Why have lower income neighborhoods been left out of the housing recovery?
In an ana;ysis of the Seattle marlket, Pro Teck Va;uatgion Services describs how income and access to credit drives home values and why across the country we are seeing strong appreciation in wealthy areas but slower recovery in areas of lower income.
Seattle’s median household income is soaring, with an increase of $5,000 in the 2013 census, making it the second highest increase in the country, according to U.S Census as reported recently in The Seattle Times by Gene Balk.
Seattle was also noted by Forbes Magazine in 2014 as one of the top ten places in the US for business and careers. With companies such as Amazon, Costco, Boeing, Microsoft and Nordstrom headquartered in or near the city, it’s easy to see why the area is experiencing much success and the demand for employees in IT, engineering and other high-skilled/high-paying professions.
Washington is well represented in Home Value Forecast’s top ten this month, with five of the top ten markets being from the state. Seattle tops the list in lowest home inventory (2.36 Months of Remaining Inventory) and highest average selling price ($411,000).
Looking at the overall real estate forecast for the metro area shows a positive picture on housing prices, appreciation and stability. But does this show the entire story?
The Seattle Times dug deeper into the numbers in an October 6th article you can read here. In the article they discussed how the $5,000 increase in household income was skewed, with the top 20% of households experiencing a $15,000 increase to $247,548 while the bottom 20% experienced no increase, with an average household income of $12,974.
Bellevue is one of Seattle’s more affluent areas, with average homes selling for almost twice the CBSA average. Homes lost 25% of their value during the housing crash but have rebounded steadily, making up almost all of their value – —less than $10,000 off pre-crash highs.
ZIP code 98014, Carnation, includes the fast growing Lake Marcel-Stillwater area. This area tracked closely with the overall CBSA average historically, but did not experience the aggressive peak . Since 2011 Carnation has outperformed the average as professional families have been attracted to the area. Current real estate prices are almost 10% above pre-crash highs.
Finally, Auburn is the least expensive community highlighted, with current real estate averaging half that CBSA average. Auburn real estate has not experienced the rebound the others have, with current prices still 20% below pre-crash peaks.
So what’s different? The last two columns are telling. Distressed sales can have a long-lasting effect on a recovery. When there are many REO sales, with an REO discount, the impact is also felt on regular sales.
The availability of credit is also impacting these three communities differently. After the housing crash most credit has become very tight, particularly with lower income first time buyers with less than perfect credit. With the passing of Dodd Frank came the Consumer Financial Protection Bureau and their Qualified Mortgage rule. The QM rule was intended to prevent what led up to the housing crisis by requiring lenders to prove that borrowers had the ability to repay. This has greatly restricted access to credit for those with limited money to put down and need to take on a greater ratio of debt relative to their income.
The Bellevue average loan-to-value ratio (average mortgage size/average sale price) is 69%, Carnation’s is 85%, and Auburn’s 95%. First-time home buyers must have spotless credit in order to be approved for a FHA 5% down mortgage. Auburn is feeling the credit crunch, limiting demand to those few who can qualify and therefore, limiting home price appreciation. Bellevue, with a $744,100 average selling price and average loan-to-value of 69% means the average homebuyer is putting down a $230,671 down payment…..more than the average home selling price in Auburn
The good news is that change is on the way. Last week Fannie Mae, Freddie Mac and federal regulators announced they have agreed to rules aimed at loosening lending standards to make mortgages more affordable and easier to get for individuals with less than stellar credit. Combined with a lowering of the minimum down payment from 5% to 3% for selling the loans to Fannie and Freddie should have a positive impact on communities with lower priced properties.
CBSA Winners and Losers
Each month, Home Value Forecast uses a number of leading real estate market-based indicators to rank the single-family home markets in the top 200 CBSAs to highlight the strongest and weakest metros.
The ranking system is purely objective and is based on directional trends. Each indicator is given a score based on whether the trend is positive, negative or neutral for that series. For example, a declining trend in active listings would be positive, as will be an increasing trend in average price. A composite score for each CBSA is calculated by summing the directional scores of each of its indicators. From the universe of the top 200 CBSAs, we highlight each month the CBSAs which have the highest and lowest composite scores.
The tables below show the individual market indicators that are being used to rank the CBSAs along with the most recent values and the percent changes. We have color coded each of the indicators to help visualize whether it is moving in a positive (green) or negative (red) direction.
ice appreciation. In addition, new top and bottom metro areas are reported for the month.