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Housing prices

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When I moved to the Seattle area over eight years ago, I knew I wanted to make this place my home. Since it was clear my residence would be permanent, it seemed like a good idea to buy something rather than rent. Back then, I found a nice condo for around $130,000 in the Redmond area. At a decent interest rate, a 30 year fixed rate mortgage with a 20% down payment was about $680/month. It was a no brainer! I was paying almost $900/month for an apartment, and had I not moved they were increasing my rent to $1090. I could have a bigger place for cheaper, and build equity I could later use as a down payment on a house. I also owned the inside walls and could do stuff like remodel the kitchen, paint, install hardwood floors, etc. Back then, the only reasons most people continued to rent were 1) they didn’t plan on being in the area very long or 2) they had lots of debt or credit problems preventing them from getting a home loan.

Now days, it’s much different. My condo is worth about $240,000 and it’s considered a pretty low end place. Most of the condos in the Kirkland area are $300k-$400k, and if you want down town Seattle you’ll pay even more. With interest rates starting to climb back up, it’s harder to justify paying $2,000/month or more for a condo. Gone are the days of using a condo as a “stepping stone” between an apartment and a house. The concept of “owning is cheaper than renting” is gone, which scares away most people – especially those who aren’t too concerned about their financial future.

It seems the solution to this over the past couple years has been to keep lowing the interest rates until people can afford houses. But has this just made the problem worse? Most people look at a house in terms of what it costs them per month. I have x dollars per month that I can afford as a house payment. What does this buy me? As interest rates drop, the value of the house that money can buy me goes up. This increases the buying power of the average potential home owner. With so many people moving into the area over the past few years and more buyers than sellers, this allows people to offer more money on a house and causes the market value of houses to go up. We’ve been seeing this for a few years now, and other states like California and New York are also no stranger to this. When the point comes where people are having a hard time affording a house, banks do stuff they’ve never done before. We have 40 and 50 year mortgages now. We have 1-year adjustable rate mortgages. We have interest only loans. Banks do whatever it takes to lower your monthly payments to attract your business, all while housing prices continue to increase.

Those who cannot afford to buy a home have to rent. Land lords have to raise rents to afford their mortgages, so rents are going up as well preventing people from saving any money. In San Diego, a lot of apartment owners are getting the idea to turn their cheap apartments into low cost condos. By low cost, I mean only $400,000 or so. This lowers the availability of apartments thus driving the cost of other rental units up as well. This ends up pushing poorer people out of the area.

So what’s the effect? Those who can get their foot into to the real estate market continue to get richer while those who are forced to rent get further and further behind. Is this creating a wider social gap between the rich and the middle class? What can be done about this? Obviously, raising interest rates would be a problem. You don’t want the house you bought a year ago for $500k to all of a sudden only fetch you $300k because none of the potential buyers can afford that mortgage. Is this simply capitalism at work and a normal aspect of our economy, or do all Americans have the right to be able to afford a house some day?

I was very lucky to “get in” to the housing game before all this non-sense started, and due to the appreciation of my condo I was able to make a nice 20% down payment on a home and have some extra money left over to invest. I think I made a good decision to buy something seven years ago, but what about those who are just starting their lives now? Some people push themselves to their financial limits to buy the cheapest possible shack and become “house poor”. Yes, they have their house but they have to live off dry noodles every night for dinner.

I was talking to a real estate agent friend of mine and she said the majority of her clients buying their first homesare getting the down payments from their parents, or a family member. Does this lead to a world where social status is inherited?

I’m very interested in any comments you guys have.

Mike

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