Soon Seattle's Tech Boom Will Not Explain Its Housing Crisis


Making the obvious assumption that city leaders won't change any policy in the near term, what does this mean? Move to Tacoma? Come to terms with paying half your income in rent? Seems like every factor for housing cost increases in at play all at once. Which one breaks down first and how soon?

And if global finance is to blame, why has it seemingly popped up so recently and what changed to make it such a large factor? Shouldn't we expect some counteractive force, like inflation, to start becoming an issue as well once people start taking value from their now-more-valuable homes? Or is housing as a store of capital masking inflationary pressure because of how slowly it moves to other markets? If that's true, then it's a bubble.

Everyone is saying it's not bubble this time though, so what are we missing? Seattle is either now and forever a town for rich people, or we're just in a holding pattern while we adapt and / or something breaks. You are right to look at Vancouver as a model, but they're not much further down the road than we are. And they don't have to buy their own healthcare once they're homeless.
Development borrowing costs are high due to a number of factors. I think a big factor is that the traditional banks have largely exited the market leaving it to smaller scale private lenders that won't lend cheaply. After the global financial crisis a lot of well-intentioned regulations were put in place to prevent another real estate lead downturn of that magnitude. These regulations gave large commercial banks (Wells, Chase, BofA, etc.) a significant disincentive to lend for large scale commercial development. But federal government guarantees are still there for multi-family housing and of course residential mortgages so banks are more willing to lend. It is that expansion of cheap credit that leads to even more expensive home prices. Supply and Demand still explain all of these price increases: population growth, income growth, and access to low borrowing costs. That mixed in with slow development lead to short-term price increases. The market will catch up. The City can help by continuing to expand multi-family zoning and speeding up the permitting process.
It would be nice to see some quantitative data to back up your assertions. I agree than speculation, foreign investment, and high financing costs all have an impact on housing prices, but clearly so does supply and demand. Given we are in a period when the city's job growth is greatly exceeding its increase in housing stock, it is reasonable to conclude that it is at least contributing factor. From a policy perspective I think it is important to address both causes of price increase, and without presenting any data (or the opinions of qualified economists) I am confused as to why you are convinced financial speculation is the primary driver.

Your point about the high cost of finance does make me think that some form of development bank run by the city or county offering low interest loans for the construction of affordable housing could be useful in making such construction feasible for developers. What would your thoughts be on such a policy?
No question investment drives up demand and therefore prices.

But Amazon is a contributor here as well. The company is a sure thing for continued growth, which means Seattle can count on a steady influx of well-paid home-shoppers to cushion against recession, which makes it a relatively safe market for investors.

The other culprit is historically low interest rates, as @2 explains. As long as money is so damn cheap, people will borrow more of it pay for houses, which again drives up prices.

Put a hefty tax on real estate investors and raise mortgage rates to a more reasonable 10%, and you'd see a drastic drop in prices.
The fact that the wild and crazy world of Finance exists does not explain why the wild and crazy world of Finance is buying property in Seattle and Dallas, but not in Buffalo and Norfolk.

There must be a reason for this, don't you think? What explanation do you have for this peculiar discrepancy, Charles?
@4: And so what do you suggest for those homeowners who couldn't afford a 10% rate - and I'd bet you'd like to eliminate the mortgage interest deduction on their taxes as well.
@4-You're talking about engineering a huge drop in the value of what is most families' biggest investment. And a very large number of people would be instantly underwater. This sounds like a recipe for a huge recession to me. Are you really that angry with homeowners in general?
@4. By what right?
Um. Can someone in the business confirm this 16% number? Because I'd like to do some lending at 16%.
If it's global, what can local officials do about it? A local policy to counter a global force will be arbitraged away. Like cheap loans backed by the city's credit? Won't those just get resold on the global market until they get sold back to the builders on the ground at the "normal" 16%?

This seems like an issue for a President, the State Department, and the United Nations, not a city mayor.
I have often wondered if it is better for new buildings to sit half empty, then to admit the rent is too high. Perhaps renting units at a rate inadequate to repay high interest loans would trigger acceleration clauses and balloon payments? In this scenario it could make more sense to keep a building half full and there would be a long term floor on rental rates.
@9 Obviously not -- there's no way in hell that the average Seattle developer is paying WSJ Prime + 12%. Charles was either speaking to an ignorant high-risk developer, or to a liar, or to one of the ubiquitous Marxist pixies in his head.
It's so cute when Charles learns how the world works. I'm assuming previously he thought it was being funded by pretend money?
@raindrop, @dvs99, @jackay: I'm just stating facts, I'm not in advocacy mode. And for the record, I've got lots of skin in Seattle real estate.

