Seattle, like most major cities, has been grappling with a significant housing inventory shortage. As a realtor who works with many buyers, I know how frustrating it can be when you’re ready to hit the ground running with your house-hunting, but there simply aren’t many houses to choose from. Understanding the underlying factors contributing to this scarcity can shed light on the complex dynamics of Seattle's real estate landscape, and help us understand IF and WHEN this situation will improve. Today, we will delve into three key reasons behind Seattle's low housing inventory, and I’ll share what I think will happen as we move through 2024 and beyond.
VERY Low Interest Rates in 2020-2022
The primary driver of Seattle's low housing inventory is the historically low interest rates we saw during the pandemic, with mortgage rates bottoming out at 2.65% in January 2021. The Federal Reserve's decision to keep interest rates at near-record lows during the pandemic fueled a surge in demand for homes in 2020-2022. Low-interest rates make mortgages more affordable, enticing more individuals and families to enter the housing market. While this surge in demand is a positive sign for the real estate industry, it has created a situation where the number of available homes struggles to keep pace.
With mortgage rates at such enticing levels, many current homeowners are hesitant to sell their properties. They are capitalizing on the opportunity to refinance their existing mortgages, reducing monthly payments, and securing more favorable loan terms. As a result, a significant portion of the housing stock that would typically be available for sale is being held onto by current homeowners, leading to reduced supply and heightened competition among potential buyers.
Homeowners Becoming Landlords
In some cases, homeowners are leaving their homes, but instead of selling they are holding onto them as rental properties. This shift in behavior reduces the number of homes available for sale, exacerbating the scarcity of housing inventory. It’s worth noting though that Seattle is expected to grow by 160,000 residents by 2040, so rental housing will be in high demand.
For many, especially those who have owned their home for a while and paid down a large portion of their mortgage, the ability to refinance into 3% during the Covid years suddenly made their home a good candidate to be a rental property. Their monthly payment is now low enough that it can be covered by incoming rent.
While the decision to become a landlord can be financially lucrative, and a benefit to the rental market, it also contributes to the challenges faced by potential homebuyers. The increase in rental properties diminishes the pool of available homes for purchase, intensifying competition and driving up prices in an already tight market.
Zoning Restrictions Limiting Supply
Zoning restrictions pose another significant obstacle to addressing Seattle's housing inventory crisis. Despite the city's booming population and growing demand for housing, restrictive zoning policies have limited the ability to develop new residential properties. Seattle's geography, characterized by bodies of water and hilly terrain, further complicates the expansion of housing developments.
Until very recently, developers were only able to build two to six-unit homes in Seattle’s urban centers, but most Seattle neighborhoods outlawed such housing with zoning restrictions. That has all changed with the state’s new “missing middle” zoning law that will allow multi-unit developments to be built city-wide. While this will improve housing scarcity in the long-term, it will be a slow journey and it ultimately still falls short in creating the number of new units necessary for our growing city.
Conclusion
The combination of historically low interest rates during Covid, homeowners turning to renting instead of selling, and zoning restrictions on new construction has created a perfect storm, limiting the availability of homes for prospective buyers. While each of these factors plays a distinct role, their collective impact underscores the need for comprehensive and collaborative solutions.
So, when will this change? The fact of the matter is that people cannot hold on to their 3% rates forever. They will move for a job, divorce, or death and eventually our market will balance a bit. With the projected population increase over the next few decades we will likely see continued housing scarcity, but the normalizing of interest rates will help significantly moving forward.
As always, if you’d like to start the conversation about making home in Seattle, send me a message!
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