By Allison Butcher, Senior Policy Analyst, MBAKS

On Wednesday, January 31, the Master Builders Association of King and Snohomish Counties (MBAKS) kicked off its first general membership meeting of the year—an economic forecast breakfast presented by the association’s Sales & Marketing Council.

The breakfast took place at The Westin Bellevue and featured presentations by Metrostudy Regional Director Todd Britsch and Morgan Stanley Financial Advisor Dan Becraft, C(k)P QPFC.

Becraft touched on highlights of Morgan Stanley’s investment outlook for 2018. In short, the report states that global economic expansion delivered strong returns last year but we should not expect the same in 2018. Morgan Stanley is not anticipating a recession this year, but rather that markets will begin to normalize.

The forecast already factors in recent tax cuts, Becraft said. A look back at the U.S. stock market over the last 37 years shows that tax cuts are not correlated to market performance. In the year after President Ronald Reagan’s tax cuts took effect in the 1980s, for example, the market dropped.

Morgan Stanley Financial Advisor Dan Becraft, C(k)P QPFC (Alabastro Photography)

Becraft offered additional observations, including ways in which demographics influence a country’s economy, predictions on interest rates (he expects they will stay low and may even be cut), and more.

The biggest risk to our economy going forward, he noted, is our national debt, which stands at $20 trillion. However, China’s national debt is significantly higher. Whereas the United States’ debt-to-GDP ratio is around 100 percent, the ratio in China is closer to 460 percent. Becraft said some are speculating this could lead to a move by China within 36 months to repatriate capital that has flowed out of their country in recent years. If this were to happen, it could result in investments being pulled out of real estate in the United States, including the Seattle market, and transferred back to China.

Britsch focused on economic and housing data in the Puget Sound region and provided compelling information in his presentation as well, particularly related to the lack of future housing inventories.

Britsch’s presentation highlighted the fact that population and job growth continue to be very strong in the Puget Sound region, with 137,000 jobs added since 2015 and continued low unemployment in King and Snohomish counties. Furthermore, data from the Department of Licensing show that net driver in-migration into the region has averaged more than 6,300 per month since 2012, for a total of 460,000 new drivers from outside the area.

Metrostudy Regional Director Todd Britsch (Alabastro Photography)

Britsch also stressed that housing supply is not keeping up with demand. Looking at the driver license data, he estimates this growth has created a demand for 100,000 owner-occupied homes between 2012 and 2017. However, during this time, we have built and sold roughly 60,000 homes, creating a housing supply shortfall and causing upward pressure on home prices. The average list price for new construction within formal subdivisions, Britsch stated, has risen 20 percent in Snohomish County and 24 percent in King County year over year.

Britsch warned we are running out of land at a rapid pace. With 10 months’ supply of vacant developed lots in Snohomish County, he said we’re at "crisis level" in terms of lot inventory. The North Creek market area, which has been very robust in recent years, has dried up, Britsch said.

Since 2009, the entire Puget Sound region has had a net loss of 3,018 lots coming out of the system, not to be replaced. More importantly, in that same time frame, the available finished lot inventory has declined by 17,879. Britsch also pointed to Northwest Multiple Listing Service data, which shows King and Snohomish counties have just over a two-week supply of homes for sale.

Although the current housing market is showing signs of weakening, Britsch believes it will remain strong. The housing market is all part of a cycle and we can expect an adjustment in sales, he said. Britsch predicts core areas from King County to South Snohomish County will continue to see double-digit appreciation due to lack of inventory.

Founded in 1909, the Master Builders Association of King and Snohomish Counties (MBAKS) has grown to become the largest residential homebuilders association in the United States. With 2,900 member companies, the association is dedicated to membership value, housing advocacy, community service, and financial stewardship throughout the Puget Sound region.

15 Years Green

Jason Lear is principal and co-owner (along with his wife, Holly Batt) of Batt + Lear, a 15-year-old Seattle construction firm, employing a diverse group of 25 employees. Batt + Lear builds and remodels structures to be highly energy efficient, simple, and functional and has won numerous green building awards over the years.

Joined MBA for the Health Insurance Trust

Batt + Lear joined the MBA in 2005, specifically for the MBA Health Trust. "Right from the beginning, it had been our dream to be the kind of company that people wanted to work for," says Jason. "Early on, we offered 20 days of paid time off plus health insurance. The MBA Health Trust was the only plan that would let us insure a minimum of just five employees. We also appreciated the ability to pick our own practitioners."