The fact is, the parameters our policies feed into the economy drive home prices up. Today's low mortgage rates are an artifact of the Fed setting and holding the prime rate near zero. Free money is a dubious policy decision, not an inherent right. We've also opened our real estate market to global speculators, which ensures that we'll never build our way out of the supply glut. And, as Raindrop points out, tax breaks on mortgages drive up prices, too.

Increasing the cost of money would bring home prices down, not just because loans would harder to get but because fixed income investments such as bonds and money markets would become (once again) safe, profitable investment alternatives to real estate. Instead of encouraging investment in money, however, we're encouraging investment in housing, and now we're living with the consequences.
@Mtn. Beaver: Someone converting a SF lot to four shitty town homes might pay 16% interest on a short term loan. Most major development projects in Seattle are funded privately, however, either by the developer (e.g. Vulcan) or the developer's pick of investors, and yes, those developers are in a position to choose who's money they'll take.
@WoofCandy is exactly right. This is the flip side that everyone is pretending doesn't exist. Cheap money allows for speculation and RE is posting high returns. Guess where the money goes on both sides. I should add I don't think this is a negative thing, just a rational response. I'm confused why this is a "thing".
Three articles from Canada's Financial Post:
Garry Marr | February 15, 2017 "Economist says it’s 1980s all over again in the Toronto market. Remember how that ended?"

Garry Marr | June 5, 2017 "Toronto home sales drop most since recession as new rules put brakes on market"

Garry Marr | June 2, 2017 "Vancouver real estate market heating up again as sales and prices recover from buyers tax"

That last one is worth a read.…

Clearly taxes have an impact. Maybe that impact is necessarily short lived, or maybe different taxes would have a different effect. If the root cause is monetary policy, it's notable that Fed officials also talk about preferring other tools to fight bubbles.
Vancouver's exponential rise in housing costs had to do with foreign investors (mostly from China) swamping the market:…

I know we have the same situation in Western Washington because as a property owner I have recently received a couple of offers to buy my property from Chinese real estate investment firms, even though it's not for sale now nor will be in the foreseeable future.

So for once, I gotta grudgingly agree with Mudede. The demand is exceeding the tech workforce expansion because it's coming from overseas investors. Any affordable housing solution for the region must address foreign investment, otherwise it will fair utterly.
Duh, fat fingered the keypad again. The work "fair" in my comment should be "fail".
Charles is ignorant about what it cost to borrow money… His numbers are way high.

2 words: Rent Control
One word: bad
@22, 24

Rent control hasn't worked well in any other city. Why would Seattle be different?

Nevermind the fact that it's illegal under State Law anyway..
As someone who lived in Seattle for 20+ years up until this spring, I can anecdotally, tell you what my experience has been and it cant be compared to Canada as much as San Francisco. A tech boom that favors high dollar salaries for the minority while landlords do everything they can to keep making a buck on those people, while screwing the majority out. Government agencies that want to increase the taxes on the majority to pay for "the arts" and dump more money into the issue of increased homelessness while ignoring the core issues behind it. Now the San Francisco exodus has shifted it focus to Portland and Seattle while it suffers from it own hand. This is something that is clear already in the short time I have been in my new state. Working class Seattleites leaving for better opportunities and saying good-bye to all-talk-no-action that has been rampant for years.…

