Land Costs, Housing Costs and the Urban Growth Boundary

In 1995, as part of its Comprehensive Plan, King County adopted an Urban Growth Boundary (UGB), with the goal of promoting compact, contiguous, and accessible residential development. On the urban side of the boundary, zoning allows for home-building at densities from one to eight dwelling units per acre for single family, and at higher densities for multi-family development. In order to preserve agricultural and forest land, and to avoid "sprawl" type of development, the rural side of the boundary limits residential development to one dwelling unit per five or more acres.

With housing prices continuing to rise rapidly during the 1990s, it is sometimes suggested that by limiting the amount of relatively cheap suburban land available for housing development, the UGB has caused the most recent surge in housing market prices.

Land Costs and Housing Prices
Urban land (land on the western or "urban" side of the UGB) has risen about 4% per year in real dollars since 1982 (footnote 1). This rate of increase in price is typical of what has happened to urban land historically and across the nation.

Chart: Cost of Land as a Percent of the Cost of a New Home Click for > Enlarged View (77KB)

As a proportion of the cost of a new home, however, a standard housing lot in King County, on the urban side of the UBG, remains at the same 9% of the cost of a new home in 1999 as it did in 1982. As a proportion of the cost of all existing homes, it has risen just 1% from about 11% in 1982 to about 12% in 1999.

Very little of the actual increase in home prices can be attributed to the increase in land cost. In terms of dollar increases, the average per unit cost of land rose $23,500 during the 1982 - 1999 period (from about $9,500 to $33,000), while the average price of a new home increased by $251,500 (from about $110,000 to $361,500). Because the cost of raw land is a small proportion of the cost of a home, the effect of the UGB on housing costs is likely to be small to negligible.

Graph: Cost of Urban Land as a Percent of the Average Price of a Newly Constructed Home Click for > Enlarged View (49KB)

Footnote 1 Data on average land cost is based on sales of vacant residential land as recorded by the King County Office of Assessments. The average price of a lot in King County equals the average price per acre of all urban land sales in a given year divided by six. Six dwelling units per acre allows for a typical lot size of around 7,000 sq. feet, with some allowance for common space and/or critical areas. For further discussion and details of methodology, see Determinants of Housing Prices in King County (unpublished paper), November 2000, available from King County Office of Regional Policy and Planning.

Can Environmental Stewardship, Economic Prosperity and Affordable Housing
Co-exist in King County?
The housing market is highly complex, driven by factors on both the supply side and the demand side. On the supply side, factors such as the costs of construction materials and labor, raw land, site preparation, and financing will affect the total costs that a developer must pay to build a house.

But there are also demand side market factors. These include the overall economic prosperity of the region, its attractiveness to new residents, interest rates, and the nature and age of the population. The rate of job growth is a prime determinant of housing demand. As employment in a region grows, more housing is needed. But there is a lag before the housing industry can respond to job and population growth, so there is often an undersupply of housing in the short term. This can cause the price of housing to rise sharply until the supply catches up with demand and/or job growth slows down.

Graph: Change in Jobs, Housing Units and Average Home Price in King County: 1981-1999

Click for > Enlarged View (97KB)

The graph above shows what has happened to job growth, housing starts, and average home price during the last two decades. The graph shows that from 1983 to 1989 job growth was high in King County. The number of housing permits began to increase steadily to meet demand, but because jobs grew faster than housing could grow, the average home price began to climb. With a new peak in job growth in 1989, housing prices surged upwards. In 1990-93, when job growth stagnated, there was little or no increase in the price of homes, and housing starts declined moderately. The same cycle repeated itself during the mid- to late 1990s.

Urban Growth Boundary or Business Cycle?
Housing prices rose much more rapidly during the late 1980s than during the second half of the 1990s. In real (after inflation) dollars, the average price of all existing homes rose 5% per year during the 1980s compared to 2% per year in the 1990s. The real price of a new home rose three times as fast in real dollars: 6% per year in the 1980s compared to 2% per year in the 1990s. The Urban Growth Boundary was not in place during the 1985 - 1990 expansion period, yet housing prices rose much more rapidly than during the 1995-2000 expansion period, when the UGB was in effect. This suggests that the UGB is a not a significant driver of housing prices.

Prosperity, Housing Quality and Cost
Increases in personal and household income, job security and confidence, the effect of wealth generated from stock options and other securities, and low interest rates have all had the effect of raising the amounts available to spend on housing. Because there is a demand for bigger and better houses by the 40% of the population (those earning 120% of median income and above) that can afford to buy a home, the building industry has responded with homes that are of "custom" or "estate" quality, have a higher average square footage than a decade ago, and include more amenities (more bathrooms, garage space, and appliances). In other words, the more "house" people can afford, the more construction costs and sale prices will escalate to produce that quality of home.

The Resale Housing Market
What is true in the new housing market has a ripple effect throughout the resale housing market. There will be trade-offs in terms of quality, space, and particularly location, but the cost of resale homes will rise (or fall) in response to market demand, just as the cost of newly-constructed homes do.

Building an Affordable Home in King County

What would it take to build homes affordable to those at 90-100% of median income? The housing industry has many incentives to build homes that they can sell to those at the top end of the market. It takes a conscious, careful decision to build a home affordable to a moderate income household. But it can be done, without subsidy, and with a traditional profit margin of 5 - 10%.

