The new battle for Seattles future.
The new battle for Seattle's future.
steve estvanik/

This piece originally ran on August 10, 2016, and was the first of a four-part series. You can also hear writer, activist and just-announced Mayoral candidate Cary Moon talk about solutions to Seattle's housing crisis on Blabbermouth, The Stranger's weekly podcast.

Everywhere you go, Seattleites are talking about our out-of-control affordability crisis. It is on EVERYONE’s minds. We need to reexamine what we think we know about the housing market to understand what to do about it. The spiraling cost of housing is probably not caused by what we think it is.

Demand is up, but it’s not simply driven by population growth. Yes, our tech sector is growing. Welcome to Seattle! Happy you’re here, you 70,000 people who have joined us since 2010. Tech workers, however, are not the problem. These fine young people who have scored a good job and want to find a decent house or apartment are only one factor increasing demand in our region. Yes, tech workers are well-paid and can spend more than others for housing and yes, they are a large cohort. If our only challenge were to build enough new rental apartments for our friends in tech while avoiding displacing people and communities, we’d probably be fine.

Also true: the crazy rental market in San Francisco is driving up prices here. Young tech workers start out in jobs there, work for a few years at Google or Start-Up Inc, and then move here for the next career phase–partly because it’s affordable in comparison, and you still get to live in a city with world-class amenities. An average new market-rate rental in San Francisco can rent for roughly $6 per month per square foot, and here it is currently half that, while the average salary for a tech worker in Seattle is about the same as in San Francisco. That means if rental developers and landlords see that San Francisco workers will pay $3000 for a 500 square foot studio (Holy. Crap.), and the same apartment currently costs $1500 in Seattle…. well it’s not going to stay $1500 for long.

Our tech-fueled economic growth and the influx of tech workers who can pay higher rents are the most visible change we are experiencing, but let’s consider other factors for a moment and come back to this.

Wall Street investors–Real Estate Investment Trusts (REITs), private equity funds and hedge funds with new real estate divisions–have been buying up local apartment buildings and starter homes. We’ve all noticed rents here have been rising rapidly, and so have they. Seattle is now in first place of all US housing markets for rent growth, growing at four times the national average. Rental real estate here offers some of the highest returns on investment in the nation, compared to all possible investments. Seattle is now the 8th highest-ranked city for REIT ownership of multifamily housing, and REITs own 8.2% of our total inventory. Our rising rents present a juicy profit stream in a world where such opportunities are actually hard to find.

REITs are not new, but private equity funds like Blackstone purchasing homes as assets is a new phenomenon. According to this Seattle Times story from 2014, Invitation Homes—the country’s biggest rental home fund of this sort, owned by Blackstone—purchased 1585 homes in 2013 in our region to hold and rent out. Is that number big enough to have an effect on prices? From the Seattle Times: “In a market already low on inventory, big investor purchases could artificially pump up home purchase prices, said Yale economist Robert Shiller, whose book ‘Irrational Exuberance’ warned in 2005 of a national housing bubble.” These landlords are not like your Aunt Linda renting out grandma’s old house. Maximizing profit streams is their one and only purpose, and they are ruthlessly efficient in raising rents to the absolute max.

And it gets worse. Remember the housing bubble that caused the financial crisis of 2008, and how mortgage brokers sold a house to anyone with a pulse, then the banks sold off these subprime mortgages to Wall Street banks that packaged them, sliced them up, and sold them as CDOs back into Wall Street machine? This story was laid out in a very entertaining way in the movie The Big Short. Hedge funds and private equity funds are now starting to package and resell the revenue stream from our rents, using a similar approach.

Blackstone, the aforementioned huge private equity firm, issued the first “single family rental security” in 2013. Here is how it works: A hedge fund assembles a set of rental properties, purchasing them with their own cash. Then they create a new product that allows investment into pools of rental properties, and offers a steady return. They sell their properties to this new security, paying themselves a nice profit. Then their subsidiary operates this security, selling bonds to institutional investors (mainly insurance companies and pension funds), paying the bondholders out of the cash flow from the rental income stream.

While these Wall Street landlords operate mostly in the sand belt states, taking advantage of the collapsed prices of the subprime crisis, they’re here too, taking advantage of our ever-increasing rents. Wall Street watchdogs are raising concern that these rental-backed securities are the direct descendants of the mortgage-backed securities that set off the housing crash ten years ago.

According to this analysis, the initial $479 million offering from Blackstone generated more demand from bond buyers than they could meet, so Blackstone and other firms quickly created $3 billion more of these securities. This “exciting new asset class” is expected to grow into a $1 trillion industry in the next few years.

And sorry, it gets worse, again. International “hot money”, the excess capital sucked out of some other economy, is looking for a safe place to park and our region’s houses look positively delicious. The global elite have accumulated waaaay too much money—billions upon billions. Who knows where it’s from; this is the kind of mystery money you read about in the Panama Papers and stories of overnight billionaires or hedge fund paychecks that boggle the mind. What matters to us is that wherever this money was extracted from, it is now in a shell company that is desperately looking for a secure place to park it. These buyers don’t care much about purchase price; they just want to turn that cash into a real physical asset—preferably in a reliable, stable housing market—as quickly as they can, before it evaporates. This hot money has already wreaked havoc on housing prices in several of the world’s great cities: London, Miami, New York, Sydney, and Vancouver.

