Don’t Blame Investors For Unaffordable Housing

An article published this week in Seattle Weekly titled A Letter to the Investor Buying Our Apartment Building pinned the blame for the lack of affordable housing in the Seattle area on investors and their dirty obsession with profits.

…Eve and Charles told us they were putting the property up for sale. Who could blame them? The building is a century old and so much work went into maintaining it, especially for a couple of people who, also, are aging. But it’s prime real estate, right on the water with a view that would make even Donald Trump drool. So we had a good idea of what would happen after the sale went through. Skyrocketing rents and a landlord we’d never see, much less ever know.

No one begrudges your interest in a profit. After all, spending millions on a building is no small thing; you should indeed expect a sound return on your investment. But if that means that low-income, older tenants who have lived in the same place for decades must leave their homes, and likely their city, in search of affordable rents, then let’s be honest. You aren’t just in the real-estate business. You’re in the business of creating unaffordable housing.

Yes, it is sad that the long-time tenants of this apartment will need to move. No, it is not the investor’s fault. If you must assign blame, point the finger at basic supply and demand.

On the supply side, building policy in the Seattle area makes new construction expensive, time-consuming, complex, and in some places thanks to restrictive zoning and height restrictions, downright impossible.

On the demand side, the Seattle-area economy is currently booming, with high-paying tech jobs leading the way. People are moving to King County in record numbers.

Investors are not causing unaffordable housing. They are an effect of an economic system running on overdrive.

When the timer expires on your longtime bargain on a water view rental it feels good to have someone to point the finger at, but blaming the investors is just dumb.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

38 comments:

  1. 1
    The Tim says:

    P.S. – Sorry about the unplanned hiatus! Work and life have been a little crazy, leaving little time for blogging, unfortunately.

  2. 2
    Joe M says:

    I expect better quality after such a long break. It’s not dumb to blame investors. And Seattle is building apartment buildings left and right–would you have them do away with any zoning restrictions whatsoever?

    Speculating (“investors”) quickly turns into a self-feeding frenzy that gets disconnected from supply. Check your masthead.

  3. 3

    A clearer picture is when you see a large rental complex go through a “condo conversion”. The tenants all have to buy or leave, and are all competing for replacement housing at the same time. It was pretty sad to see back in 2005. Mass Exodus. Hundreds of tenants.

    Not only did the “fix and flip” of the rental units into privately owned condo dwellings increase housing costs. The large number of displaced people being shoved into the purchase and/or rental markets, all at the same time, pushed up prices and rents nearby as well.

  4. 4
    boater says:

    RE: Joe M @ – Well when you go to places without zoning restrictions you do see cheaper housing.

  5. 5
    wreckingbull says:

    I hate to be that guy – a cold SOB like Whatsmyname, but this is pretty much spot-on. If someone else is affording the property, it’s not unaffordable. Working downtown after a 10-year hiatus, I am amazed at how much the city has stratified in such a short amount of time. Inevitable I guess.

  6. 6
    A says:

    RE: Joe M @

    How do you identify bubbles? Ponzi mentalities don’t announce themselves, and people actually want to live in the properties. It’s silly to accuse investors of greed when the resident is literally the counterfactual profiteer. The resident wants to soak up the gap between historical rents and market rent. If the investors don’t benefit from the market pricing, does the wealth altruistically spread threw the community? Nope. The resident wants it.

  7. 7

    RE: Joe M @ – I think you’re a bit delusional if you think there’s some sort of feeding frenzy by investors grabbing up apartments. Investors tend to act more rationally. The problem is caused by too many new jobs being created for the housing supply. And rising rents would occur even if no apartment houses changed ownership.

    As to zoning, really? Is claiming Tim was suggesting replacing overly restrictive zoning and development rules with no rules at all the best you could come up with to support your position?

  8. 8

    “On the supply side, building policy in the Seattle area makes new construction expensive, time-consuming, complex, and in some places thanks to restrictive zoning and height restrictions, downright impossible.” (from post, I am too dumb for HTML)

    On a data-driven, highly analytical web site like this one, I’m a little surprised by this statement. Any data to support this notion? And I’d like to drill down on the definition of “building policy” too. Does that include seismic requirements that maybe aren’t necessary in other parts of the country?

    I certainly don’t disagree with the overall point. Times change. Prices increase. People move. Life goes on. And yes, we should be concerned about affordable housing. But blaming investors is dumb.

  9. 10

    RE: Janice Harper @ 9 – A very fair response Janice!

