Seattle-area affordability set to plunge to 9-year lows in 2018

Seattle Bubble spreadsheets are updated even when content isn’t frequently posted. You can get access to the spreadsheets by becoming a member of Seattle Bubble.

If you’re wondering about the lack of posts on these pages recently, the explanation is pretty simple: There just isn’t much to say. The Seattle-area housing market has been in a protracted boom period with ridiculously low inventory of homes for sale and rapidly-climbing prices for years now. In a lot of ways it looks like the housing bubble that was in full swing when I started this blog in 2005, but what’s going on behind the scenes is very different this time around. Is it possible that Seattle really is special this time around and the “bubble” won’t burst this time? … Maybe?

Anyway, I’ve been meaning to update more of the charts of the “fundamentals,” so let’s start with an updated look at our affordability index charts for the counties around Puget Sound.

As of February, the affordability index is at the same level it was in July 2005, just three months before Seattle Bubble was launched.

Median home prices have already started to creep up, and interest rates are climbing, now at their highest levels since early 2014. The affordability index for King County currently sits at 88.1. An index level above 100 indicates that the monthly payment on a median-priced home costs less than 30% of the median household income.

King County Affordability Index

I’ve marked where affordability would be if interest rates were at a slightly more sane level of 6 percent—73.0, which is worse than any point outside of the peak bubble years of 2006 and 2007.

If rates went up to a more historically “normal” level of 8 percent (the average rate through the ’90s), the affordability index would be at 59.6—six points below the record low level in July 2007.

Here’s a look at the index for Snohomish County and Pierce County since 2000:

Snohomish / Pierce County Affordability Index

The affordability index in Snohomish currently sits at 109.1, while Pierce County is at 121.2. Both down considerably over the last few years, and at their lowest points since late 2008.

You can calculate whether a home purchase scenario is “affordable” using the Affordability Index measure with my simple affordability calculator.

Tomorrow or Wednesday I will post updated versions of my charts of the “affordable” home price and income required to afford the median-priced home. Hit the jump for the affordability index methodology, as well as a bonus chart of the affordability index in the outlying Puget Sound counties.

Outer Puget Sound Counties Affordability Index

As a reminder, the affordability index is based on three factors: median single-family home price as reported by the NWMLS, 30-year monthly mortgage rates as reported by the Federal Reserve, and estimated median household income as reported by the Washington State Office of Financial Management.

The historic standard for “affordable” housing is that monthly costs do not exceed 30% of one’s income. Therefore, the formula for the affordability index is as follows:

Affordability Formula

For a more detailed examination of what the affordability index is and what it isn’t, I invite you to read this 2009 post. Or, to calculate your the affordability of your own specific income and home price scenario, check out my Affordability Calculator.

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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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

32 comments:

  1. 1
    Rupert D says:

    Good commentary as of March 6th from the NWMLS site:
    http://www.northwestmls.com/index.cfm?/News–Information

  2. 2
    David says:

    I cannot fathom the Fed, with $21T of debt, can ever raise interest rates to whatever was historical. Not in my lifetime anyway.

    The Fed is like a rat in a manure pile. Occasionally making a dash for higher rates to squash inflation fears – but not for long. The Government cannot afford it.

  3. 3
    Brian says:

    Thanks for including the affordability index based on higher mortgage rates! I was curious about that.

  4. 4
    Nick says:

    I’d be super curious to see a couple other metro areas w/these calculations
    Maybe SF, LA, Dallas/Austin, Boston, etc.

  5. 5

    The Continuing Resolution (CR) to Fund Our Federal Government Expires in 9 Days

    What does that mean to Seattle Real Estate budget planning? Plenty.

    If I owned stocks right now I’d sell short and buy back in after the CR is approved, hopefully without Government Shutdown….its already happened about a month or so ago for the same reasons….so its easy to predict. There will be trillions lost in the stock market if the Progressives press on for a DACA fix without an end to chain migration and the WALL….Trump will give them a Government Shutdown spanking and the rich elite open borders folks have MUCH to lose when that happens….look at Facebook stock today because they hijack our personal information illegally.