Staying Insured Through Downturns

Jason's company has made it a priority to maintain health insurance benefits, even through difficult financial periods. "Making it through 2008 was tough. We had to cut our 20-employee team by half. But we did have the good fortune to be vested in remodeling. After the financial crash, people couldn't sell or invest in new buildings, but there were a lot of remodel projects. So we got through. Now we're up to 25 employees and doing well."

Temporarily Lured Away

Jason tried another health insurance program for three years before coming back to the MBA Health Trust. "We were lured away by another insurance trust, which seemed less expensive. And it was cheaper initially because we had a group of young employees who never made claims. But when our employees actually started using the insurance, we were penalized, and our costs were hiked drastically by 45 percent. So we found our way back to the MBA Health Trust."

Modest Increases Are Easier to Plan For

All businesses have seen escalation of health insurance premiums the past couple of years, but Jason says the Trust is keeping them reasonable. "You assume rates are going to go up," he says. "We can handle single-digit increases. They are easier to plan for versus what you see outside of the Trust."

Regence BlueShield Is Very Versatile

Regence BlueShield, the Trust's insurer, provides Batt + Lear many care and provider options. "There is a lot of flexibility. Our staff can select the HSA plan or the preferred provider plan," says Jason. "Personally, for my family, I appreciate that Regence supports alternative care, things like massage, chiropractor, naturopathic doctors, etc." Jason says the plan is also well managed. "The administrators are great; they show us owners different plan options for getting the best coverage for the lowest price. And they present well-explained options to our employees and are always available for consultation."

Built Green

Batt + Lear are highly engaged with Built Green, the MBA's program for setting certification standards of excellence for construction that makes a significant impact on housing, health, and the environment. The program provides consumers with an easy-to-understand rating system that quantifies environmentally friendly building practices and gives builders the resources and support to build high-quality, desirable homes. "We were green builders right from the start," says Jason. "We wanted to be more public about it. So we started to certify projects as green. And now I'm on the executive committee of Built Green."

MBA GRIP Program Delivers L&I Refunds

Jason's firm also takes advantage of GRIP, the local safety incentive program for members of the MBA. GRIP provides Batt + Lear with a team of professionals dedicated to helping them reduce on-the-job injuries, manage workers' comp claims, lower L&I premiums, and maximize refunds. "It's a great, overlooked program that I wish we had known about earlier. We left a lot of money on the table. This is the third year we are getting refunds," Jason says.

The MBA Means Advocacy

The MBA has long been known for lobbying and government relations on behalf of its members and Jason is seeing the benefits directly in Seattle. "There's definitely a new focus from the MBA toward Seattle businesses like mine," he says. "The MBA advocacy groups are partnering with other influential groups to provide the Seattle City Council with a voice representing builders and green builders—which we very urgently need."

By MBAKS Content Strategist James Slone

What happens when inclusionary zoning works against affordability? Just ask Seattle.

Like many urban areas in the United States, the Puget Sound region has become unaffordable for many new and existing residents, especially in Seattle, where high land value, lack of supply, cumbersome permitting, and restrictive zoning have sent prices skyrocketing.

One approach some U.S. cities have pursued to address affordability issues is inclusionary zoning (IZ). IZ policies utilize municipal or county planning ordinances to mandate that a given portion of new construction be affordable for low- to moderate-income households.

These mandated units are generally paid for with subsidies. For example, the builder can subsidize affordable housing by eating the building cost, or the government can subsidize it by providing an incentive to the builder in the form of an offset or by setting up an affordable housing fund.

MBAKS does not advocate for IZ policies, having long argued that the additional costs to the builder will ultimately be passed on to the new homeowner or renter, driving up the cost of market-rate housing. Despite these concerns, inclusionary zoning has become a popular approach in cities across the West Coast—including Los Angeles, Portland, and Auburn, Washington.

In 2006, Washington state passed House Bill 2984, opening the door for jurisdictions to “enact affordable housing incentive programs… for the development of low-income housing units.” This cleared the way for Seattle to pass its own IZ program, Mandatory Housing Affordability (MHA), in spring 2019.

The MHA imposed affordable housing requirements in 27 urban villages—neighborhoods across the city designated to absorb the bulk of Seattle’s population and job growth—with the goal of creating 6,000 homes affordable to households making 60% of area median income (AMI). The MHA is just one part of Seattle’s Housing Affordability and Living Agenda (HALA), which aims to create 20,000 affordable homes by 2025.

Overpromising and Underdelivering

In a 2007 report on inclusionary zoning by the Housing Partnership, the authors point out that IZ is politically attractive because it offers a one-size-fits-all solution to affordability with little up-front cost to voters. But it’s only a partial solution. Subsidies alone are insufficient to build enough housing for everyone, especially in hot markets and space-constrained cities.