    And I agree, increased empathy for those hurt by market forces is a good idea. Because that is really the issue here. You are calling out the costs incurred by a market economy on those least able to afford it. That’s not unique to housing, it’s pretty much the definition of capitalism. Which, like democracy, is a terrible system but also the best system possible.

    And I don’t think Tim can be blamed for misconstruing the point of your article. After all, being “in the business of creating unaffordable housing” sounds a little pejorative and not simply designed to arouse empathy.

  10. 11
    Eastsider says:

    From the Seattle Times link – “Some 64,376 people from out of state were issued driver’s licenses in King County last year, according to records from the Washington Department of Licensing.”

    Were there enough new housing built to house the 64,376 new residents and their dependents last year? I don’t think so. So here you have the answer to the skyrocketing prices.

  11. 12
    The Tim says:

    By Joe M @ :

    I expect better quality after such a long break.

    As I said, I’ve been (and still am) very busy. It’s not like I have been working on some master post and that’s why I haven’t had anything up here lately. If you are that upset I will send you a full refund of the cost I charge to view this site.

    It’s not dumb to blame investors. … Speculating (“investors”) quickly turns into a self-feeding frenzy that gets disconnected from supply. Check your masthead.

    Speculation is buying an asset that you think you can sell to some other sucker for a big return with little effort. A good example of that is all the apartment to condo conversions that took place during the last bubble, as mentioned by Ardell.

    When an investor buys an apartment building and is earning a decent return on their money on day one simply by charging market rates for rent, that’s not speculation, it’s investment. And the only reason they are able to do that is because the economy is booming and housing supply is limited.

    You can’t pay rent with funky financing. Zero-down, neg-am, and all the other ridiculous subprime lending products that inflated the speculative housing bubble ten years ago are not a factor when it comes to rentals. Again, investors are a symptom, not a source of the problem.

  12. 13
    The Tim says:

    By Janice Harper @ :

    Reducing my article to “blaming,” “accusing” and demonizing investors as “greedy” is simplistic, misleading and misses the heart of my argument.

    And yet, this was the closing line of your article:

    Tell yourself the truth. You’re investing in unaffordable housing; you are contributing to homelessness and poverty as you drive rents up and people out, and sometimes those people kill themselves because they have no place else to go.

    That sure comes across like blaming, accusing, and demonizing to me.

    Note that I’ve got no dog in this fight, as I’m neither an investor nor a renter. I feel empathy for renters who are unable to afford to live in the place they’ve called home for many years. But I still contend that anger and blame directed at the investors is misplaced.

  13. 14
    Blurtman says:

    Erik,

    It sold. I saw the victims moving in today.

    02/06/14 Sold $363,700

    Remodeled.

    02/16/15 Pending sale $875,000

    They really negotiated the price down from $890k. Well done.

    Perhaps it might be rude to mention that the former owner is rumored t have OD’d in the home?

    http://www.zillow.com/homes/for_sale/Sammamish-WA/house_type/49091908_zpid/26938_rid/300000-650000_price/1097-2376_mp/1000-_size/days_sort/47.615409,-122.054557,47.61304,-122.059911_rect/17_zm/?view=map

  14. 15
    Joe M says:

    By The Tim @ :

    By Joe M @ :

    I expect better quality after such a long break.

    As I said, I’ve been (and still am) very busy. It’s not like I have been working on some master post and that’s why I haven’t had anything up here lately. If you are that upset I will send you a full refund of the cost I charge to view this site.

    Yes, I was harsh–it must be hard blogging with a family and a demanding job. And no charge as you say, though somehow I do feel I paid a wee rent with my comment.

  15. 16

    RE: Janice Harper @ -I liked the article and it would be a much better world if people thought about how the actions they were about to take actually impacted human beings. I’m glad you wrote it.
    People with money invest it. When bonds are paying very little, they invest in stocks or real estate. Most people, when they invest, are simply looking at the financial return, and the collateral damage doesn’t effect them. Does that mean that if I had a few million to invest, I shouldn’t buy an older apartment building? I don’t know. Investors buy stocks in companies that pollute, or make bombs, and cigarettes. It does seem like the pursuit of money has reached higher levels, where less thought goes into what the impact is.

  16. 17
    FlipperInSeattle says:

    By Blurtman @ :

    Erik,
    It sold. I saw the victims moving in today.
    02/06/14 Sold $363,700

    Remodeled.