    The 9th Court decision is a moot point against Trump’s DACA termination….there’s no Congressional budget for laws without legislation, the Constitution IOWs [lest we forget]. Trade the WALL for DACA? LOL….the pig-headed Progressives won’t negotiate, its not in their DNA. Nope…..we’re headed for a BIG DACA fight causing a government Shutdown over the WALL. Its slam-dunk and even establishment minded politicians don’t see it coming. I do.

  6. 6
    uwp says:

    Why is 8% the ‘historically “normal” level’?

    Rates have been under 8% for longer than they have been above 8%.
    Maybe it’s the late 70’s and 1980’s that are the outlier.

  7. 7
    David says:

    RE: softwarengineer @ 5 – I never sold a share during the Obama Depression and just bought more.

    I think Trump’s continued reduction of regulation will keep things going for a while. Even if we have a recession, that should help us bounce back quicker than before.

  8. 8
    Jake says:

    There is a point where this will not be sustainable. However, that doesn’t mean it might not take a decade to get there or that there will be some big crash……

  9. 9
    pfft says:

    By uwp @ 6:

    Why is 8% the ‘historically “normal” level’?

    Rates have been under 8% for longer than they have been above 8%.
    Maybe it’s the late 70’s and 1980’s that are the outlier.

    Because David from the internet said so. There is no historical rate. The price of money goes up and down just like the price of stocks.

  10. 10
    David says:

    This house in Burien just sold for $620k. Prices are rising fast in that area. With more set to close at the same price on First Avenue.

    https://www.redfin.com/WA/Seattle/12060-1st-Ave-S-98168/home/21709372

  11. 11
    pfft says:

    By David @ 7:

    RE: softwarengineer @ 5 – I never sold a share during the Obama Depression

    LOL.

    You mean the Bush Great Recession? You criticize me for political stuff and then post this drivel? REALLY? You hurt your credibility when you blamed it on Obama.

  12. 12
    pfft says:

    Part of the problem with affordability is that we have less people per household. Our pop density is going the wrong way.

  13. 13
    David says:

    Just received this email from Redfin:

    “26.4% increase in Burien prices since 2017.

    The median sale price in Burien has increased 26.4% since last year.”

  14. 14
    ess says:

    On Sunday, I did my once a month tour of north end Seattle housing for sale before a meeting I have in Seattle.

    Saw a few townhouses and one expensive house. The house had all sorts of people looking at it, with more entering as I was leaving. The agent said he would probably get multiple offers.

    My visit last month was to a house that was listed for about 900K, and it went pending and then closed in about a month for almost a million.

    Affordability index issues? Not in the north end of Seattle from what I can tell.

  15. 15
    Bitcoin Bubbles says:

    Looks like we still have more room to go (price gains) looking at that chart. Not at historically high levels yet.

    What is affordability vs. the stock market? Where was the S&P last time affordability was in this range?

  16. 16
    Erik says:

    Affordability is only going to get worse in Seattle. Inventory is low, demand is up, so it’s very unlikely prices will go down. Rates are still fairly low and are expected to get higher making affordability worse.

    The only solution I see is to bring back the funny loans. This will inflate our bubble and eventually collapse. Everything is working right on time for the 18 year cycle. This is getting more and more fun. It’s the anticipation that I like.

  17. 17
    Eastsider says:

    Tim,

    You may want to adjust the affordability calculator to reflect higher property tax rate. My 2018 property tax rate has gone up 0.05% from last year. The ‘Simple Affordability Calculator’ assumes a flat 1.15% property tax rate which fails to take into account the discontinuity in the tax rate. The recently voter approved levies will further increase the rate next year.

    P.s. The index will only get worse if you include the huge assessment increase in 2018. For example, if your property tax increases by 20%, the effective property tax rate goes up from 1.15% to 1.38%!

  18. 18
    ess says:

    An article in the Wall Street Journal for those of you that have access.

    Some new insights along with some of the reasons that have been discussed here in the past. One major factor – land, labor costs are skyrocketing, regulations are adding to the price, and builders are building less but more expensive housing to offset those problems. Less housing and the wrong type of housing for first time buyers. Readily observable in this area.

    https://www.wsj.com/articles/american-housing-shortage-slams-the-door-on-buyers-1521395460

  19. 19
    pfft says:

    By ess @ 18:

    An article in the Wall Street Journal for those of you that have access.

    Some new insights along with some of the reasons that have been discussed here in the past. One major factor – land, labor costs are skyrocketing, regulations are adding to the price, and builders are building less but more expensive housing to offset those problems. Less housing and the wrong type of housing for first time buyers. Readily observable in this area.

    https://www.wsj.com/articles/american-housing-shortage-slams-the-door-on-buyers-1521395460

    it’s simple. builders all want to build luxury housing and condos because that’s how they make the most money. That means less people per sq ft.

    Average person in a household have gone from 3.33 in 1960 to 2.54 now.

    https://www.statista.com/statistics/183648/average-size-of-households-in-the-us/

  20. 20
    David says:

    RE: pfft @ 19 – It is actually because government has created SO MUCH regulation that builders cannot make money on low-end construction or even get it approved.

  21. 21
    stupidlifedecisions says:

    Question about building :

    If you have empty land that you already own, and can partner with a builder, is now a good time to build in South Seattle (near Redondo, no water view, and not the sunniest lot), or is labor so much right now that it wouldn’t be worth it?

    I myself would say no as I think a tech crash is coming within the next year or so that will factor greatly into the real estate prices here. I’m not seeking my own opinion though, just the opinion of the other posters here.

  22. 22

    By Eastsider @ 17:

    Tim,

    You may want to adjust the affordability calculator to reflect higher property tax rate. My 2018 property tax rate has gone up 0.05% from last year. The ‘Simple Affordability Calculator’ assumes a flat 1.15% property tax rate which fails to take into account the discontinuity in the tax rate. The recently voter approved levies will further increase the rate next year.

    P.s. The index will only get worse if you include the huge assessment increase in 2018. For example, if your property tax increases by 20%, the effective property tax rate goes up from 1.15% to 1.38%!

    Actually next year should go down for two reasons. First the legislature passed some very minor relief. Second, this year you’re paying the old levy amounts and the new school funding amounts. Next year will be the reduced levy amounts.

    There may be an ST3 element to it too, but I don’t remember the extent of that or when it started.

  23. 23
    pfft says:

    By David @ 20:

    RE: pfft @ 19 – It is actually because government has created SO MUCH regulation that builders cannot make money on low-end construction or even get it approved.

    link please.

  24. 24

    By pfft @ 19:

    Average person in a household have gone from 3.33 in 1960 to 2.54 now.

    https://www.statista.com/statistics/183648/average-size-of-households-in-the-us/

    Isn’t that just the result of smaller families, and largely unrelated to new construction? Not only are people having fewer kids, but also more people remaining single longer. It might even also be more openly homosexual couples who do not decide to expand their family unit with children.

    The average size of houses would be more relevant to your point.

  25. 25
    wreckingbull says:

    By Eastsider @ 17:

    Tim,

    You may want to adjust the affordability calculator to reflect higher property tax rate. My 2018 property tax rate has gone up 0.05% from last year. The ‘Simple Affordability Calculator’ assumes a flat 1.15% property tax rate which fails to take into account the discontinuity in the tax rate. The recently voter approved levies will further increase the rate next year.

    P.s. The index will only get worse if you include the huge assessment increase in 2018. For example, if your property tax increases by 20%, the effective property tax rate goes up from 1.15% to 1.38%!

    I came here to say the same thing. With a local tax rate of 1.4%, it is starting to feel a lot like renting.

