— by Ken Wood —

Okay, let’s talk about HOUSING AFFORDABILITY; specifically here on the island, though the basic problem is actually everywhere:

1. There is a disparity between what it is possible to earn and what a mortgage payment costs each month. I say mortgage payment and not rent, because rent that is not keeping up with mortgage payments is non-sustainable; no one is going to rent out a house and lose money every month indefinitely.

2. So it is easy to say that home values are too high, that speculation is driving up the market, that Californians are driving up prices, that Microsoft millionaires are driving up prices, etc. And there may be some truth to all those; demand for a limited product does indeed drive up prices. BUT IS THAT REALLY THE PROBLEM?

3. Let’s do a few calculations and see if it’s the price of houses that causes the affordability problem, or is it something else? There are a half dozen modest stick-built homes available on Orcas for under $350K. With a 10% down payment the monthly payment at current interest rates (30 year fixed – 3.8%) the monthly payment is $1468 with taxes and insurance the total will be close to $1700 per month. Even with TWO people working, at island pay scales that is realistically out of reach. …..BUT…..

4. What if the PRICE stays the same and the INTEREST RATE changes? What if citizens were given the same economic encouragement that is given to corporations? So let’s envision a home loan program that offers a 40 year loan at 1% – that’s NOT crazy, those are exactly the same terms the government offered to farmers and ranchers in the 40’s to encourage agriculture.

5. Our hypothetical islander’s payment on the same house with the same price but with those terms would be:

……….$797 add in the same taxes and insurance (which is a different rant) and the monthly total is $1029.

6. Are you surprised? I own a real estate brokerage and those numbers still surprised me! It is clear that the housing affordability problem is NOT the prices. It is the interest rates and terms. Basically it’s the banks sucking so much interest off the top of every mortgage that is causing the problem. How much interest? Good question!

7. The 1% – 40yr loan earns the lending agency $67,318 over the life of the loan. The 3.8% – 30yr loand earns the lending agency $213,396 over the life of the loan… Now do you see where all the money goes?

8. And let’s be clear here; the bank did not use the money that people deposited in their vaults to make the loan. The bank CREATED that money out of thin air and “reserved” a percentage of the deposits to cover the loan (reserve requirements vary but 10% is an oft touted number) Do you see the racket here? Just imagine how much money in mortgage interest payments leaves the island every month, never to return or to circulate, just… gone.

9. So what’s the answer? I think a locally based credit union that exists to provide affordable housing loans and provides a small but safe income for investors could do a lot to make housing more affordable in almost any community.

Thank you for your persistence and patience in reading this far! Please comment!

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