    02/16/15 Pending sale $875,000

    http://www.zillow.com/homes/for_sale/Sammamish-WA/house_type/49091908_zpid/26938_rid/300000-650000_price/1097-2376_mp/1000-_size/days_sort/47.615409,-122.054557,47.61304,-122.059911_rect/17_zm/?view=map

    You are threadjacking, but really? Who is the victim here? A completely uninhabitable house has an investor drop $200-$250k into it, do a very nice job, and sell it to someone that can move in. Yeah, they made a good profit, but so what? Where they supposed to sell it for less than market because they made too much money on the deal?

  17. 18
    Jay says:

    RE: FlipperInSeattle @ – Did you flip this property? Why are you so upset? I am glad that Blurtman told us about it. It is very useful information indeed! By the way, I don’t think it takes $200 K to $250 K to fix it, may be around $100 K. Come on, who are you trying to cheat here? Innocent stupid buyers?

  18. 19

    By Janice Harper @ :

    That said, my point was that those who do invest in apartment buildings are investing in people’s homes. It is a unique form of investment that does displace people, and far too often investors, both buyers and sellers, exempt themselves from their role in this pressing social problem, and distance themselves from the very real human impact of their investment.

    Yes they invest to make money, but what do you think would happen to rents if investors didn’t invest in apartments? But for all the new construction of apartments rents would be even higher today, and that new construction would not happen but for investors (including investors who invest in government low income housing projects).

    And again, as to your particular building, increasing rents to market value does not require a change in ownership. You might have a situation where the current owner doesn’t realize the current market value, or otherwise doesn’t care. But it isn’t the investment which spurs the increase in rents–its the demand for rentals outpacing the supply.

    If you want to be critical of someone, perhaps you should be critical of all the companies providing new jobs in the region. They should realize the impact of their actions on the people that were already living here and stop their actions immediately! Wait, not enough! They should layoff everyone hired in the past two years. That will help with the one problem you seem concerned about. /sarc

    But I wouldn’t worry. Absent city government screwing it up, eventually the investors will overbuild and rents will head back down. The time-lag which Tim mentions makes that even more likely.

  19. 20

    By Craig Blackmon @ :

    “On the supply side, building policy in the Seattle area makes new construction expensive, time-consuming, complex, and in some places thanks to restrictive zoning and height restrictions, downright impossible.” (from post, I am too dumb for HTML)

    On a data-driven, highly analytical web site like this one, I’m a little surprised by this statement. Any data to support this notion? And I’d like to drill down on the definition of “building policy” too. Does that include seismic requirements that maybe aren’t necessary in other parts of the country?

    I agree data would be good, but I don’t see Tim calling for elimination of seismic requirements. Beyond that though, city review of plans and inspections of the construction project really don’t guarantee much.

    http://crosscut.com/2011/01/taking-down-mcguire-without-using-explosives/

  20. 21
    Mike says:

    What I found most misleading about this article is the tenant in question was not paying rent. It’s just not realistic for anyone aside from a Playboy bunny to be able to find another situation like that.

  21. 22
    Azucar says:

    By Mike @ :

    What I found most misleading about this article is the tenant in question was not paying rent. It’s just not realistic for anyone aside from a Playboy bunny to be able to find another situation like that.

    Exactly what I was thinking… there was something about “it could be a 2 year waiting list to get into affordable/subsidized housing” in the article and I was thinking “shouldn’t he have been on that waiting list the whole time he was living at the apartment rent free?’ It seems that it was only AFTER the free housing was about to disappear that he started to consider that he was in a situation that couldn’t last forever….

  22. 23
    Mike says:

    RE: Blurtman @ -The before pictures look like that was one heck of a party spot. I’m going to hazard a guess that this house was something ‘well meaning’ parents bought for their kid given the previous sale date.

  23. 24
    Blurtman says:

    RE: Mike @ – I have always said that I think the remodeling company did a great job on this home. It was pretty thrashed. And it was a criminal bank owned property for quite a while after the owner defaulted, and the home was languishing on the market. But by any criteria, the buyer overpaid. $321.75/sq.ft. is overpaying. Perhaps it was the flipper’s aunt who will soon default and saddle taxpayers with the loss. $728,000, as hard to believe as that is, might be more in line with comps. And the buyer could have said to the flipper, look, even if you put $150k in the remodel, you are still making a 40% profit at $728k. Bad buy. And kudos to the flipper for spotting a gem in the rough.