Supporters of IZ say these policies can play a useful supplemental role provided they strike the right balance. But when poorly designed, IZ leads to fewer affordable homes. Take Portland. After establishing an IZ program in 2017, housing permits plummeted. By exempting projects with 20 or fewer units, they perversely incentivized smaller projects.

The result was a mind-bending 43% drop-off in new home permitting in 2020, with just 2,000 new units coming online. With so few new homes in the pipeline, Portland is underproducing the housing they need to meet demand.

Portland’s woes are a cautionary tale of what happens when an IZ program is designed without carefully considering how different types of housing may be affected or what kinds of builder incentives can balance out the cost of including affordable units.

Seattle’s own MHA is a case study of both the potential and pitfalls of IZ. Zoning requirements were lifted in all 27 urban villages with the proviso that developers either include affordable units in their own projects or pay in-lieu fees. (It’s worth noting here that the MHA only affects 6% of single-family zones, which still comprise about 75% of residential land in Seattle.)

If developers choose to provide the affordable units onsite, 2% to 11% of their projects’ square footage must meet the AMI criteria. Those who choose not to provide the units must pay a fee—ranging between $5.00 and $32.75 per square foot—to the Seattle Office of Housing’s affordable housing fund.

Thus far, the Urbanist has reported, “developers have overwhelmingly chosen the in-lieu fee option,” netting the program $68 million that could fund 850 affordable units. While these are considerable sums, the MHA’s one-size-fits-all design has discouraged certain types of more affordable “missing middle” housing by constraining supply and driving up costs.

The Trouble With Townhomes

A relatively affordable, market-rate family housing option, townhomes fill a vital niche in healthy housing markets. But the MHA’s square footage requirements and in-lieu fees have added significant costs to townhomes, making them less attractive to homebuilders.

In April 2019, 60 townhome projects were fast-tracked to beat the MHA deadline, a record number of permits in a single month. After the rush, townhome permits dropped to 33 per month. In October 2021, townhomes hit their nadir with just one application for the entire 31-day period.

The problem is that the majority of townhome projects average just three to four units. Because builders can’t subdivide square footage in a single unit, they have to round up to one or two AMI-restricted units to avoid the in-lieu fee—potentially half or more of their total units. The result is an effective 25–66% affordability requirement imposed on townhomes even though the MHA calls for just 2.1–11%.

Faced with this, builders end up paying the fee. According to a member survey conducted by MBAKS in 2021, the average fee per four-unit project is now $130,972, essentially doubling predevelopment costs. And because the fees are due early in development, construction loans won’t cover the added expense.

The MHA does provide development incentives like increased floor area ratio (FAR), modified density limits, or an extra story intended to offset MHA fees, but they don’t pencil out in practice. Townhomes usually have three floors and adding a fourth is a liability for both buyers and builders. An extra floor means higher square footage fees, stricter codes, and a four-story home buyers don’t want.

Because of all this, it’s now simply too expensive to build townhomes, and many developers have pulled back from initiating such projects. In 2018, townhome permit applications were set to accommodate 4,647 residents; in 2021, townhome projects had dropped to accommodating just 1,437.

It’s difficult to make housing more affordable when mandates and fees make it more expensive. As Alan Durning of the Sightline Institute put it, “The very notion of imposing fees on homebuilding to pay for affordable housing is facepalmingly wrongheaded.”

Escaping the Twilight Zone

A poorly designed inclusionary zoning program that doesn’t take all types of housing options into full consideration will not only fail to deliver significant affordable housing but will actively discourage the construction of proven housing types that more families can afford.

While MBAKS would prefer to exempt townhomes from MHA altogether, the association and other housing advocates have proposed a few reforms that could make a significant difference. These include allowing MHA fees to be paid in installments and letting builders of small infill projects pay fees only on floor area that exceeds pre-MHA FAR limits.

For MHA housing in general, there are incentive carrots that would balance out the stick of fees, including multifamily tax exemptions for MHA projects, a 50% waiver in costly off-street parking requirements, and opening the door to micro units that offer naturally affordable market-rate rents.

Of course, the real solution to our housing shortage is building a lot more homes. Most of the city is still restricted to single-family zones.

We must open the door to more housing types, lower construction hurdles like onerous permit timelines, and let homebuilders build. With significant zoning changes, Seattle could encourage more missing middle housing—such as townhomes, rowhouses, duplexes, and fourplexes—across the entire city.

Without incentivizing these housing options, inclusionary zoning will simply become exclusionary zoning by another name. We need a lot less stick, and a lot more carrot.