Table: Costs of Building a Standard Quality Home Click for > Enlarged View (120KB)

The table at left shows how much it would cost to build standard-quality homes, based on the actual cost of land at two attractive locations. The Saylor Index (footnote 2) is used to calculate local area construction costs per square foot by quality level (see box below). At $182,616, with 10% down, the detached home would be affordable to a median income household of three. The town-home, at $155,278, would be affordable to a household at 90% of median income. The asking price for the homes being constructed on these sites is higher, because quality and amenities have been upgraded to meet high-end demand.

Housing Quality and Cost Construction costs are calculated based on six different quality categories: economy, fair, standard, custom, estate, and luxury. Standard quality is "constructed to meet and exceed code requirements and to provide comfortable acommodations….While features are standard they are significant enough to give the residence an individual identity, with some individual design enhancements. Quality of worksmanship is indicative of experienced work-ers working in a 'structured environment' with several levels of quality control and accountability." Custom quality is "…constructed to exceed code requirements and to provide attractive and comfortable acommodations...Features are modi-fications of standard and introduce a uniqueness to the residence." They have design features which clearly indicate that care was taken to give the residence the appearance of special architec-tural design. These are significant enough to give the residence an individual identity, with some individual design enhancements. Quality of workmanship is "indicative of experienced workers working in a 'controlled environment' where attention to detail has precedence over speed of completion."

The Rental Market in 2000

In the fall of 2000, it cost an average of $800 per month to rent a 2 bedroom, 1 bath apartment unit in King County. At this time last year, the same unit rented for an average of $755. This year's rent represents a 6% increase over last year's average. A studio rented for an average of $619 this fall, and a 3 BR unit rented for an average of $1,089. The average for all types of units was $819.

Table: Rate of Increase in Income and Rent: 1990-2000 Click for > Enlarged View (85KB)

Although last year's increase was sharp, household income has generally kept pace with rental increases during the 1990s. The King County rental market has seen an average annual increase of 4.1% in rents during the past decade. During this time median household incomes have been increasing at a slightly faster pace - about 4.4% per year. This is good news for renters who earn 60% of median income or more, since they can generally afford the $800 per month in rent.

Low Income Renters Still Struggle for Housing
But renters who earn 50% of median income or less continue to have a difficult time affording King County rental units. In 1999, only about 32% of all rental units (apts. and single family) were affordable to those earning under 50% of median income (about $26,000 - $29,000).

A household earning 30% of median income (about $16,000 - $17,800 for a household of two - three persons) could only afford $400 - $425 per month in rent. But only 8% of apartments rented for under $500 last year, and only .7% rented for under $400.

Graph: Average Rent and Affordable Rent: 1990-2000 Click for > Enlarged View (51KB)

Who Can't Afford Housing? There's a common misperception that anyone who works can afford rental housing. Many low-income workers do find housing by doubling up with others, living at a parent's home, or by paying 35 - 50% of their income for housing, and skimping on other necessities. But the following list shows a sample of our neighbors, coworkers, and service suppliers who earn below 50% of median income, and below 30% of median income. Many of these workers cannot find affordable housing in King County, particularly if they are the sole support of one or more dependents. Average Earnings less than 50% of Median Footnote 3 Property Managers Food,Lodging Managers Many Teachers Coaches, Umpires, Sports Instructors Radio & TV Announcers Chemical Technicians Museum Curators Human Service Workers Medical/ LabTechnicians Most Secretaries School Bus Drivers Floor Layers Machine Tool Operators Average Earnings less than 30% of Median TV Camera Operators Counter & Rental Clerks Hotel Desk Clerks Bartenders & Waiters Fast Food Cooks and Coffee Shop Attendants Housekeeping Cleaners Animal Caretakers Taxi Drivers, Chauffeurs Apparel Patternmakers

Footnote 3 WA State Employment Security Dept. Average Annual Income by Occupation.

2000 Vacancy Rate Lower than in 1999

Countywide there was a 3.5% vacancy rate in the fall of 2000, compared with 3.9% at the same time in 1999. When vacancy rates fall, fewer apartments are available to those seeking housing, and there is upward pressure on rents. The largest declines in vacancy rate were in larger units with 2 - 3 BR and 2 baths.

Certain areas had sharp decreases in vacancies: for instance, Shoreline's vacancy rate fell from 3.9% last year to 2.1% this year. In White Center, where rents have typically been more affordable, the vacancy rate fell from 6% to 3.5%. Federal Way's rate was down from 5.7% to 4.5%. Vacancy rates in North Seattle are very low, 2% or lower in most areas. However, vacancies were up in Kent and remained about the same in Renton.

Table: 2000 H.U.D. Income Levels by Household Size
Click for > Enlarged View (163KB)

King County Creates New Resource for Affordable Housing

The King County Credit Enhancement Program is a new initiative designed to assist in the development of affordable housing. King County will provide credit enhancement, which will reduce financing costs for housing developments - either market rate or affordable developments. In exchange for project savings, the project developer/owner agrees to set aside long term affordable units within the project.

In 1998, the King County Council authorized credit enhancement for up to $50 million in housing project debt. At inception, it was estimated that the new program would assist in developing approx-imately 500 units over the next five to seven years These would be maintained as affordable housing for a minimum of 20 years. Once the housing project loans or bonds are paid off, the credit enhance-ment authority is available to use in other additional projects.

The latest project using credit enhancement is The Village at Overlake Station, a transit oriented development to be built over the Overlake Park and Ride in Redmond which will provide 308 rental units affordable to households with incomes be-low 60% of the King County median income adjusted by family size. The project will be developed by Langly Properties, Inc. for the King County Housing Authority which will own and operate the development.

The program is flexible and can accommodate a range of housing developments.
Key features are: