The last few weeks have seen thirty year mortgage interest rates at or near the 3.75% level.

 

Although it is beginning to seem like the new normal, these interest rates are truly remarkable since they are the lowest on record since mortgage rates began being tracked back in the early 1950's.  I myself took advantage of these rates by refinancing my home (again) just last month.  The Fed has indicated that they plan to intervene to hold interest rates near the current level into 2014 but world events or a nasty bout of higher inflation could have them re-evaluating their policy at any time.  So the time to lock in these rates is now.

 

Although lender requirements are more stringent with complete income and asset verification now required, those with the down payment, a steady job and good credit can get a mortgage.  Overall, loan requirements are reverting back to the way they used to be before the recent era of easy money, unqualified borrowers and stated income loans brought down many lenders.

 

These historic low interest rates combined with the decrease in home prices over the past few years have made homes in our area more affordable than they have been in a long time.  The era that we are currently living in might be looked back upon someday as being the golden age to acquire real estate.  The latest S&P / Case-Shiller Home Price Index for the greater Seattle metropolitan area (including King, Pierce and Snohomish counties) indicate that it was June 2004 the last time prices were lower than they are now.  To put it in perspective; we have lost around eight years of home appreciation.  (For the record, though, Seattle home prices are still almost 32% higher than in January 2000).

 

Although there is no way to predict where home prices are headed, and they may continue to slowly fall in the short term, there is evidence that the desirable close-in urban village neighborhoods in Seattle have bottomed out with prices now essentially flat.  Some of these neighborhoods where I have been working (such as Ballard, Fremont, Phinney and Wallingford) are already experiencing a lack of inventory and multiple offers are not uncommon for nicely maintained and well priced listings.

 

On the outskirts of the City and beyond the City limits it is a different story.  Distressed properties accounted for a third of all single family home sales in King County last year - and half of all sales in Snohomish and Pierce County.  Distressed sales include foreclosed homes as well as 'short sales' in which homes are sold for less than the amount owed on the property.  Looking ahead, the sheer number of bank owned properties in these areas is likely to feed an increase in 'short sales' as foreclosure sales further erode property values.  Ultimately, though, these homes will be absorbed by home buyers (who realize that they can now own for less than they pay in rent in many places) or investors who will pick up bargain priced real estate - which will lead to a balanced market down the road.

 

The take away from all of this is that location still matters (more than ever).  It has been proven that it is better strategically to pay more for a well located in-city property (with good schools) even though these homes may be older and smaller than what is available in the outlying suburbs.  These in-city homes will better preserve value and withstand market declines over time as well as being more likely to rebound more quickly as demand picks up.  And with the ultra low interest rates now available, even these choice homes are more affordable than they have been in nearly a decade

Now that Seattle has finally fully embraced the Accessory Dwelling Unit (ADU), sometimes known as a Mother-In-Law Unit, as a way of increasing density in the City without changing or impacting the single family characteristics of a neighborhood, the door is open for homeowners to generate legal income from their residence.

 

Also, after years of deliberation, legislation just went into effect in December 2009 to legalize the Detached Accessory Dwelling Unit (DADU) whereby a structure such as a detached garage can be converted into a rental unit.

 

Note that there are specific guidelines and requirements for both the ADU and DADU concerning size, entrance door location, bedroom egress, electrical box location and parking as well as the necessity of meeting all of the other current Seattle residential building, mechanical, electrical and energy codes.

 

It is important to realize, also, that these ADU's do not create a "duplex" and there are strict requirements to register the ADU with the City and owner-occupy one of the two units for more than six months out of the year (although there are exceptions granted for a longer owner absence).

 

From the City's point of view, ADU's will provide hundreds (or even more over time) of affordable in-city apartments that should provide tenants with a quiet, homey residence with an ambiance quite different than the high rise apartment structures located on the busy arterials. 

 

The financial cushion that an ADU provides a homeowner is substantial and could make the economic difference when deciding whether to rent or own.  This additional income may provide buyers with the ability to buy a larger home or to afford a home in their preferred neighborhood.  In fact, I advise my clients that they should take this into consideration when looking at homes - even though it may not be something that they are currently interested in.  Circumstances do change and this option adds flexibility especially during a period of extended unemployment since many ADU's generate income that covers more than half of the mortgage.  In fact, this additional income could have kept some homeowners out of foreclosure.

 

Besides the rental income, homeowners may be planning space for an aging parent, an adult child or as room for an eventual caregiver (which would allow the homeowner to more easily age in place).

 

Another bonus would be the possibility of taking early retirement.  Unlike in the past, many middle age homeowners who bought their homes later in life will not have enough time (or savings) to pay off the typical 30 year mortgage before their target retirement date.  And even a paid off home will require the payment of real estate taxes and home insurance. 

 

As the supply of new apartment buildings in the pipeline drys up due to lack of financing, rental rates are projected to resume increasing this year and more rapidly in the near future especially in the desirable in-city neighborhoods.  It is feasible that, over time, the ADU could generate enough income to eventually cover the entire mortgage payment leaving the home owner to only cover the taxes and insurance - and still benefit from the federal mortgage interest income tax credit.  Your home would truly be an asset rather than a liability.   The inherent financial freedom of an income generating home provides a compelling reason to own rather than rent.

 

See the attached PDF's from the Seattle Department of Planning and Development on the actual requirements for putting in an ADU or DADU.

 

   http://tomknee.com/docs/Seattle-EstablishingADU.pdf

 

   http://tomknee.com/docs/Seattle-EstablishingDADU.pdf

  

The closely watched Standard & Poors / Case-Schiller index of 20 metropolitan areas rose 0.3 percent from December on a seasonally adjusted basis.  That marked eight consecutive months of home values improving or at least holding steady.

 

The index was down 0.7 percent from the same month last year, the nearest that the year-over-year reading has come to positive territory in three years.

 

Seattle is one of the 20 cities in the Case-Schiller index, but it saw January home prices fall 0.6 from December and 6 percent from January 2009.

 

The Seattle residential market peaked in summer 2007 and has dropped 29 percent since then.  Local prices have returned to May 2005 levels.

 

This does seem about right for the Seattle market overall.  But, based on the recent sales volume that our office has been experiencing over the past couple of months, I would venture to say that some of the desirable close-in neighborhoods have fared somewhat better than this with less of a price drop than the Case-Schiller index indicates. 

 

Although all areas have seen price declines over the past couple of years, the "urban villages" of Seattle with their easy downtown commute have been better able to withstand price declines than the outlying suburban neighborhoods.