  24. 25
    whatsmyname says:

    By wreckingbull @ :

    I hate to be that guy – a cold SOB like Whatsmyname, but this is pretty much spot-on. If someone else is affording the property, it’s not unaffordable. Working downtown after a 10-year hiatus, I am amazed at how much the city has stratified in such a short amount of time. Inevitable I guess.

    Whoa! How’d I miss this? I’d say welcome to the tundra brother; but I don’t see how it is cold to say that if someone can afford it, it’s not unaffordable. It’s just recognizing the obvious. And recognizing reality is key to making sustainable plans. That’s a good thing. Thanks for recognizing that is my message, though.

    On this letter, I felt terrible for the guy who was the subject. It sounds like there truly were no housing options for him, (that included housing, at least). More importantly, he didn’t seem fully capable of dealing. He needed help. Now I don’t think the landlord should be excoriated for declining to shoulder alone what 2 million people in King County won’t carry together. But I think this is a moment to remain conscious that when we deal with people, sometimes truly disadvantaged people, it can’t always be about the dollar.

    That’s totally different from having sympathy for someone raging because he thinks his level .X financial position has entitled him to purchase housing in the 25th higher percentile.

    Also, you don’t need to capitalize my name.

  25. 26
    whatsmyname says:

    RE: Blurtman @ – Not saying you’re wrong, I don’t look in this area. But did you notice that this house had an acre and a quarter of land? I checked a couple of comps; they had from < .3 to .6. If you are going to look at $/sf of the improvements, you need to adjust out the delta in land value or you have no real basis for comparison.

  26. 27
    FlipperInSeattle says:

    By Jay @ :

    RE: FlipperInSeattle @ – Did you flip this property? Why are you so upset? I am glad that Blurtman told us about it. It is very useful information indeed! By the way, I don’t think it takes $200 K to $250 K to fix it, may be around $100 K. Come on, who are you trying to cheat here? Innocent stupid buyers?

    I wish I flipped it – super profit. But no, didn’t flip it. And not upset, but I hate I hate the ignorance on display. I still don’t get the “cheating” lines. The facts: the house was uninhabitable. An investor bought it, dumped a ton of money in it. It was sold in an arms-length transaction to a buyer. How is that cheating? What was the investor to do differently? Sell it for a small profit at a below-market price that you approve of?

    Did the buyers pay absolute top of the market? You bet! Would I? Not way. But they got a cool, effectively new house, on acreage, in a desirable area – and one that is pretty friggin cool to boot.

    As for your “opinion” of it only being a $100k for rehab? Seriously? You might not like how the money was spent but they got near your number just on the outside – driveway paving, roofs, decks, railings, doors, windows, garage, landscaping, etc.

  27. 28
    FlipperInSeattle says:

    By Blurtman @ :

    RE: Mike @ And the buyer could have said to the flipper, look, even if you put $150k in the remodel, you are still making a 40% profit at $728k.

    And they would have lost the house to another buyer… with that kind of spread the investor would have been very patient in waiting for their price…

    By Blurtman @ :

    RE: Mike @ And kudos to the flipper for spotting a gem in the rough.

    Agreed. We passed on it at the auction thinking it was worth about $550. Even the REO price surprised us. They did an incredible job, the market has been very hot for the last 14 months, and they got the absolute top of the market…

  28. 29
    Blurtman says:

    RE: whatsmyname @ – True dat, and even more kudos to the flipper.

  29. 30

    I’m not going to comment on the particular property involved with the flipper issue, but if the flipper does make an excessive profit that can be due to the bank selling for too little. That happens less now than before, but it still happens, and if it happens, there’s no reason the flipper should sell the house for less money. What they sell it for has little to do with what they paid and what they put into it. What they sell it for is dependent on the comps and the current demand. If it were otherwise they would be guaranteed a profit! ;-)

  30. 31

    RE: Craig Blackmon @

    They’re Leaving King County for Pierce’s Cheaper Real Estate?

    “…This doesn’t mean that newcomers aren’t flocking to King County. They are. But the new data shows that the outbound flow increased even more dramatically than the inbound in 2014.

    Meanwhile, the opposite thing happened in Pierce: There, the scales tipped in favor of new arrivals.

    And it was a remarkable turnaround. In 2013, 75 more people moved out of than moved into Pierce County. But last year, Pierce registered a surplus of 4,336 domestic movers.

    The $64,000 question is: How much of Pierce’s gain is King’s loss?

