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Home » Archives » March 2006 » WE ARE FACING A CRISIS IN AFFORDABLE HOUSING

[Previous entry: "A DISCUSSION OF AFFORDABLE HOUSING MYTHS"] [Next entry: "Court Asked Not To Grant Stay Of Decision On ADUs"]

03/19/2006: "WE ARE FACING A CRISIS IN AFFORDABLE HOUSING"

A Series Of Articles By Paul Losleben Of The Orcas Research Group

In May, we will vote to authorize a 0.5% sales tax on every real estate sale to provide funds for a San Juan County Affordable Housing Program.
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PART FIVE

Crisis in Affordable Housing: Looking to the Future

By Paul Losleben, Orcas Research Group*

We would like to thank the Guardian for allowing us to publish this series of articles. The issue is complex and we are grateful for the flexibility to describe the problem and what is being done to solve it in some detail. We would also like to thank the readers for their patience and careful consideration of the issue. Finally, we would like to thank those who wrote letters to add their voices.

Briefly, we established in the first article that we have a serious problem. In the second article we established that the problem could not be solved using only private financing and that public financing would be needed. In the third article we examined alternatives in public policy and taxation. Finally, in the fourth article, we described the Housing Bank, how it will operate and how funds are to be spent.

It would be foolish to claim that we have solutions for all the problems of affordable housing in San Juan County. The future holds a great many uncertainties. Will the real estate market continue to appreciate at a high rate? How high will interest rates climb? To what extent will our aging population increase demands for services? What relationships can be built with other organizations?

While the issue is complex, we are fortunate that this is not rocket science. There are no immutable laws of economics that prevent us from taking charge of our own affairs to make changes as they are needed. Rather, the mathematics of compound interest rates, even given the great variety of mortgage options, is well understood. Given our demographics and probable growth rate, we can project the scope of the problem. There are successful approaches that have been used in other communities that can serve as a guide. In the work that the Orcas Research Group has done over the last two years we have set to the side politics, ideology, and emotion in an effort to get to the bottom line. We argue that ultimately, it is the numbers that define the problem and the solution. Like a business, the numbers have to make sense. Like a business, it is the organization that is put in place and the skills of the individuals who staff that organization who will pay attention to the numbers and successfully adapt to a changing world.

Also like a business, we cannot agonize over decisions forever. We have 17 years experience in these islands in affordable housing. The County conducted a housing needs assessment in 2000 indicating that the problem was already severe. The State Legislature passed enabling legislation in 2002 to allow San Juan County to help fund a solution. The Community Land Trust Alliance of the San Juan Islands completed another survey in 2003 indicating that the need had become more severe. The Orcas Research Group did a survey of infrastructure employers in 2004/2005 that projected a shortfall of skilled workers in the next 5 years. There have been studies paid for by the County and studies done by volunteer organizations. There have been workshops, forums, summits, and public meetings of all forms.

Now, it is time to act before it is too late. San Juan County has not yet reached the condition of other destination communities where desperate measures are belatedly being attempted with limited success. It is now time for your voice to be heard.

You will receive a special ballot in early May. Please take the time to be informed and vote before May 16th.

For more information and detail, please go to: www.SanJuanHousingBank.org

*The Orcas Research Group is a private non-profit organization that is dedicated to preserving island values through projects focused on producing a stable island economy. The Group accepts no grants or donations and all work is accomplished by volunteers.


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PART FOUR

Crisis in Affordable Housing: What is the Housing Bank and how will it work?

By Paul Losleben, Orcas Research Group*

We established in the third article of this series that potential changes in public policy might help, but that among the possible sources of public support, the proposed real estate excise tax is the best alternative available to us. In this article we will examine how the Housing Bank was selected to administer affordable housing funds including the proposed real estate excise tax, what legal constraints it will operate under and what priorities it will place on how the funds are to be spent.

What is the Housing Bank? Nearly a year ago we came to the conclusion that an efficient, effective, and innovative organization would be needed to administer county-wide financing of affordable housing, especially if public funds were involved. Across the nation, there are many different kinds of affordable housing organizations, the most notable being non-profits, Housing Advisory Councils, Housing Authorities, and Public Development Authorities. Each of these presented significant challenges to our use in San Juan County. We were strongly opposed to government ownership of housing and wanted an organization that minimized government bureaucracy and overhead so that the maximum amount of these funds would reach organizations that would put these funds to use.

