“Hidden costs” will keep Washington’s home perpetually unaffordable
Although mortgage rates have leapt from 3 percent to 7 percent in a year, the cost of home ownership isn’t going down anytime soon. According to a forecast by Norada Real Estate, the typical Washington home’s value increased by 15.1 percent in the past year. Although next year’s value increases are expected to be much smaller (.08 percent for Seattle), an actual decline is not expected.
Yet that doesn’t mean the market will be affordable moving forward for 85 percent of Washington residents who already can’t afford a median-priced house ($643,000). “Hidden costs” due to state regulations and delayed permitting processes could keep them perpetually unaffordable – unless something changes.
Of course, interest rates play an enormous role in determining whether a home is affordable. While prices may not have changed, the doubling of interest rates in the past year means that people will pay more in interest as part of their mortgage for the same loan amount.
Put differently, two people could have the same mortgage amount for houses with disparate values if one has a higher or lower interest rate.
When people buy a home, the final price isn’t so much the issue for affordability as it is whether they can make the monthly mortgage payments.
That means that Washington homes are not only expected to gain some value the next year, but due to higher interest rates, the monthly mortgage will be much higher.
The mortgage calculator below gives a rough estimate of how much of an impact a four percent interest rate increase has.
Yet, even if interest rates go back down Washington homes will be still less affordable than they could be, thanks to statewide housing regulations. According to the Building Industry Association of Washington (BIAW), those regulations add an average of $72,524 to the cost of a newly constructed home. Additionally, housing energy codes add more than $20,000 to the cost of a home, while permitting delays not only keep homes off the market but when they do the value has inevitably increased due to higher completion costs.
Combined, it’s estimated that “hidden costs” add $134,354 to the final price.
To put that in perspective, for every added $1,000 to a home price approximately 2,200 Washington families are no longer able to afford it. That means roughly 300,000 Washington families are not able to afford a home due to hidden costs. If you’re one of the 85 percent of residents who can’t afford a median-priced home, you might be able to if meaningful reforms occurred reducing that figure.
Washington residents can’t control federally-adjusted interest rates, but they can push elected officials to enact changes that will reduce the cost of home construction without jeopardizing house construction standards. The easier they make it for builders, the faster they process necessary permits, the sooner builders can complete their projects and get them onto the market, at a cheaper price than were it to drag out or bog down in regulations.
If we’re serious about improving housing affordability, we can’t sit around and hope for the days of 2 percent interest rates again. The state has the ability to make housing more accessible.