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The rising prices for starter homes force some first-time buyers to compromise

By Elizabeth Rhodes
Seattle Times staff reporter

ROD MAR / THE SEATTLE TIMES Many buyers can afford no more than $200,000 for their first house, yet homes in that price range are growing increasingly rare in greater Seattle. In North Seattle, for example, starter homes are now $350,000-$400,000, like the one pictured above. Located near Green Lake, it's $379,950, has two bedrooms on the main floor, an updated kitchen with hardwoods, a new deck and a finished basement.

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While sales of million-dollar homes (yes, they're booming) are oft-mentioned as a bellwether of the health of the local housing market, something else has been happening under the radar — the rising cost of the starter home.

Eric Uyeji is very familiar with it, and with first-time homebuyers' expectations: a house with two or three bedrooms, a couple of baths and a price that doesn't top $200,000, in a close-in Seattle neighborhood. Windermere broker Uyeji can find that house in various South Seattle neighborhoods — almost. Problem is, "Those $200,000 homes are now $230,000 or $250,000," he estimates.

Go north into the neighborhoods popular with young buyers — Green Lake, Phinney Ridge, Ballard, Fremont — and entry level is "$350,000 to $400,000," reports Coldwell Banker Bain's Dick Fulton.

And on the Eastside, the house that sold for $200,000 in 1995 is now $400,000, says Phil Souza, owner of Century 21 Smith-Ring. "The very same house — and that's entry level" in Bellevue and Kirkland, he says.

Why, it's enough to make some buyers throw up their hands and pack up for Spokane, where housing is considerably more affordable.

Buyers shouldn't give up hope

Not so fast. While prices here may seem unrealistically high, buying a place to live isn't hopeless (if it were, we wouldn't be experiencing the hot market we are), although real-estate pros acknowledge some compromises may have to be made.

How the housing affordability index works The Washington Center for Real Estate Research in Pullman generates this index to measure the ability of a family earning a middle-class income to purchase and make the payments on a median-priced home. The index assumes a 30-year fixed-rate mortgage at the prevailing current interest rate, with 20 percent down. (First-time buyers are assumed to make a 10-percent down payment with a 30-year mortgage at prevailing rates.) • "Family" refers to two or more persons related by blood, marriage or adoption. • Both "middle-class income" and median home price vary by location. • In King County, the income number is $59,000; that's the median, which means half the county's families make more, half make less. • Median home prices are based on the most recent sales; for this story, for the first quarter of 2004. Elizabeth Rhodes

Nor is it necessarily as bad as it looks — at least overall. For proof, consider the housing affordability index generated by the Washington Center for Real Estate Research in Pullman.

That index measures the ability of a family earning a middle-class income to purchase and make the payments on a median-priced home.

This spring, that hypothetical King County family had 119 percent of the income required to carry the mortgage on that median-priced home. How can that be? Simple. Washington's private-sector wages are the 11th highest in the nation, according to the Bureau of Labor Statistics.

And King County buyers were actually in worse shape than those in surrounding counties. Snohomish, Pierce and Kitsap county buyers all had 130 percent or more of the income required to own in their respective counties.

Large portion of market

But look solely at first-time buyers, who comprise a third of the market, and the picture quickly turns grim.

	This two-bedroom "fixer" in Greenwood is listed at $175,000.

King County's first-timers possessed just 67 percent of the income required to purchase and carry the mortgage on a typical starter home. (defined as a house costing 85 percent of median — or about $250,000.) Still, that's an improvement. First-time King County buyers found purchasing even more out of reach in all of 2002 and half of 2003, according to the affordability index.

First-timers in surrounding counties come closer to having the income necessary to purchase; however none has 100 percent of what's needed. For that, buyers need to go out of Puget Sound. In Spokane, for example, novice buyers have 116 percent of the income necessary.

"First-time buyers are having an especially difficult time locating affordable housing," says Glenn Crellin, executive director of the Washington Center for Real Estate Research, who developed the affordability index. Low mortgage-interest rates have counterbalanced rising home prices and eased the situation to some extent. However, if interest rates rise — and Crellin thinks they well — affordability will decline, he says.