Soon Seattle will suffer the same fate while losing a qualifed, experienced workforce to incessant tax increases, traffic congestion only to be used by those making barely-livable wages, over-population in small areas, crime, and the generally accepted politicized hipster logic that everytime you dont agree with something you need another traffic-clogging-bull-horn-screaming march to prevent people from getting home after a long day of work just to pay over-inflated rents, mortgages and an over-inflated cost of living in a city simply because it is "redefined" in the media's eyes. I have already seen it in my new state. Three new Seattleites in my new city this week alone. Working class Seattleites moving here and (other places), escaping the insanity, and leaving those big-paycheck directives, attitudes, and pundits with little-to-no tangible responsibilities or skills beyond their degrees to foot the tax bill. Seattle can compare itself to Canada if it wants and the financial issues around it with foreign investors. There is a point to that. Eventually those foreign investors will want to put their friends into local and gubernatorial politics to run the show - if they havent already. And Seattle can blame itself for blindly selling itself down the tubes while protesting the man who wants to prevent that, or protesting the next feminist issue du jour, or protesting the next cultural slight someone experienced and Seattle and Washington State can afford to do that - for now. The rest of those who are growing tired of it and see it already are leaving or have left and we are establishing our political bulwarks in new locations, in case you decide to leave and want to your brand of insanity with you in an effort to yet again repeat history.

@19 Chinese buyers in the market is certainly a clue, but not necessarily as big a part of the problem as in BC. They have closer ties, via former British possessions, and a smaller national financial presence. In the US, we aren't going to deal with it by only looking at foreign investment, we really have to get at the whole investment market - Blackstone etc. - to avoid what happened in Vancouver. Which, yes, did blow a bubble and hurt people who bought high, but it had gotten pretty dire. The sooner we act, the less the pain.
Really curious to know which city ROThornhill is seeing ex-Seattleites flock to. Is it Boise? Is it Denver Is it Phoenix?

You can bet where ever it may be, the locals there are no doubt engaging in exactly the same type of "they're ruining our town, I tellz ya'!" hand-wringing we're undergoing here.
"a local developer recently explained to me that a Seattle developer is lucky if they get a loan for a project that is 12 percent. The normal is 16 percent!"

This is a complete fiction The Stranger should do a better job at fact-checking their writers. I don't know who gave him this information - but no credit worthy developer is being charged 12-16% on a 20 Million dollar construction loan - not a single one. Or if they are they're engaged is some super risky venture that probably couldn't get financed any other way. The current prime rate is what, 4%? Not a chance in hell there's Prime + 2X Prime construction loans.
@30 I guess a-holes moving here from Seattle is the new a-holes moving here from California.
As a former resident of San Francisco during the first tech bubble, I just wanted to point out that the parallels between San Francisco and Seattle exist but there are a lot of differences in how they got there vs. how we got there.

The twinsies facts on both cities is that we're traditionally blue collar, working class towns with a lot of neighborhood segregation going on that no one gave much of a fuck about until tech realized that we were working class, blue collar towns who had choice real estate going for us. I mean, when the building boom came to Phoenix and Tempe, hardly anyone went: 'Gosh, all that oppressive heat 70% of the year. This sounds like the fun kind of miserable!' Rather it was so cheap to live there such that you could afford to insulate yourself in a permanent bubble of climate control that the whole thing felt like there was some financial sense to relocate there. Here as with San Francisco with mild climates and stunning views and formerly cheap real estate and progressive politics, it almost seems foregone that the tech hordes would have eventually invaded.

Where things are different is that San Francisco because of its progressive politics has a byzantine, labyrinth set of city laws around renter's rights, rent stabilization, and development. Anecdotally, a friend of mine who is by no means wealthy happened to inherit a building from a relative who made a sound real estate decision to buy in the 1960s when it was cheap. He tried in earnest to obtain the permits to renovate the building to simply bring it up to code (it had been sitting largely vacant for 10ish years) and had such a maddening experience with simple permits that the choice became: hire an expensive lawyer just to deal with the city on a relatively simple situation and sink potentially millions of dollars into this and be forced to sell to recoup your costs or walk away. He chose to walk away and sell as-is. San Francisco is well aware that their situation is in part the result of self-inflicted city-level legislation that seemed like a good idea at the time and is now a steaming swamp of my enemy is myself that they don't know how to get themselves out of. With that in mind, its little wonder that people have thrown up their hands in what is largely an impossible situation and moved on to a similarly position city but with fewer by comparison self-inflicted wounds legislatively.

