The rapidly increasing housing prices and spiraling rents are happening so quickly we’ve all been caught off guard. Why didn’t we see this coming, and get our defenses in place?
A good starting point toward an answer is to look at who is winning and who is losing at this game. Those who own benefit when prices rise. This has always been the case, duh, but it is more acute here in Seattle and more acute now in this economy. Homeowners and the already wealthy are getting richer just watching the value of their assets grow.
For many of us who own a home, it is our only secure investment. Yes, Seattle has more than a few multi-millionaires with multiple assets in their diversified investment portfolios, but many homeowners have just the house. We are counting on cashing out our homes to fund retirement, and probably don’t have any other choice but to quietly, uncomfortably cheer for increasing property values. For some of our NIMBYs, this is their predicament. In our neoliberal economy, most of us don’t have pensions, don’t have anywhere near enough in our 401Ks, and don’t make enough money to set aside any retirement savings. Middle class homeowners at least have one asset that offers enough economic security to let them sleep at night.
The New Economics Foundation offers an excellent explanation of this collective shift in view: “The expectation of future price rises has also changed how we think about property. Houses are no longer regarded as simply somewhere to live, but an investment that offers long-term financial security in the face of stagnating ages, dwindling pensions, and reduced welfare provision.”
For boomers with savings to invest and handyman skills, buying a second home or two to rent out has become part of their retirement strategy. Redfin CEO Glenn Kelman calls them Landlord Nation, “a group of mom-and-pop investors who have seized on low mortgage rates and robust rent growth to plow savings into rental properties.” These landlords do the math, just like the Wall Street investors: if you can borrow at low interest rates, and rents seem to keep increasing, then the outlook is pretty promising. Especially compared to other possible investments in stocks and bonds. “The haves in our society are renting homes out to have-nots, and they’ve been able to do that at increasingly high rents.”
But of course, the biggest winners are speculators, the banks, and the whole financial sector. To banks, this price escalation is all upside: the more loans, the more fees and interest they collect, the more they can invest this income stream into new loans and exotic instruments that exponentially grow their profits. For the Wall Street banks and private equity firms and hedge funds that are packaging and selling our rents as securitized bonds, they grab their profits and fees while passing along the risk onto institutional bond purchasers. There is basically no downside to these players—as long as our government will bail them out when the housing bubble bursts again.
For the 55% of Seattleites who don’t own a home, there is no good news. Rents go up and up, and home prices go up and up, both spiraling out of reach. If we can, we stay in Seattle and spend too much on rent, praying something will change. An increasing number of us move further and further out of the city, chasing affordable rents while trying to maintain jobs, connections and community in Seattle.
So far, the City of Seattle has focused on increasing the overall supply of housing to resolve this crisis. Constrained supply in a time of growth is part of the problem, no doubt. It’s easy to see how supply of our housing is limited, and not expanding to meet this voracious new demand. A quick summary of why:
Because more than half of our city’s land is zoned single family. Because only so much land is available in a small-footprint city surrounded by water. Because buildings take time to build, so supply lags behind (especially with increasing demand). Because land cost keeps escalating, making it more and more expensive to build.
Developers are busy building more market-rate rental buildings; tens of thousands of units are coming online in the next few years. Exacerbating the problem of constrained supply, though, is that the supply of existing affordable housing is quickly disappearing because it’s being sacrificed to serve the higher end of the market. Old 1950s apartments are being upgraded or torn down. It is estimated that Seattle has demolished 7000 units of “naturally affordable” housing in the last few years, or 11,000 units since 2004. As each building is torn down, 20-100 families are forced to leave their homes and go after the remaining affordable housing units—competing with the growing number of workers in our retail and restaurant industries, who are trying to get by on just $13 per hour.
When professional landlords from Wall Street purchase our starter homes for their single-family rental securities, they take these houses off the market indefinitely. So the net effect is the inventory of starter homes is shrinking, and our inventory of affordable housing is evaporating, while high-end housing is expanding. The number of people displaced or pushed outside the city, with longer commutes and fractured social networks, grows.