San Juan County has the authority to establish organizations called Commissions. One such organization already existed in the form of the Affordable Housing Fund Commission and we proposed to the County Council that they modify that organization to address a broader responsibility. Four key criteria influenced this decision:

First and foremost, while it represents the county government, the Housing Bank Commission is the least bureaucratic approach that we have found. It consists of seven commissioners who are not county employees, but citizens who volunteer their time and expertise to lead the Housing Bank.

Second, the Housing Bank Commission can accept tax deductible donations of money or land.

Third, the County can issue tax exempt bonds on behalf of the Housing Bank Commission to provide an important source of low interest money that is needed for a complete financial strategy.

Fourth, in Washington State, there are strict regulations as to what organizations can act as an agent of the government in making spending decisions. A county commission is one such organization, subject only to approval by the County Council.

On February 28th, the County Council approved an ordinance establishing the Housing Bank, consolidating several existing programs and providing authority to address the problem of affordable housing across the full spectrum of incomes up to and including moderate and middle income.

How will the Housing Bank Operate? There are a number of legal constraints on how the Housing Bank can operate to assure that public funds are spent for the public benefit. County Code 2.27 as modified by Ordinance 3-2006 specifies how the Housing Bank will operate and Ordinance 2-2006 specifies how the real estate excise tax revenue will be spent.

Specifically, "the County, through the Housing Bank will not directly develop, own or operate affordable housing units." Rather, the Housing Bank "shall solicit the cooperation of state and federal agencies, other local governments, for profit builders and developers, non profit organizations, non profit organizations providing affordable housing or housing-related services in the County, and similar agencies and organizations." Through competitive grants and loans, the Housing Bank will assure that all funds are applied in a manner that is consistent with local, state and federal law. For the first time, San Juan County will have a cohesive plan for addressing this critical problem with local organizations implementing housing to meet local needs.

How will the Housing Bank be Funded? It will be funded by a variety of different sources--some public and some private. The ordinance establishing the Housing Bank consolidates under this one Commission a number of existing modest funds addressing low income and below. In addition, a one half of one percent real estate excise tax is being proposed to provide more substantial funding to extend coverage through the moderate level ($48,000 to $57,000 for a family of four). Jobs within this income range include such vital public functions such as law enforcement officers, fire fighters, teachers, medical personnel and other such public service functions.

A myriad of other funds will also be sought through other private and public sources to extend coverage across the full spectrum of need including middle income families. For example, the Washington State Affordable Housing Finance Commission provides low interest construction loans and mortgage programs for income levels up to and including middle income ($72,000 for a family of four).

How will funds be spent? The mechanics of how the funds will be spent is specified by law. The Housing Bank must use a competitive solicitation process in which programs are publicly advertised and grants and loans are awarded to eligible and qualified recipients. The Housing Bank Commission selects projects to be funded and final approval is made by the San Juan County Council. The Housing Bank is required to implement appropriate management and financial controls to assure that statutory limitations are met and that all supported projects reflect sound financial management. Further, the Housing Bank is required to report to the public on both the current assessment of need and the progress in meeting that need.

How will the Housing Bank be staffed? Finally, the most essential element of good management is attracting qualified individuals to staff the Commission. We are fortunate to live in a county with a wealth of highly skilled and experienced individuals who are willing to donate their time as Housing Bank Commissioners. The County Council advertises for vacancies and appoints commissioners. In anticipation of successful passage of the real estate excise tax, the County Council will review candidates with qualifications in finance, the private mortgage market, project management, legal issues relating to housing and property, architecture and construction, affordable housing, grant writing, and public administration. A salaried Executive Director will provide continuity, additional expertise, and support to the Commission.

Beyond these requirements there are a number of priorities that will be pursued:

Economic benefit: The County shall place a high priority on programs and projects that benefit residents of the County; that provide housing for employees to diversify the County's economic base and provide a more balanced, year-round economy.

Needs of individual islands: The Commission shall seek to balance the affordable housing units developed through its programs among the various islands based on their population and needs.

Mixed income communities: The Housing Bank will give priority to projects that utilize both public and private funds to build homes for families across the spectrum of income including moderate and middle income.

Perpetual Affordability: To maximize the effectiveness of affordable housing programs and to minimize cost in the long term, the Housing Bank has a responsibility to safeguard the community investment by giving priority to approaches that assure that future residents will be able to afford these homes.

Use of local contractors: In order to sustain the local economy and promote the development of a continuing local capability to construct affordable housing, the Commission shall encourage local developers, local builders, local subcontractors, local suppliers, and local workers to participate in competitive projects.

Housing appropriate to the islands: Housing Bank will place priority on projects that conserve energy and water and are modest and friendly to the environment. Our island culture and climate encourage the construction of homes that reduce costs to the homeowner in the long term. These savings allow more homeowners to qualify for improved mortgage terms through programs like Energy Efficient Mortgages.

Durable, high quality homes: Because we are investing in the long term, the Housing Bank will place priority on design, materials, and construction techniques that result in homes that are low maintenance and will serve residents for a very long time.

These are bold objectives and it is important that we act while there is still time to meet the affordable housing needs of our community.

WE MUST ACT NOW! The Housing Bank is positioned for success: the enabling legislation been passed by the County Council, a plan has been developed on how the Housing Bank will operate, and we have the authority to assemble the volunteer staff. All that is needed now is your support: your vote will provide key funding necessary to address the need for affordable homes in our communities.

You will receive a special ballot in early May. Please take the time to be informed and vote before May 16th.

For more information and detail, please go to: www.SanJuanHousingBank.org

*The Orcas Research Group is a private non-profit organization that is dedicated to preserving island values through projects focused on producing a stable island economy. The Group accepts no grants or donations and all work is accomplished by volunteers.

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PART THREE

Crisis in Affordable Housing: Search for Financial Solutions
By Paul Losleben, Orcas Research Group*

We have established in the second article of this series that using private financing alone will not solve the problem and that public support for moderate income households and below is needed. This is not the entire story since there are also non-financial possibilities to consider. In this article, we will examine potential changes in public policy that might help and finally also consider tax alternatives.

Zoning has been a hotly contested issue over the last 15 years resulting in a controversial down zoning of potential housing density in San Juan County. Would easing zoning restrictions to permit higher density by increasing the supply of buildable parcels solve the problem? Unfortunately there are examples of other communities where this was attempted with undesirable results. A most tragic example is the Bitterroot Valley in Montana. The people of this naturally beautiful region opposed zoning restrictions. When the region was discovered by "outside money", the newcomers divided the land into ever smaller parcels at ever increasing prices. Today, the original residents believe that the beauty and serenity of the region has been destroyed. They have the same problem that we do; working families cannot afford to live in the community and there is increasing tension over growth. A change in zoning might increase supply and reduce prices in the short term, but the long term cost is unacceptable. A recent article in the Missoula Independent is a striking dialog on what could happen in the San Juans.

Use of public land is an important consideration for the Housing Bank. Nantucket Island, with a problem much worse than ours, has recently completed 12 rental units, built on school land, that are being made available to teachers. This project was made possible through a low interest loan from the Massachusetts Development Finance Agency which raises funds through tax exempt bonds. This project, however, illustrates the difficulty of providing affordable housing in a destination community. Even with the low interest loan and "free land" the rental prices of the units are exceeding HUD guidelines. We are hopeful that there is still time for this approach to work. The School Board on Lopez Island is considering such an option for teachers, and land might also be made available on Orcas and San Juan Islands. We know that use of public land can be an important part of the solution, but we also know that it will only be a part of the solution.

The Land Bank is often brought up as a potential solution to affordable housing, either suggesting the use of land acquired by the Land Bank or suggesting that the real estate excise tax supporting the Land Bank be reduced in favor of an equivalent tax to support the Housing Bank. Neither is a viable option. The properties owned by the Land Bank are restricted to conservation purposes by the enabling legislation. Surplus property may be sold for any purpose including affordable housing, but must be sold at market value, so there is no cost savings. On the second point, the Land Bank is a valuable and highly popular program which was approved for a term ending in 2014 with a vote of 73% approval. To suggest that we should choose between the mission of the Land Bank and the mission of the Housing Bank implies that we can only afford one or the other. Both are important to our residents and, with real estate sales at an all time high, we can afford both if we choose to.

Alternative sources of tax revenue were carefully examined once we reached the conclusion that the problem could only be solved with partial support from public funds. Washington State ranks 24th in the nation on overall state tax burden according to the Tax Foundation, with no tax on personal income and no tax on interest, dividends, or capital gains. While there are many different taxes in Washington State, the four largest, as a percentage of revenue, are sales and use (55.6%), business and occupation (18%), property (11.9%), and excise (6.7%).

Sales tax is imposed on almost everything that we buy including both goods and most services. In San Juan County, we pay 7.7% of which 6.5% goes to the state and 1.2% is a tax to support local government. There is no local option available to us at this time to increase our local sales tax, but we could introduce legislation at the state level, much as King County did to pay for their new stadium. It would require an additional 0.5% tax to bring in the roughly $1.2M to $1.6M per year that we estimate is needed and it would take 2 to 3 years to implement the legislation before we could bring it to a vote. Sales tax is generally considered to be regressive and is especially so in Washington State where many exclusions exist. For example, while we pay sales tax on most blue collar services, other services such as finance, insurance and real estate are exempt. Even if we could afford the delay, we conclude that a sales tax would have very strong grass roots opposition and would not pass.

The Business and Occupation tax is imposed on gross receipts of businesses and is unique to Washington State. This B&O tax is a highly unpopular tax in the business community and is a quagmire of exemptions, deductions and deferrals. There are presently extensive efforts underway to reform the taxes on businesses at the state level and it is highly improbable that a B&O tax to support affordable housing could be introduced in today's political climate.

Property taxes are the oldest form of taxation in Washington, predating statehood and are relatively low compared with the rest of the Nation. San Juan County has the lowest property tax rate in the state averaging 0.613% of assessed value, a situation tempered somewhat by the fact that we have the highest assessed value. There are a number of caps placed on property taxes at both the state and local level, the most severe of which is the 1% limitation on annual tax increases implemented in 2002. With real estate prices increasing by an average of 10% per year over the last 10 years and doubling over the last three years, the legal limitations on property taxes preclude it as a viable solution.

Excise taxes are essentially a sales tax on a specific item, in this case on the purchase of real estate. The San Juan County Council adopted an ordinance to be approved by the voters in May that will charge 0.5% on the sale of real property to provide grants and loans for the development of affordable housing. Real estate sales in a small county like San Juan are unpredictable, but the proposed tax has the benefit of tracking increased prices and thereby balancing the problem with the solution. There are three principle arguments that are raised in opposition. First, it is argued that this tax punishes those at the margin who we are attempting to help. As we pointed out in a previous article, it is now the disparity between home price and income that is the primary difficulty and not closing costs. Realistically speaking, there are already programs in place to assist low income families with closing costs and down payment if needed. Second, it is argued that those who will pay this tax do not get to vote. This is no different than any of the local real estate taxes which are voted on by current residents and not by future property owners. In this case, it is a one-time tax and thereby less intrusive. Third, it is argued that it is unfair since it is paid by a few for the benefit of everyone. This argument does not hold up since we pay sales tax on nearly every product and service with the notable exception of real estate and real estate commissions. If a buyer paid sales tax on real estate commissions it would raise nearly the same amount of money as the proposed excise tax.

Conclusion: The problem of providing affordable homes to working families in San Juan County is very complex and we have already waited too long to implement solutions. We believe that we have done a thorough job of examining alternatives and have assembled a "tool box" of approaches and sources of financing that we believe will address the full spectrum of need. The proposed excise tax is an important part of the solution and we conclude that it is not only necessary, but the best alternative available to us. We welcome suggestions and help to find other solutions, but in the short term at least, this is our best option.


For more information and detail, please go to: www.SanJuanHousingBank.org

*The Orcas Research Group is a private non-profit organization that is dedicated to preserving island values through projects focused on producing a stable island economy. The Group accepts no grants or donations and all work is accomplished by volunteers.


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PART TWO

While most people agree that we have a serious problem, taking the next step to look for serious solutions is much more difficult. People have shared lots of ideas with us, but the best response came from local builders who said, "The most constructive thing you can do is to find ways to finance affordable homes." We have taken that advice to heart.

This second article in a series of five will delve into defining the limits of what is possible using private financing and when public financing becomes necessary. In what follows, we attempt to strike a balance between what is reasonable for investors and what is fair to homeowners. We use the income guidelines defined by the Department of Housing and Urban Development (HUD) to define income ranges:

In 2006, median family income for a family of four for San Juan County is $60,300.
Low income is defined as $30,150 to $48,240.
Moderate income is defined as $48,240 to $57,285.
Middle income is defined as $57,285 to $72,360.
Slightly lower or higher ranges are defined for smaller or larger families.

Our local affordable housing organizations are finding it increasingly difficult to finance projects due to cuts in federal programs and increasing competition for state grants. Even with their best efforts, nearly all homes provided by these groups are restricted to low income and below. The result is situations where families with moderate and middle income cannot qualify for these homes, but still cannot afford homes in the islands.

The role of the Housing Bank as recently approved by the County Council is to serve as a financial organization that will address the full spectrum of need including moderate and middle income. The Housing Bank will build no homes, but will pull together sources of financing including both private and public funds to be used by existing and future local organizations to assure long term availability of affordable homes. As such, the Housing Bank and these local organizations will apply these funds within the constraints imposed by the funding sources. For example, the proposed real estate excise tax is constrained to moderate income and below.

There are literally hundreds of approaches to financing and there is only limited space in this article for detail. We will use a baseline home price of $300,000 for what follows. Practically speaking, we cannot expect to attract and/or retain skilled workers with homes less expensive than this. For those who are interested, we would be pleased to provide additional detail to support our conclusions.

What we know won't work:

With conventional 30 year fixed rate mortgages now at 6.125%, with a 10% down payment it would take a family income of over $75,000 to qualify for a mortgage to purchase a $300,000 housean income well above middle income. Likewise, Adjustable Rate Mortgages (ARMs) at 5.875% only reduce qualifying income by about $2,000, still above middle income. In today's climate of increasing interest rates, even with a cap, ARMs can spell financial trouble for families in the 3-5 year time frame and we do not encourage their use at this time.

Shared equity is an approach that has been used in commercial real estate and has become popular in residential real estate in the last 15 years. Basically, a third party investor becomes a co-owner of the property with the goal of refinancing or selling after 5 to 7 years so that the homeowner can buy out the investor. Both the homeowner and the investor benefit from significant tax breaks. On the surface, this sounds like a great idea, but the devil is in the details. Once annual real estate appreciation rates reach levels of approximately 10%, well below our current rate of 27% for 2005, the homeowner never catches up. This is especially true when increasing interest rates inhibit refinancing. For our example, the homeowner would have to increase family income by at least 50% to afford to refinance if the same interest rates as today were available. More typically, the homeowner would be forced to sell and would not have accumulated enough equity to purchase an equivalent home.

What might work:

Longer term mortgages might help. 40 year mortgages at 6.125% bring the income requirement for that $300,000 house down to $70,000, just within the middle income range, but still far above moderate income.

Second mortgages might help. We have proposed and hope to form a local investment group to help solve the problem of affordability. The strategy is simple. Our islands are blessed with a high percentage of investment income, most of which leaves the islands. For those who would be willing to invest locally, we can offer a modest income, reduce risk to the primary lender and reduce the composite interest rate paid by the homeowner. For example, offering a 4% return on 40% of the loan amount would result in an effective composite rate of 5.275%. This would reduce the qualifying income to $57,853, well within the range of middle income families. If this investment pool were made through tax exempt bonds, the rate of return to the investor would be competitive with other forms of investment.

Private land leaseholds where ownership of the land is retained by an investor and leased to the homeowner are now only marginally profitable because of the cost of land. While the purchase price of the structure may be reduced by one third to one half, the cost of the landlease including infrastructure maintenance, taxes, insurance and a modest return to the investor push the qualifying income for the homeowner up to the high moderate to low middle income range.

What is tested and proven to work:

Donations have been the mainstay of many affordable housing programs, especially at the lower income levels. We are fortunate to live in a county where we benefit from the generosity of our neighbors in the form of financial assistance and donations of their time and skills. We are grateful for this assistance, but are also realistic about the limits of this source of revenue.

Community Land Trusts are similar to private land leaseholds except that they acquire the land through either grants or donated funds. The land is owned by the non-profit trust in perpetuity and typically leased to the homeowner for 99 years or more for a token amount, typically $1. In return, the homeowner agrees to a resale formula that assures that the home will always be affordable to families at this same economic level. There are over 200 CLTs in the nation including four in San Juan County. It is falsely believed by many that CLTs remove land from the tax rolls. This is not true. Residents pay property tax on their home plus the value of the land at fair market value.

Sweat Equity has received considerable publicity through the success of Habitat for Humanity which relies on donations, volunteer labor and sweat equity to build low and very low income homes. Using the slogan, "A hand up, not a hand out," the group emphasizes community action, often faith based, and a heavy dose of homeowner participation both through 500 hours labor and demonstrated financial responsibility. In San Juan County, Homes for Islanders is a countywide non-profit organization based on a similar strategy with partial support from the U.S. Department of Agriculture. As much as 40% of the cost of the structure can be saved using this approach.

Life Cycle Costing and Value Engineering addresses the total cost of the home including not only construction, but maintenance and repair costs over the expected life of the home. Value engineering weighs the value of all the major components of a home against their cost including their life cycle cost. Value engineering asks important questions like, "Do you really need that?" as well as, "How much will it cost to replace that when it fails?" Both questions are important to our community investment in building an inventory of perpetually affordable homes for our island residents. Energy efficient mortgages are one example of how reducing the expected cost to the homeowner over the life of the home can be used to get favorable financing terms.

In conclusion, the Orcas Research Group has found that no single approach will solve the affordable housing problem by itself and it is only through the careful combination of approaches that we can hope to make progress. It is most important that we provide a continuum of solutions so that we can eliminate the problem of economic stratification of our community by putting all the low income people in an isolated development. By using combinations of public and private funding we look forward to a day when we can build mixed income communities. We can accomplish this by using creative private funding for middle income, by using the real estate excise tax to lower costs for moderate income and below and by using existing federal and state funding for low income and below.

The Housing Bank will serve as an important focus for this objective and the real estate excise tax provides a critical part of the funding that is not available from any other source.


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PART ONE

As a community we are facing a crisis in affordable housing. The word "crisis" is bandied about a lot lately and we would like to begin this series of articles with an emphasis on accuracy. We will begin with why we believe that our community is facing a crisis. We then expect to proceed in subsequent articles to address why it is urgent to address this problem now, what approaches have been investigated, what approaches work in other communities, why public support is needed and what the role of the newly established Housing Bank will be.

The Orcas Research Group started work on this issue about three years ago. Our primary focus up to that time had been projects to improve stability in the island economy. We came to the conclusion that our goal of creating stable year-round businesses employing local residents would not work. The rapid increases and high cost of island living result in labor costs that inhibit competition with mainland businesses. We found it very difficult to identify business opportunities where the new business had a competitive advantage that would bring mainland dollars to the islands. Even with salaries that are competitive with the mainland, we found that we could not retain or attract workers with essential skills. This led us to examine the problem and possible solutions.

Some demographics are now well known. We are losing our young working families. In the 1990 census our population aged 25 to 44 represented about 30 percent of our population. This is similar to demographics for Washington State and for the USA. For us, that was just over 3,000 people. Ten years later in the 2000 census this age group had dropped to 22 percent and the 2003 Washington State Data book reports that it had dropped further to 20%. We now have fewer than 3,000 residents in this age group while the population overall has increased by nearly 50%. This is a serious symptom of a problem, but does not clearly identify why our young families are leaving.

In 2005 the Orcas Research Group surveyed employers who offer our county's best and most stable jobsthose hiring our teachers, law officers, fire fighters, medical workers, and other service sector employees. The results were uniformly alarming. All employers reported an aging work force with extensive retirements of key personnel over the next five years and difficulty hiring and retaining workers with skills that are essential to maintaining the island infrastructure. All expressed the opinion that the cost of housing was a major problem.

Based on this information, we set about verifying that the problem of attracting and retaining skilled workers was real and that the cost of housing was the most serious contributor to the problem. We are all aware that inflation still exists and that the cost of nearly everything is higher in the islands. We become alarmed at increases in ferry fares, increased cost of energy, increased cost of water and the whole spectrum of products and services that we accept as essential to island living. But, these all pale in comparison to the rapidly increasing cost of housing, now nearly twice any other budget item for families in the Northwest according to the Bureau of Labor Statistics.

This takes us to the basic issue of housing affordability. The National Association of Realtors established the affordability index in 1970 and it is the commonly accepted standard. Locally, the Washington Center for Real Estate Research publishes the index for all counties in Washington State. A score of 100 means that a median income family can afford a median income home. This index takes into account the several factors that contribute to affordability. Salaries are higher, interest rates are lower than 25 years ago, a larger variety of financing options are now available, and costs of taxes and insurance are taken into account. Considering all of this, our islands are among the least affordable communities across the Nation, worse than King County (80) and much worse than neighboring communities in Island (87), Skagit (98) and Whatcom (83) Counties. Homes in San Juan County today are less affordable than they were when interest rates peaked at an unbelievable 18.5% in 1981 when the national index reached an all time low of 65. Today, the local index in San Juan County is much worse at 51! First time home buyers face an even lower index of 30. This will only continue to deteriorate as both prices and interest rates increase.

The reality of today's real estate market in the San Juans is that most working families cannot afford to purchase a home, no matter how hard they work or save. This claim flies in the face of what most of us would like to believe; that if you manage your debt, live modestly and work hard that you will be able to participate in the American dream of home ownership. Home ownership is an important investment in economicand day-to-daysecurity for families. Unfortunately, it is now out of reach for many of our residents.

There was a time when the down payment and closing costs were the most serious difficulties to be overcome. Today, with the median price of homes at $462,500, few families can afford the down payment, but it is family income that is the major barrier to home ownership. In our Bulletin #10 posted on www.SanJuanHousingBank.org entitled Home Ownership we presented the numbers. Assuming a purchase price of $250,000 (there are only three manufactured homes available in the current multiple listing service in that price range) it would require an income of $62,000 with a 10% down payment, 6% fixed rate 30 year mortgage. Saving for an extra year to increase the down payment from 10% to 20% only reduces the qualifying income needed for a mortgage by 1%. Saving more doesn't help much when the increasing cost of housing exceeds any reasonably expected growth in family income or savings.

Supply and demand would seem to address this problem except that two thirds of home purchases are made by non-residents as evidenced by real estate sales registered with the County last fall. Our housing market is dominated by outside economic forces. Prices are now so far beyond the reach of local salaries that conventional economics do not apply. Salaries can no longer be increased to the point that local residents can afford housing since local businesses would no longer be able to compete. Further, local public service providers don't have the legal flexibility to increase salaries to the point needed to afford housing. We are forced to acknowledge that the problem cannot be solved by just increasing salaries.

Basically, we are victims of living in a beautiful and desirable area. Demand has driven prices up to the point that our residents can no longer afford to purchase homes. Unless we do something soon, we will no longer be able to provide essential services to our residents. There is presently a serious shortage of nurses on San Juan Island. Our fire departments are having difficulty finding both volunteer and paid staff. Sheriff deputies are increasingly under financial pressure and cannot afford to purchase homes. Our public works department is losing people with key knowledge and is unable to find replacements. Half of the faculty in San Juan Island schools are retiring within the next 5 years. The list goes on. If these are our best jobs, what does that say about the rest of our work force? What does it say about our ability to sustain our community? It is a crisis in any sense of the word.

For more information and detail, please go to: www.SanJuanHousingBank.org

(*The Orcas Research Group is a private non-profit organization that is dedicated to preserving island values through projects focused on producing a stable island economy. The Group accepts no grants or donations and all work is accomplished by volunteers.)

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