    Unfortunately, we can’t say for sure because the new data doesn’t indicate the counties from which new arrivals originated. The Census Bureau will crunch those numbers in a future release.

    But I suspect that King is feeding Pierce’s growth…”

    http://www.seattletimes.com/seattle-news/data/priced-out-has-the-king-county-diaspora-begun/

    Perhaps we’re overbuilding if home owners are leaving King County?

  31. 32
    Deerhawke says:

    Janice’s story makes great copy. But a few things for her to consider. She should check out the facts and once she has confirmed them, she might be less tempted to demonize real estate investors.

    First, rental real estate is a very low margin business. It always has been. If you think that real estate investors are making megabucks, jump right in– the water is fine. I have been looking at rental real estate for the past 2 years and could not find anything to buy that made any sense. Most of the deals say they offer a 5% return, but hidden in the fine print are all kinds of lies and misrepresentations that really means it is a 2 – 2.5% return. It is an underperforming investment unless 1) you can force substantial price increases or 2) the building rises dramatically in value or 3) both. For my money, buying existing rental real estate is a lousy investment.

    Second, the escalator does not always go up. Sometimes (like in 2010) rents drop precipitously. Sometimes asset values drop rapidly too. Sometimes these two things happen at the same time and you wonder why oh why you ever wanted to own rental real estate, but now you cant rent it and you cant sell it. And it is rather remarkable that when this happens, the bank still wants the same monthly payment, the county still wants the same taxes, and the roofing company still wants to be paid to put on the new roof. And then worst of all, the tenants refuse to continue to pay rents above the new market rent level. They can be pretty insistent on getting a discount and when they don’t, they are more than glad to leave their oh-so beloved “home” to go find new digs on 20-day’s notice. Somehow during the dark days of the downturn, I never saw a sympathetic story in the Weekly about the poor landlord who had been abandoned by his greedy tenants who all suddenly demanded to pay market rates.

    Third, when we look at this story, perhaps just some of the blame for the problem should go to Eve and Charles (and all of the others out there like them). They ran a business in part as a charity and allowed people to get used to paying subsidized below-market rents. But then they sold it as a business. When they sold the building as a business at market rates, it is only natural that their successor would have to charge market rents to make his debt service, taxes, maintenance payments, etc. In essence, Eve and Charles were the ones imposing market rents on their successor and through him on their tenants.

    It is always easy to seek a scapegoat in times of economic pain. It is much more compelling than blaming suffering on impersonal things like sudden changes in supply and demand.

  32. 33
    Macro Investor says:

    By Deerhawke @ :

    Janice’s story makes great copy.

    Not really. Socialists like Janice are tiring. By her incomprehensible logic, a land owner should give away his hard-earned investment to someone SHE DECIDES is more deserving. She doesn’t know or care how hard that person had to work and save. She doesn’t know or care that sometimes those investors are a pool of older people who don’t have much themselves.

    Since when are poor people entitled to live in a wealthy coastal city on view property? Doesn’t it make more sense for them to live where costs are lower? Not to socialists like Janice. We all should be forced to chip in so poor people can live in a wealthy neighborhood.

    I’ve got an idea for Janice. Buy the property yourself, then run it as a charity. Until then, shut up.

  33. 34
    The Tim says:

    By Deerhawke @ :

    Third, when we look at this story, perhaps just some of the blame for the problem should go to Eve and Charles (and all of the others out there like them). They ran a business in part as a charity and allowed people to get used to paying subsidized below-market rents. But then they sold it as a business. When they sold the building as a business at market rates, it is only natural that their successor would have to charge market rents to make his debt service, taxes, maintenance payments, etc. In essence, Eve and Charles were the ones imposing market rents on their successor and through him on their tenants.

    This is an important point that many people missed, I think. If you insist on getting upset at a particular person, it seems that the sellers of the apartment building were the ones directly to blame for putting an end to the sweetheart deal these renters were getting.

  34. 35
    Yu says:

    “Don’t blame investors” The topic seems to assume that there are more and more investors coming into the housing market. In fact, investment home sales has been reducing for four years. 27% in 2011, 24% in 2012, 20% in 2013, 19% in 2014 according to NAR surveys. So investors has nothing to do with the housing price increase at all.

  35. 36

    RE: Yu @ – For multi-family it would be 99.9% investor.

  36. 37
    Yu says:

    Doesn’t matter. That survey included all kinds of houses.

  37. 38

    RE: Yu @ – But the article at issue is about an apartment building.

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