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Do you have a spare $100,000?
In the current great “blame game” over the cause and effects leading to the “bust” of the housing bubble, the role of government is being downplayed. That is unfortunate. Without an understanding of the role played by government, we are most likely to repeat the errors with the same outcomes. We are already seeing the resurgence of the “sub-prime mortgage” mentality as a solution to making housing “affordable.” Are we unwilling to face the truth and address the actual problem?
The impacts of the “housing bust” are not common to all areas of the country. In those states and regions which have adopted more restrictive land use regulation, the impacts are much more severe. Coastal California, New York and New Jersey are primary examples of the effect of government regulation. The Seattle metro area, including Kitsap, also is in that group. The single most critical government action is restriction of land available for development. Artificial restrictions on the law of supply and demand directly cause prices of land to escalate beyond all common economic free market understanding. When conflict between “affordable housing” and “stopping sprawl” was resolved by political action, environmental concerns prevailed and the low and moderate income sector paid the price.
In 2001, the value of a 1/3-acre lot in Silverdale was about $27,000. In Seabeck, a 3-acre lot went for $42,000. Seven years later, those lots had experienced a tripling in value to $84,000 and $134,000, respectively. No discovery of gold or other resource supported the increase.
The sole cause was a series of state and local government policies that effectively reduced the amount of land available for residential development. Less land to develop resulted in higher price for the available land. The examples noted are common throughout the county. Those inflated values also reflect results of a number of studies that demonstrate an increase in the cost of housing in our county of about $100,000 on average per home caused by regulation. The cost increase is not because of more bedrooms or larger family rooms. The increase is the direct result of government action with no “value added” to the home.
The impact of the additional cost is significant. To get a conventional 30-year, 20 percent down, 5 percent interest mortgage, the extra cost will prevent many first time buyers from qualifying. The increased cost will result in an additional $20,000 required for the down payment. Then, over the life of the mortgage, in addition to the $80,000 extra principal will be the interest cost of about $75,000. If the buyer avoids the increased down payment they will still be faced with payment of the full $100,000 additional principal and $93,000 interest. In terms of “monthly payment” aspects of a loan, the increased payments are either $430 on the $80,000 or $536 on the $100,000. Can there be any doubt that the regulatory impact of restricting land availability of land for development is detrimental to the concept of “affordable housing?” Can you see the direct link between government regulation and an overpriced housing market?
The current housing bust also created a major financial problem for some of our most vulnerable homeowners; the military members of our community. Military families ordered into our community are faced with the challenge of finding appropriate housing. Because they move from area to area more frequently than most others, they rarely have an opportunity to grow real equity through home ownership. The “no-down” VA loan, a principle benefit of service, is a common practice. Normally, appreciation of property value covers the cost of resale after a few years and the family is financially safe. In the case of the current “bust” condition in Kitsap, those families now have homes with negative equity that they cannot afford to sell. In many cases, the drop in value also has resulted in significantly lower rental returns which may not cover the monthly mortgage payments. A number of our military families have been dealt a major financial blow because of our local political decisions over which they have no control and probably no input.
When you question the cost of housing, forget “supply and demand” and thank your state legislators and county commissioners.
Jack Hamilton can be reached at email@example.com.