The nonprofit housing developers, perhaps the true heroes in this saga, are having a harder and harder time due to rising land costs and difficulty assembling enough funding. The City’s HALA report says we need 70,000 more housing units in the next 20 years and 20,000 of those should be affordable. (Note how strangely insufficient even this goal is.) Unless we develop a mechanism to preserve the naturally affordable units, or somehow stop the ongoing rent increases, the number we need to replace will keep growing. With all the tools identified in HALA, the City expects to build 6,000 affordable units, eventually, over the next 10 years. The numbers are not even close; we are not building anywhere near enough new affordable housing to keep up with the ever-growing need.
In prior periods of growth in Seattle, housing developers just increased supply to meet demand. But that was when our housing market was just a strictly local exchange for people who lived in our city. The housing market used to stay in balance, generally, because a) supply served local demand, and b) housing and apartment prices so closely tracked local wage growth, and c) the banking sector was regulated to stay in a service role and avoid inflating bubbles.
What is wreaking havoc now is all the other factors escalating demand, with the frenzy fed by both an asset-inflating debt bubble and the deluge of the world’s excess capital. Our local housing market is being colonized by the global financial elite. Or, said more calmly by Ha-Joon Chang in his book 23 Things They Don’t Tell You About Capitalism, “Because finance is efficient at responding to changing profit opportunities, it can become harmful to the rest of the economy.” Our housing market used to be contained fully within our simple local economy. Now it operates as part of global finance, reacting to dynamics beyond what we can see and know how to control. The difference between normal and this condition cannot be overstated.
All these pressures explode the simple, strictly local supply/demand model most of us hold in our heads. The more demand for rentals rises, the higher rents grow, and the more attractive our apartment buildings—and rental homes—become to Wall Street investors from the financial world who want to own this rental revenue stream. The more institutional investors and global hot money parkers take houses off the market at all tiers, the lower active inventory drops. The higher demand/lower supply of houses, the more inevitable price growth seems, the more predators our market attracts. The more Seattle people can’t afford to buy a house, the more they look for rentals, the more developers upgrade or demolish the humble, naturally affordable apartment buildings to build bigger but more expensive ones. The more modest old buildings we tear down, the more we permanently destroy housing that might have remained affordable to regular working people. The more all this happens, the more inevitably bullish our market looks, the sexier it becomes to outside predators, and on it goes.
This rapid spiral in home prices we are experiencing cannot be attributed to the commonsense law of local supply and local demand. Other economic laws have sent these values into another dimension. And it is these other laws, laws determined by the financial world—the world of surplus global cash, capital flight, bonds, yield-hungry money managers, rating agencies and “exciting new asset classes” —that we are not recognizing or factoring into our picture of our current housing crisis.
Back to the question from part one; is the growth of our tech sector to blame? If our only challenge were to provide new housing for all the well-paid workers that tech is hiring, and our housing market still worked as a simply local exchange like it used to, it seems like we could absorb that influx. Remember former Mayor Paul Schell’s hopeful plans for Seattle to “grow with grace” in the late '90s? That felt possible at the time, like a challenge we could understand and meet with existing tools of land use policy, zoning codes, and preservation protections. If the housing market still worked like it did then, we’d be marveling at the nice apartments and condos young tech professionals could afford, and otherwise go on with our lives.
This escalating dynamic we have instead is infuriating for those of us who aren’t wealthy. It is causing a crisis for those of us who work here and cannot afford a place to live. Banks, landowners, developers, and financial speculators all benefit when prices rise and rise and rise. Renters, newcomers, hopeful first-time home-buyers, working class people and young people all fall further and further behind. The more our rental industry, which used to be small mom and pop local players, is captured by Wall Street and big corporate investors, the more this rental revenue will likely be extracted from our local economy and sent elsewhere, reducing money in local circulation. The more indebted we Seattleites become, and the bigger share of our paychecks goes toward housing, more and more of us will likely live on the edge, unable to manage unexpected expenses.
Everyone here, whether quietly grateful for the rising equity in your home or having a panic attack because your landlord just raised your rent, is distressed at the unconscionable number of people this is pushing into homelessness. The shelters are overflowing and the number of unsheltered people rose 19% in the past year alone, to about 3000 in Seattle. According to this report, every $100 increase in median rent increases the number of homeless people 15%. That is pretty irrefutable cause and effect. For those of us who are already homeless, or living one unexpected expense away from slipping beneath the surface, it’s more than just distressing—trying to survive this level of daily anxiety is exhausting and toxic.