  26. 26
    Eddie Huang says:

    There is much headwind at both national (interest rate reflecting 10 yr yield rate) and regional levels (property tax rate hike, property assessment increase, rental construction influx). Risk is higher and it looks closer to a bubble than past year. But real estate price peak will be difficult to predict, when local companies such as Microsoft and Amazon rule the cloud space, which isn’t an easy space to capture (just ask Oracle), growth and subsequent stock price increase will be felt across the region. Even though Netflix isn’t part of local economy, it actually uses Amazon cloud so when Netflix wins, Amazon wins. Also cities with lower affordability such as SF, LA, NYC continues to increase in property value (at a lower rate but not necessary at a lower dollar amount,) so those calling it over in Seattle price run may not be correct either.
    With that said, I am considering seriously unloading some properties as the price to rent ratio creeps and rental vacancy rate (which I’m not sure where we r, but should find out). There are safer bets with better hedging than Seattle real estate at this point.

  27. 27
    N says:

    @26 – Great points. I am curious how much credit everyone on here gives to the local economy for the current boom vs. other factors. Given that most major metros are seeing the same trendlines (low inventory, rapidly increasing prices) is it merely a strong economy everywhere but just hotter in Seattle or do you give some credit to much easier credit, low interest rates, investors

  28. 28

    The NWMLS is switching to a new mobile app for agents, called Homesnap. It also works for consumers, but without the “agent only” information. So far I’m not impressed, but I’d be interested in the opinion of others. This is about the third app the NWMLS has used for agents, and the first one wasn’t too bad, the second one (Homespotter) nearly worthless.

  29. 29
    Jake says:

    @27 I think the local economy is obviously a factor, but from my amateur perch, the short supply and rising costs of housing looks like a national (and somewhat worldwide trend). There will be a correction at some point, but that correction may look different in Seattle than other places.

    On another note, I monitor what’s going on in South Seattle the most, and it is getting pretty crazy. This townhouse in Columbia City just sold for $85k over asking for $685k: https://www.redfin.com/WA/Seattle/5017-37th-Ave-S-98118/unit-A/home/172020. Just 6 months earlier, the townhouse behind it sold for around $630k (which is a standalone). Having watched this area for several years now, it is always interesting to see the stupid decisions buyers make in a seller’s market. Given the other housing available, this would fall into that category.

  30. 30
    David says:

    Here’s one from 10 YEARS ago: https://www.seattletimes.com/business/uw-study-rules-add-200000-to-seattle-house-price/

    & here is a link to give you all the reading you can stand: https://www.google.com/search?q=government+regulation+30%25+cost+of+housing&source=lnms&sa=X&ved=0ahUKEwjU677EtvvZAhUI-GMKHbhaDeYQ_AUICSgA&biw=1239&bih=680&dpr=2

    By pfft @ 23:

    By David @ 20:

    RE: pfft @ 19 – It is actually because government has created SO MUCH regulation that builders cannot make money on low-end construction or even get it approved.

    link please.

  31. 31
    Eddie Huang says:

    RE: Jake @ 29 – I should retract somewhat on effect of rate hikes on mortgage, after watching the US treasury yield movements and Fed’s Powell testimony. It could be that mortgage interest rate is less impacted since there appears to be potential instability in financial market, keeping the US 10/30 yr treasury yields bounded. However, with the still scheduled short term rate hikes, should watch the inflation number to gauge what Fed will do and also the yield curve. Looking back at 2007 yield curve flattening to inverting was not a fun thing…

    With that said, Seattle real estate should continue to party on, especially if you are buying to live.

  32. 32
    whatsmyname says:

    https://seattle.curbed.com/2017/2/22/14702850/seattle-renter-owner-percentage-ratio

    http://www.nmhc.org/Content.aspx?id=4708

    Even in 2016, apartments were 34% of Seattle housing stock; 42% of households were renters; and there was some significant number of condos out there. It is a giant stretch to call the relationship between median household income and median SFR prices “affordability”. A more realistic measure would probably be the relationship between median household income and the lowest SFR prices.

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