Vancouver B.C. is an extreme case. Hot money has been flowing out of China and into Vancouver since the 1990s, as several conditions made that the easiest place for wealthy Chinese people to purchase real assets to stabilize their portfolios. Proximity, wonderful quality of life, a global culture, the friendliness of Canadian banks, and a relatively reliable housing market caught their attention. See Kerry Gold’s analysis of this dynamic, especially in an excellent long-form story in The Walrus titled “The Highest Bidder: How foreign investment is squeezing out Vancouver’s middle class.”

Canada’s fast-track visa program for wealthy foreign investors, called the Immigrant Investor Program, helped make Vancouver irresistible. A foreigner could get a Canadian visa if they loaned $800,000 to the Canadian government repayable at zero interest in 5 years. 85% of users of this program in Canada were from China, as the steady trickle of money leaving China turned into a fire hose. The Canadian government suspended this program in 2012 and closed it down in 2014, partly due to the disastrous escalation it was causing to Vancouver home prices. The Visas stopped but the money flow didn’t. According to this article in MacLean’s: “National bank of Canada economist Peter Routledge has hypothesized that Chinese buyers last year shelled out nearly $12 billion on real estate in Vancouver, accounting for 33% of city’s sales.”

From Gold’s article in The Walrus: “The effect on the city has been profound. In 2006, according to Andy Yan, one of Vancouver’s leading lights on this issue, 19 percent of single-family homes were valued at more than $1 million. Nearly a decade later, that share has jumped to 91 percent. For Yan and others, the connection between Vancouver’s escalating property prices and the arrival of offshore buyers is clear.”

This flow of Chinese money is looking for the next housing market, and it appears that Seattle and California cities are emerging targets. According to The Guardian, it is underway now. “Geographically, Chinese buyers are concentrated in the most expensive markets: New York, Los Angeles, San Francisco and Seattle.”

Their analysis expects the flow of money from China for the next five years to double what it was for the last five. And what is crucial to note, again, is that this money is not being invested in productive enterprises; nearly 90% of the money is being used to purchase homes.

According to the MacLeans article: “The cash flowing out of China into assets around the world has hit tsunami proportions, driven by fears of a slowing economy and declining currency. Estimates suggest $1 trillion was moved out of the country last year, and a sizable portion of that went to foreign real estate.” Of this total, it is estimated that Chinese investors purchased $1.1 billion in real estate in Seattle in 2015.

It’s not the fact of the money coming from China that is the problem, nor is it a question of Chinese investors operating outside the legal framework. These purchasers aren’t breaking any laws. The problem is the reckless exploitation of a local housing market. Manhattan, Miami, London and Sydney are all dealing with a similar condition—anonymous hot money seeking a secure place to park, and seizing upon local real estate for that purpose. In New York, the new towers of stacked $100 million condos on Central Park South, now called Billionaire’s Row, sit largely empty. They are being used as virtual “piggy banks”. In London, foreign owners now possess more and more of what is called Prime Central London, having purchased 5000 of 7000 homes sold there in 2012, but rarely even visit them. Nearly the whole Mayfair neighborhood of 19th century mansions lies unused and unoccupied. In Vancouver, the effect of foreign ownership is appallingly visible at night. The windows of the cool new condo towers near False Creek are mostly dark because no one lives there, while people who work in the city cannot find or afford a place to live.

The amount of excess capital flowing into urban real estate in the world’s most livable cities is enormous. This money isn’t buying “housing” for the purposes you and I understand, but buying houses as a tradable commodity, a place to park surplus cash. To them it’s no different than buying gold bullion, or paintings by Picasso.

How much of our condition of escalating prices in Seattle is driven by these other factors—these hedge fund speculators jacking up rents, Wall Street landlords taking starter homes off the market, and global hot money parkers? We can only guess, because the city or county doesn’t track who is buying what. We do know that 38% of purchases in Seattle real estate are done with cash, which is a red flag suggesting something is out of whack. We don’t know how many homes are used as primary residences or are sitting empty, or how many are used solely for AirBnB short-term rentals, or how many are owned by shell companies, how many are owned by Wall Street hedge fund spin-offs purely to extract maximum rents. It is probably some mix of all of the above. Clearly, these other forces beyond the local demand of job growth are driving up both rental prices and home prices—but we can only build a vague picture instead of crisp detail needed to fully understand the dynamic.

What we all can see already is that regular folks who just want somewhere to live don’t have a chance against all these other predatory players who are taking over our local market. Analysis at says 47 % of Seattle renters are rent-burdened, paying more than 30% of income for rent.
Currently, in order to afford a median 2-bedroom apartment ($2796 per month), you need to earn $119,000 per year. (Extrapolated from this now outdated analysis) How much does an average tech worker earn? $108,000—even tech workers can barely afford a basic 2-bedroom rental. If apartment prices continue to rise, prices will soon be out of reach for most of Seattle’s tech workers too. For those of us who work a minimum wage service job, of course, Seattle’s escalating rents are already cruelly out of reach.

Things are as desperate for would-be home buyers. Even folks who you’d expect could afford a house, like middle class working families and professional couples, are being priced out. Seattle is in the “Sexy Six” of urban real estate markets, and is consistently at or near the top of the rankings for hottest markets for expected housing price increases.

Zillow says the median home price in Seattle is now $585,000, and increasing every week, with some recent estimates are as high as $666,000. If you use the very basic rule of thumb that says you can afford a house that costs 2.5x your annual income, that means you need to earn $234,000 a year to buy a median house (or have really rich parents). Less than 10% of Seattle residents make that kind of money. Folks who until recently could afford to buy a starter home can no longer compete and are being left behind. Our housing stock is no longer for us.

Read part 2 of Charles Mudede's four-part series examining Seattle's growing housing crisis: The US housing market is hosting a serious parasite.