The City Council is partway through a series of information-gathering hearings as it begins its deliberations on the 2016 Housing Levy. Here’s an attempt to make sense of the mountain of data being presented.
I’m going to borrow liberally from the presentations being given to the City Council in order to tie it back to the conversation that the Council is currently having and contextualize it in the data they are using to make decisions. The presentations themselves can be found posted on the City Council web site here and here.
Let’s start with a basic question: who are the people participating in the Seattle housing market? And actually, right off the bat we discover that we need to split it into two housing markets: renters and homeowners. But before we delve into those details, we need a quick introduction to a concept: Area Median Income (AMI). This is how the U.S. Department of Housing and Urban Development, aka HUD, defines income levels relative to a particular region — important since almost all aspects of the cost of living and affordability (food, gas, housing, and wages) all vary widely depending on where you live. HUD defines AMI for a household split out into size of the family:
(for some reason, they decided to leave the actual AMI, i.e. 100%, off the above chart — but if you want to know what it is, just double the number in the 50% column)
So the below charts show us the distribution of income levels for renting and homeowning households in Seattle, expressed as a % of Seattle’s AMI. First renters:
Then homeowners:
And that presents us with the first big take-away: generally speaking, richer people own, and poorer people rent. It’s not a hard-and-fast rule, but it’s a very clear trend. The explanation is often pretty simple: getting a mortgage to buy a home requires a cash down-payment and a level of credit-worthiness that elude many poorer people. And to be clear: that’s not a moral judgment: the mortgage system has all sorts of intrinsic, discriminatory biases. But let’s put the home-ownership market aside for the moment and focus first on the renter’s market since it is currently central to the housing affordability question.
Here’s another insight into the renter households: the vast majority are 1 or 2 people.
If you refer back to the chart of AMI for household size, you start to see the picture of what Seattle’s renters can really afford. But we need to get crisper about that, and here HUD can help us out again.
We need to pause again and define another essential term: affordable housing. According to HUD, housing is affordable if a household is spending no more than 30% of their income to pay for it.
Stop and do the math. A single worker making minimum wage of $13 an hour (and we have lots of them here) pulls in about $26,000 per year — putting them well under 50% of AMI. And affordable rent for them is $7800 a year — $650 per month.
Here’s what actual rents look like in Seattle:
Cheat sheet: all those people making 50% of AMI or less — 39% of renters — are screwed. There is almost nothing available below $900/month, and for $900 to be affordable you need to make at least $36,000 annually which almost exactly 50% of AMI for a 2-person household.
How did we get here? Well, it’s a combination of factors. First, there’s the surge in population:
Side note: jobs have grown faster than the overall population, which should be a good sign for the economy, if housing had kept pace. Alas:
We’re madly scrambling to catch up now, but over the long term missed the ball on this. Some of that is understandable, as the economic downturns drove vacancy rates way up (and rents way down):
So rents are going up dramatically, across the board:
That has left us with a large number of renters, particularly low-income renters, who are “severely cost-burdened” by rent: they are spending 50% or more of their income on rent (remember 30% is the official definition of “affordable”).
Now new rental housing is getting built over the next few years, as we saw in the earlier chart, but unfortunately most of it is market rate housing being built in the more expensive neighborhoods:
And as we saw in the above charts, rent on new housing is substantially higher than rent on older housing. So the prospect for the current residential building boom helping our affordable housing problem is pretty bleak. Now the city realizes this and has been prioritizing programs that help low-income renters to afford housing:
This represents a mix of programs that provide financial assistance to renters and tax incentives to developers to build affordable housing or to set aside 20-25% of units in a project for affordable units. But the demand far exceeds the resources available; the city prioritizes the most vulnerable, those making 30% of AMI or less, and that consumes almost all of their resources. That leaves a giant “donut hole” of low-income people without help, since 21% of all renters are severely cost-burdened by rent payments.
So the challenge for the City Council here will be two-fold: devote some Housing Levy funds to financial assistance for cost-burdened renters, but also to address the bigger (and more expensive) need to build affordable housing. Some of the City Council members recognize this already, which is why they have been pushing so hard for “backyard cottages,” micro-housing, and SEDU’s.
