behind. And if the number of buyers remains constant amid low inventory, prices will rise.
Our country has constructed an average of 1.6 million homes a year over the past half-century but only 1.3 million were produced in 2019. King County has created 122,000 new housing units since 2010 (that comes out to one home per 2.6 new county residents over the same 10-year period) and it approved about 18,000 new housing permits for each of the last 5 years – consistently high figures compared to decades past – but, still, those numbers are clearly not enough to quench the thirst of local buyers.
This chart (right) shows national home listings at historic lows (through early 2020). In addition, realtor.com projected in spring that total existing home sales will decline nationally by about 2% in 2020. And the absence of a traditional springtime buying season will also likely deliver a downturn in overall sales to our region; in June, the number of homes sold across King County was 17% lower than a year ago.
“Considering how many young people are becoming of age to buy, right now we are underbuilt by about 4 million homes [nationally],” George Ratiu, senior economist for realtor.com, told viewers on CNBC. “Just as importantly, we have to realize that a lot of people were planning to move and simply put those plans on hold” during the coronavirus scare for financial and/or health reasons.
The median age of a U.S. home is 37 years (as of 2016, last available data), and more than half of all owner-occupied homes were built before 1980. As homes age, they will need to be remodeled to remain in the housing pipeline. As an alternative, tearing down older homes will require years to replace them. Fortunately, many Seattle lots legally subdivide single-family zoned areas with townhome communities – producing more vertical housing within the same footprint. (Some existing homes are also adding detached accessory dwelling units – often known as the acronym DADUs – in the backyard for rent.)
Another factor, the growth of single-family rentals across the nation has jumped in recent years. Thanks in part to the Airbnb phenomenon, rental homes rose 31% from 2007 to 2016, a period when many investors scooped up foreclosed homes and converted them to revenue-generating properties.
That’s some serious housing shrinkage – both here and across the country. While supply narrows, demand widens.
All buyers – whatever generation – are also seeking homes to take advantage of historically low mortgage interest rates that are hovering around 3.0% and are expected to fall further over the next 1-3 years. As mortgage rates drop, a typical occurrence during recessions, the lower the borrowing costs for buyers and the greater the opportunity to afford a larger home.
Whether it’s economics or pandemics, homeowners are staying put for longer – tightening the supply further. The average tenue of homeowners who sold in 2019 was 8.3 years nationwide – a record high – with expectations for that figure to rise after stay-home orders tamped down sales for most of the spring. The homeownership rate in King County is 61%, down 4 percentage points from a decade ago, quite possibly because of a rising tide in population. (There is a 65% homeownership rate across the nation.)
Many owners who may have contemplated selling this year reversed course after the pandemic hit. Others have decided to take advantage of the historically low rates to refinance their mortgage, an indication that moving plans are no longer a point of discussion in those households.
Ratiu points out another dynamic that harkens back to 2008-2010: a more cautious set of home builders who lost billions of dollars when the housing market contracted. “They learned a very tough lesson in the last recession,” he says. “We lost a great number of local and regional builders who never returned. [Those who remain] have been much more measured in their approach.”
The senior economist continues: “Because inventory is so tight, we had [in 2019], 24% of Americans spend over a year looking for their homes. We are likely to see some of that happen this year.”
As you can see, finding a home is one of the great challenges in our region – yet another important reason to partner with a solid real estate professional who can help navigate the path to your dream home. I’m always ready to listen, learn and advise.