In our local politics and media, you frequently see a consistent tension underlying the discussions about housing. On one side are the homeowners—often a mix of well-off baby boomers and middle-class folks just barely keeping afloat—who connect the dots they can see, between all the cranes and skyrocketing prices and traffic-clogged streets, and arrive at the conclusion to just STOP all the greedy developers. One the other side are the self-described urbanists, often professionals in the development sector or young people who grew up completely within the “there is no alternative” neoliberal economic system, who push the only solutions they can imagine: build more supply of housing because they believe the market will balance itself in the long run. Neither offer a deep solution to the problem we really face. We are arguing over crumbs. We should look behind the curtain and confront the larger causes of our shared misery.
And let’s stop blaming the newcomers, OK? Young people with a tech sector salary are not the problem. Pulling up the drawbridge, denying access to future generations, is absurd. And kind of impossible. And that’s not what cities are about. Instead, how about inviting newcomers and young people into the civic conversation and collaborating together to find solutions? Millennials are probably the hardest hit by this predatory version of neoliberal capitalism we currently live in. From the New Economics Foundation: “In aiding the creation of an economy that runs off mortgage debt rather than through boosting spending power via increases in wages, productivity, or trade, we’ve become entrenched in a housing affordability crisis with a great human cost. The burden of mortgage debt is now increasingly falling on the shoulders of the young, much moreso than any other time in the last 20 years.”
Our out-of-control housing market is not some sort of fluke outcome, like a freak storm. All the dynamics we now see—the global 1% using homes as a safety deposit box for excess money, lenders irresponsibly fueling a debt bubble, REITs and private equity funds capturing our starter homes for their rental revenue stream—are outcomes of the same predatory economic system. These effects are exactly what happen when we take our hands off the wheel to “let the market manage itself”: ongoing upward concentration of wealth. It is the same dynamic that Thomas Piketty talks about, how wealth inequality will grow exponentially if the rate of return on assets far exceeds the rate of wage growth. Except instead of seeing this on a page as an abstract economic model, it is playing out in a real place, ruthlessly sorting us into those who can afford to live here and those who can’t.
So is this a real estate bubble, or not? We undeniably are watching assets inflate in price, fueled mostly by consumer debt. Housing prices are already way out of reach relative to local wages, and housing economists commonly understand that bubbles are supposed to burst when this happens. But instead, prices here—and in all the hot-money cities—go up and up, suggesting they are not even connected to what locals can afford. What would burst this kind of bubble? These global elite buyers (hedge fund predators, hot money parkers, shell companies, hyper wealthy pied-à-terre owners) are not very price-sensitive; they are looking for investment security more than anything else.
At some point, you’d think a hot new market would cool off when these sophisticated investors think the growth period is ending, and would shift their excess capital to the next feeding frenzy. But there are not that many desirable cities like Seattle and Vancouver and Miami, so there may not be many alternative markets for them to play in. Don’t forget the flow of money out of China is expected to double what it has been, so the voracious demand for real estate assets will likely continue.
Wall Street’s direct participation in buying local houses as a commodity is also new, so we don’t really know how this part of the story will unfold. We are in uncharted territory now. Look at Manhattan and London and Vancouver, all ahead of us down this path; their housing prices haven’t shown signs of a deflating bubble. This is sort of terrifying. If it hasn’t happened there yet, it is not clear if it will happen for us.
While the already wealthy are making bank, the rest of us are left to fend for ourselves in an increasingly hostile economy. Since the financial crash of 2008 and Occupy Wall Street, we’ve all grown aware of how our virulent strain of predatory capitalism is seizing up our national economy. But the impact on our city’s housing stock is a direct hit on our daily lives. This cruel sorting into haves and have-nots is not the city we want to be, right? If we want to put Seattle on a different path, and aim for a future that is more inclusive, affordable, and committed to shared prosperity, then let’s roll up our sleeves and get to work.
Tomorrow see part four, the conclusion: What do we do about this.