This is the point in the argument where rent-control advocates start screaming “See? This is why we need rent-control now!!!” And that is a subject for another long post another day, but in short: it doesn’t work that way. Rent control would little to make housing more affordable, and it would create a strong disincentive to building more affordable housing, the one thing that we need much more of, more than anything else, to address the problem. Instead it would drive more focus on market and especially luxury housing. Economists across the political spectrum are in consensus on that point.
Which brings us around to home ownership. We can do the same calculation of how many home owners are “extremely cost burdened” due to mortgage payments, and it looks like this:
Clearly homeownership is difficult for low-income households — which is why they opt to rent instead. This is a shame because, as Council member Gonzalez rightly pointed out last week, it provides a certain amount of insurance against rising housing prices, both because fixed-rate mortgages have a constant payment over decades and because a home’s resale value appreciates along with the overall market.
But the extent to which the housing market has bifurcated into “richer people buy and poorer people rent” is rather stunning, and it is likely to get even worse as home prices continue to skyrocket:
Now the one bright spot here is that “underwater mortgages” are almost a thing of the past:
But the real story here is the inventory of homes on the market:
If there were still a huge backlog of underwater mortgages that caused people to sit on their homes, that would be understandable, but the combination of high prices and low inventory suggests that we’re about to see a big house-building boom as the market reacts to the demand from people continuing to move to the area.
Unfortunately, that is the real competition to building affordable rental housing: if it’s faster, easier, and more profitable to build market-rate houses than affordable housing, we know which developers will choose.
The driving force today in creating more affordable housing in Seattle is the Seattle Housing Authority, which is largely funded by HUD. They currently are responsible for the existence of over 10,000 affordable units in Seattle, built through partner organizations (mostly nonprofits), with more under construction.
They also, unfortunately, have 7,000 additional households waiting for assistance either through placement in an SHA-sponsored housing unit or through rent assistance vouchers.
So where does this leave the Council? It seems with many tough questions. One, that Council member Burgess raised last week, is how to balance help for renters with help for homeowners. an important piece of the context there is what has happened at the federal level over the last three decades:

In a nutshell: in the 1970’s HUD’s focus was primarily in programs related to rent. But under the Reagan and follow-on administrations, the emphasis shifted dramatically to home-ownership programs and in particular efforts to make mortgages more financially accessible through tax incentives. There is a case to be made that with the federal government’s focus so heavily on home owners, the city’s focus should be on renters — and especially so given the amount of pain currently being felt by renters and the low likelihood of developers embracing affordable rental housing on their own in the face of an active and profitable local home market.
But Gonzalez is also right that giving up on affordable home ownership for people earning less than the AMI only serves to trap those people in an unforgiving rental housing market. The city has a small land trust program that helps first-time owners buy a home at an affordable price in exchange for a requirement that the home eventually be sold for an affordable price, but that is a low-volume “niche” program that helps less than 50 people per year and has little prospect of scaling up to a level where it would make any measurable dent in the affordable housing crisis in Seattle.
The Council will also need to look harder at the distribution of both income levels and housing prices. Currently, as we saw earlier, there is almost no affordable housing for households earning 30% or less of AMI; that is a critical need and a plan could be developed to build housing for that specific — and very critical — need for our city’s most vulnerable. But what about the tiers above that? Is there enough money in the Housing Levy to help everyone who needs it? Probably not, so where do they draw the line if they know that each tier has a different need for housing and a different ability to pay for it?
But perhaps the scariest realization is that the city inevitably needs to go into the business of building affordable rental housing, especially for the smallest and least expensive units. They are not getting built on their own, and the overall market dynamics strongly suggest that they won’t. SHA is doing good work through its network of nonprofits, but there aren’t enough of those to expand development and SHA might not have the capacity to manage more even if there were. Which leads to the conclusion that every aspect of trying to get more affordable housing built for the people who need them is going to be challenging.