Second part of the Seattle ‘Bubble’ theory. Hope it’s not as long as the first. I’m not sure if reason #1, 2 or 3 is more important in price increases, but sure seems to me they all play a part. Interest rates are an additional factor, and I will add another factor.
I’ve seen blames for the price increase run from pushy real estate agents, crooked lenders and appraisers, the Federal government, builders, sellers, to pot-smoking, Beamer-driving BabyBoomers…………thank God I am now able reveal the real TRUE reason for these outlandish price increases.
The real reason Seattle real estate prices skyrocketed is…………………..
ANNA NICOLE SMITH !!
I AM NOT MAKING THIS UP !!
(Sorry, just love Dave Barry and I’m always looking for chances to throw in his lines.)
Now that she is a member of the dearly departed, prices are sure to go down !
Actually, the reason I’m covering here is one that I’ve mentioned to people several times over the years, but thanks to NOLAGUY posting at Seattle Bubble blog, I found the research that quantifies, sort of, what I thought was going on in W. Washington housing markets. NOLAGUY posted the link http://www.demographia.com/dhi-ix2005q3.pdf that contains a ‘study’ of housing affordability, mainly in the English-speaking world………U.S., Canada, U.K., Ireland, Australia and New Zealand. The ‘study’ contends that outlandish price increases around the world are caused by an artificial, government-induced housing supply shortage.
The study is produced by Pavletich Properties Limited, a company without a website, but the authors appear to be Hugh Pavletich, and Wendell Cox. Hugh Pavletich is a developer in Christchurch, New Zealand, whose motto might be “It all comes down to money in the end” http://www.historic.org.nz/magazinefeatures/2002summer/2002_summer_d.htm . Wendell Cox is associated with the Heritage Foundation, a conservative think tank, as well as The Heartland Institute and the Cato Institute, both libertarian think tanks. About the Heartland Institute ……this “group also quietly acts as a PR tool for the tobacco industry, by posing as a "Smoker's Rights" group. Their website contains such gems as: ‘The public health community’s campaign against smoking is based on junk science.’” http://www.dslreports.com/shownews/59840
Looking at the DATA of their study, you can see that places like Omaha, Ft. Wayne, Indiana, Buffalo, New York, and Youngstown, Ohio are among the most affordable cities in the U.S., while Los Angeles, San Diego, Honolulu and San Francisco are among the least affordable. Affordability they define as the ratio of median house prices to median incomes. (Seattle is the 19th least affordable city in the U.S., behind Modesto and Stockton, Ca., for God’s sake.) An ‘affordable’ house is one where the ratio of price to yearly income is less than 3 (household income = $50,000, affordable house is $150,000 or less.) The study claims that unaffordability arises from restrictive land use policies that limit land available for development and other unnecessary, lengthy, complicated or inflexible government policies that add costs to development and hence, to housing.
For W. Washington prices, I’ll buy those reasons. In 1990, the State legislature passed the Growth Management Act (GMA) that put strict limits on where population growth could occur (it’s allowed in already developed areas with infrastructure…..water and sewer lines, etc.,) AND mandated that individual cities and counties provide for affordable housing. (Maybe that part was in really, really fine print.) The policy intended to increase population density in already urbanized areas, and greater population density makes mass transit more profitable (or less unprofitable,) and gets cars off the roads. Cars off the road means less pollution, less global warming, and less gridlock. Hard to argue those.
The Realtors organization has been fighting this act since its inception, always for the stated reason of “providing more affordable housing.” I’m not generally a fan of the Realtors organization, but their stand appears to make at least economic sense. Unfortunately for them, right before the GMA was passed we went through the price boom of 1988-April 1990. Many Californians moved here and development was ‘running wild.’ The bumper sticker “Don’t Californicate Washington” was very popular, and led the legislature to pass the GMA with great public support. Until about 1996, however, there was little pressure from increased population and jobs, and prices remained fairly stable. After that, the tech boom started, jobs proliferated and the price rise of the late 90’s was on. In 2006, state voters again affirmed their support of the GMA by voting down Initiative 933, which would have caused governments to pay property owners for loss of usability due to restrictive land use policies.
If land restrictions are a major cause in our high prices, then we should envision W. Washington without them and expect that real estate prices would have gone up had GMA not been passed. Without GMA, W. Washington might have added subdivisions from the Puget Sound to the Cascade crest and beyond. Certainly, having tens-of-thousands of additional homes being built since 1990, mostly in the suburbs, would have prevented at least some of the price rises we have recently seen here, especially in the suburbs. But, with its absence of available lots, would central Seattle be priced much different than it is now? Central Seattle is in high demand because of the abundance of employment, desirable urban amenities and aversion to long commutes. Recent buyers that have helped drive up in-city prices could have bought in the suburbs today, but chose not to. My guess is that people looking for bargain house prices would not choose central Seattle with or without land restrictions. People looking for in-city amenities simply pay what it costs to live there.