Seattle on a city legislative level on the other hand has had, I'd argue, more than a decade to watch this train coming at them on the tracks with the 'horrible warning' of San Francisco and mostly covered its eyes and denied that the train was coming. Which is ironic because the earlier arrivals and build outs of Amazon and Microsoft were lauded as bringing Seattle forward while still being in denial about the long term effects of major tech companies, who every intention of staying and sprawling out. Now that the relationship with Amazon is starting to sour because of this consumptive sprawl, the city is in a bad situation in that if they start denying Amazon anything it wants on its whims - Amazon could decide to start shifting operations to a cheaper, smaller city that would be all too happy to negotiate taxes and other perks. Seattle then loses the wattage that Amazon and its overpaid employees pump into city coffers, the real estate market, etc.

Do I think Amazon could leave? Eh, probably not. But the resentment towards the tech sector and Amazon as its most conspicuous consumer is growing and is already palpable and this relationship that pits the majority of non-tech population city against monoliths who overpay people who in turn move here and contribute to the ever widening maw of class politics and affordability. But the city stands in the middle and pays good lip service and hand wringing to being 'concerned' about the cost of living and the homeless explosion but can't seem to get the lead out about dealing with the situation. Largely because there is little incentive or upside to doing that.
Construction loans are short term. It's to pay for construction, a higher risk activity. Once the property receives a "Certificate of Occupancy" by the city, the construction loaned is converted into a different vehicle with a lower interest rate, whether a mortgage or other. So very few are borrowing $20 million at 16% for a $20 million project. It's more like $11 million construction loan which costs 16% for 24 months on a $20 million project which is then converted into a much longer term loan at say 5%.
Solution: Everybody move away. What? Well, why not? It would cause the housing crisis disappear!
Tacoma has amazing houses available for 1/3-1/2 the price of Seattle. DesMoines and Burien have great houses for appx 1/2-2/3 the price of Seattle. The market will adjust. Is there an inherent right to live in Seattle that I'm not aware of?
@28 What about all the people who have no where to live because Rent Control disincetivised developers. Do they not matter?
@31 the beauty of being far left or far right is that you don't need facts. They are irrelevant. Whatever you "feel" is the truth.

Although I do say that Charles does bring a new and interesting perspective to everything without being overly dogmatic. Yes, he looks through a Marxist lens but it's good to question capitalism.
@36: No shit; my partner and I are looking to make a move from Pierce County: Federal Way, Des Moines, Kent and Tacoma all have property for sale in locations that offer an hour commute to Seattle. Cross town trips within Seattle city limits on some Metro routes can take about 45 minutes. Suck up an extra 15 minutes of commuting and start building equity. I swear, the people whining the most about rent/housing are stubborn, unwilling to compromise types that cling to unrealistic expectations of living an urban planners dream of cheap housing and a 15 minute walk to work.
With a child who will start elementary school soon, there is no way in hell I would buy in awful school districts like DesMoines and Burien.
@7 @8 It takes a radical rethinking of what housing is, but if you live in your home then the price should be irrelevant - it serves its purpose as housing, not as an investment, and that's what *should* matter. See this excellent NYT piece on a housing economist's thought experiment of why falling home prices is a good thing:…

@10 I agree that this is ultimately the responsibility of national governments, most of whom are obligated under human rights law to provide for the right to adequate housing, but sadly most of them do not live up to their international treaty-bound rights obligations. So let's start local. I interviewed the UN Special Rapporteur on the Right to Adequate Housing to that effect:…
10-18% on a short term hard money loan is very common. I have funded quite a few over the past 3-4 years. I would caution against blaming these high rates on the rising housing prices. While the rates are high, the loans are typically short term (6-12 mo.), interest only, and fill the gap of providing liquidity where it does not exist today in the marketplace. Once the construction is completed, a developer will either sell or refinance into a conventional loan. The loans carry a high degree of risk hence the higher rates and the amount paid in financing by developers is low in comparison to the other costs of construction: materials and labor.

Right now these loans provide a valuable part of the marketplace and help increase the stock of housing. Many projects would not be possible without these loans. While it seems like some in this thread may vilify the investors and developers, somebody has to create new housing stock and shoulder the risk of doing so. They should be compensated for the value they are adding and the risk they are taking. If you abhor the idea of the real estate value chain being compensated for their work, then you are welcome to cut them out by doing all of the work yourself. It reminds me of a saying my father used to say, "If you want to bad mouth farmers, don't do it with your mouth full."
#36 -- Yes, they do.

There, that was fucking easy, wasn't it?