One buyer who's felt the pinch of rising prices is a woman who just bought her first home, in South Seattle's Upper Rainier Beach neighborhood. "I couldn't afford the neighborhood I rented in (Lakewood), so this was the closest I could get," says the woman, a blue-collar, 47-year-old single buyer who didn't want her name used.

She shopped on and off for several years before finding a house in her price range and was dismayed to see her buying power dwindle as prices rose. "This house is less house than I could have gotten two months ago," she says of her 900-square-foot, 1950s rambler that cost $199,500. While it needs work, it doesn't need as much as the others she could afford.

"Under $200,000 is typically going to be more in the fixer range ... that's just something that comes with the price range ... small and maybe not in the best location," explains Windermere's Uyeji.

That's if an under-$200,000 house can be found. Last week, there were only two on the market between downtown Seattle and Shoreline, and no more than half a dozen in South Seattle. One, priced at $179,500, came with a written warning: "Stay off porch! In danger of collapsing," and went on to describe mold and foundation problems.

The dearth of homes under $200,000 is a trend, according to statistics supplied by the Northwest Multiple Listing Service. Last year, within Seattle proper, just 596 such single-family homes sold — out of 8,039 total. North King County posted 116 similar sales (out of 1,067). By comparison, South King County was a veritable first-time buyers' bonanza. It saw sales of 3,312 houses in that price range (out of 10,300).

The cutoff line

Having housing priced under $200,000 is significant because that realistically is the cutoff point for lots of first-time-buyer hopefuls, according to Crellin's calculations. He says studies have shown that people must earn 70 percent of the area's median income in order to afford a house. Otherwise it's extremely difficult.

In King County, that 70 percent translates to $41,345, which will support the purchase of an $182,000 house. (A general rule is that buyers can afford a home that's four times their income; the down payment also figures in.) Households earning more obviously have more buying power, which explains why first-time buyers are snapping up $350,000 Ballard starter homes.

"What I see is young people in their 20s through their 40s where every adult in the family is working and making it a priority to get into the house and into the neighborhood they want," Fulton explains.

Pair an optometrist and a sales manager (working in King County and earning the median wage for their professions) and they'll bring in $177,000 annually, according to Roberta Pauer, the Employment Security Department's Seattle economist. Their individual salaries are high enough that either can afford to buy a home alone. That's true, too, of air traffic controllers ($114,100) and aerospace engineers ($83,200).

For many other professions, homeownership is very possible if there are two wage earners. For example, a utility meter reader and a dental lab technician together will bring in about $76,000. The median for a construction painter and a customer-service representative together is $70,300.

Still fall short

But there are many occupations where even doubling up won't bring their wages to that threshold of $41,345 — among them taxi drivers, child-care workers, home-health aides, fast-food cooks, cashiers and service-station attendants.

Buyer-hopefuls with budgets under $200,000 "are pretty much going to have to go farther out to markets such as South King County, South Snohomish or even North Pierce County," says Souza, of Century 21 Smith-Ring.

On the Eastside, the much-desired under-$200,000 house "is really nonexistent today," and even finding a spacious condo for that price can be a challenge. "It would be easier if you wanted $1.5 million on the lake. I can get you 85 feet of waterfront," Souza quips.

Increasingly, buyers who want to live in central King County are turning to condominiums and townhouses, which now account for 22 percent of home sales. Tony To, the executive director of HomeSight, a nonprofit housing developer, predicts that trend will continue because of the high cost of land.

"Seven or eight years ago, there were two or three guys building houses in the Rainier Valley in the $135,000 to $150,000 price range," To recalls. "These were modest-sized lots and skinny houses, but they met the needs of the people in the community. Those guys are all out of business now because it costs $100,000 to buy a lot there."

And HomeSight, which used to build single-family homes in the Valley, is now building condominiums there instead. Its newest project, the Stellina, located on the north end of Rainier Avenue, has one- and two-bedroom condos priced from $150,000 to $200,000.

"It's more important to get creative in how to address this issue, than to give up on the idea that ownership is important," To concludes.

Elizabeth Rhodes: erhodes@seattletimes.com

Copyright © 2004 The Seattle Times Company

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