Demographia authors further assert that the reason prices did not skyrocket in affordable cities, in spite of widely-available low interest rates and ‘creative’ real estate loans, is that local governments have not restricted land use. Although the State of Washington has a strict growth regulation policy, several cities on the unaffordable list do not, notably Orlando and Tampa, where sprawl appears to be trying to join these two cities separated by nearly 100 miles. Does Los Angeles, with all its sprawl, actually have Growth Managemen? Yet, L.A. is at the top of the unaffordable list. Also on the severely unaffordable list are Bakersfield, Fresno, Lost Wages, Tucson, Sacratomato and Phoenix: I don’t know for sure, but do these places actually have any growth planning or restrictions ? Sure doesn’t look like it but it’s sure hard to tell by driving through. Someone must know.
Cities without land use restrictions, Houston and Dallas (both very ‘affordable’) have reasonably healthy economies, neither city has growth restrictions and neither city is thought of as a ‘highly desirable’ place to live.......no attractive beaches, no mountains, generally unpleasant weather (but great barbeque.) Houston has recently topped Los Angeles as the most polluted city in the U.S., but demographia co-author, Wendell Cox, sees Houston as a beacon among cities in solving traffic congestion http://www.publicpurpose.com/.
In spite of their claim, it seems likely that land use restriction is a factor in creating high real estate prices, but not the only factor.
Looking again at the demographia lists, virtually all of the unaffordable cities also happen to be cities that can be viewed simply as desirable places to live: Los Angeles-Orange County, San Diego, Honolulu, San Francisco, and Ventura County are at the top of the least affordable list, and would be at the top of many people’s most-desirable-places-to-live list. My guess is that their unaffordable prices prevent them from becoming even more crowded that they already are, but obviously many people moved there in spite of high housing prices. From my experience listening to people moving to and from wherever, housing price is a factor in where to move, but so is the strength of the economy, the quality of life, and the general ‘appeal’ factor an area is perceived to have.
The study never once mentions the fact that there are places that people just would rather live in.
How else to account for the no-growth-planning cities of
Los Angeles and
Dallas being at opposite ends of the affordability
spectrum ?
The authors’ agenda and solution for creating more affordable housing appears to be the removal of all government regulation and allowing ‘the market’ to determine policy. Guess it’s not surprising that Mr. Cox belongs to libertarian organizations. In spite of its egalitarian-sounding name, ‘the market’ opposed initial air and water pollution controls in the 60’s, promoted destruction of indigenous wildlife all over the world, and opposed anti-slavery movements in the South. Perhaps ‘the government’ IS ‘the market’ for things needing protecting from the excesses of capitalism.
In Texas, where all the cities are affordable, industrial pollution standards are ‘voluntary.’ Should Washingon have a policy, then, be to build freeways and subdivisions as far out as ‘the market’ will bear. The government ‘restrictions,’ referred to by demographia authors, are not just growth boundaries for urban areas, but ‘unnecessary’ and ‘overly complex’ building requirements such as construction and building setbacks from waterways and wetlands, fees charged against new housing to help pay for schools, road and infrastructure improvements necessitated by the additional population, outdoor burn bans that add to costs of hauling away debris at construction sites and so on.
For Western Washington, these fees add a large dollar amount to the cost of each newly-constructed residential unit. Growth boundaries have severely limited supply of housing while demand has grown. Yes, restricting lenders from making riskier mortgages will shrink the supply of buyers somewhat, but more owners may turn to sell with owner financing, (seller-carried mortgages,) similar to what happened in the early 1980’s when the supply of buyers from the late-70’s real estate boom was curtailed by double-digit interest rates. Will Congress suddenly decide to do away with the practice of allowing sellers to pay virtually all buyer’s costs ? Probably not. Will lenders decide to completely do away with adjustable rate mortgages (ARMs)? ....with Option ARM’s that allow buyers the choice of paying down principal in the first few years of the loan ? Maybe with a real crisis, like the Savings and Loan catastrophe of the late 1980’s.
Is it a good thing to have housing so unaffordable anywhere ? I don’t think so. The question then is, must we trade something to get affordable housing ? Will we allow unlimited freeway building and subdivisions? Will we remove most or all environmental restrictions connected with the housing industry? Why not remove automobile and water pollution standards as well? A long as your locale is a desirable place to live and there are jobs there to support people, there will be increasing population pressure.
For the existence of ‘a Bubble,’ there must be a potential for a steep drop in demand. The potential reasons might be: 1) Seattle could quickly become a less desirable place to live after a..........................volcanic eruption, a tsunami, a mega-earthquake...............another week of rain? But Texas is not a particularly pleasant place to live, yet people keep moving there. 2) Catastrophic economic news. But if the economy is a disaster in Seattle, where will it be good? What investments will be worthwhile? 3) Catastrophic decrease in demand (buyers) or huge increase in supply. The huge increase in supply can come from reason #1 above, Seattle becoming much less desirable, or the construction floodgates could be opened by removal of GMA provisions. Will Washington’s populace ever see fit to remove or relax growth restrictions ? I’d bet big money against that in Las Vegas, since these growth restrictions are helping to keep the area desirable to live in. But if restrictions are not lifted, will the area be able to produce ‘affordable’ housing again?
The decrease in demand could come by buyers going on strike, by deciding to wait for prices to drop, or it could arise through buyers being unable to get loans. The Federal government has the power to do make loans more difficult to get. Will they? ‘The market’ has the potential to raise interest rates. What little I know about that I will add in another post.
Of all the possible ‘Bubble’ scenarios for Seattle, this seems to have the most potential for triggering widespread price drops.
h
