Post contributed by Sam Lai:

If green, energy efficient homes are so hot right now, then why isn’t everyone doing it???

It seems like everyone’s going green these days.  When you buy your car, a tree gets planted in honor of your purchase, or the chemicals used to dry clean your shirts are “less toxic” than normal.  With every industry scrambling to get to the front of the green line, you would think that the housing industry should be no less affected.  And, with the amount of media attention on green, it would seem to indicate that we’ve reached a saturation point in every sector of society.  However, the availability of green housing seems relatively scarce even in the greenest corner of the left coast.

A recent report was published called the Green Building Value Initiative –Assessing the Market Impacts of Third Party Certification on Residential Properties by Earth Advantage Institute.

The report analyzed the market performance of third-party certified homes in the Portland and Seattle metropolitan areas.  Green homes are commonly recognized as homes that demonstrate a certain level of energy and water savings, CO2 reduction, improved indoor air quality and stewardship of resources.  Prior to the development of any certifications standards, consumers were left in the dark about the actual performance and attributes of homes which were being marketed as green or “sustainable.”  The analysis reports that certified homes in the Seattle metro area sold at a price premium of 9.6% and a 3 to 5% premium in the Portland metro area as compared to non-certified counterparts.  If this is the case, why don’t we see more available green housing stock in our Seattle metropolitan market?  Here are a few thoughts from the perspective of a certified residential appraiser in Seattle (me):

*Green Equals New

Although third-party certification of green homes has been an effective means to differentiate new construction green homes with a greater assurance of quality, certification of the refurbished existing housing stock has been non-existent or extremely uncommon.  Of the 500 homes sold in Seattle in the last 12 months that were marketed as being “green,” only 6 were built prior to 1990.  Of these 6 homes only 1 home was certified as green.  The other supposed “green” homes built prior to 1990 were marketed as having one or two marketable “green” characteristics such as low voc (volatile organic compounds) paint, non-toxic finishes, double-paned windows, energy star appliances, bamboo flooring, tankless hot water heater and energy efficient heat pump.  While many of these characteristics are certainly found in homes that are green, it is self evident that installing bamboo flooring is not enough to transform a conventional house into a “green” house.  One agent went so far as to write on the NWMLS marketing description that the house was “essentially like a brand new 3-star Greenbuilt home.”  In other words, “it’s not new or 3rd Party Certified, but trust me, it’s still green.”

*Live in a townhouse OR drive green?

The scarcity of available virgin home sites in these metropolitan areas also regulates the diversity of design characteristics of new homes that can be built.  Seattle is comprised of housing stock that was primarily developed prior to 1955.  While green/efficient housing is best fit for close-in metropolitan housing markets, these areas are typically already built-up of older housing stock with few development sites available.  The result is, of the 500 self-declared “green” homes sold in Seattle in the last 12 months, 442 were townhouses or ultra compact zero-lot-line cottage homes.  Would-be buyers of green homes are frequently forced to choose between a historic energy sucker built in 1926, a green triple level 2 bedroom townhouse designed for young professionals with no kids and no arthritis, or move to a “green suburb” and spend over an hour in traffic every day.

*New Equals Green

Seattle Department of Planning and Development has a reputation for being one of the most stringent energy codes in the country and is touted as achieving potentially 10-20% energy savings over ASHRAE/IESNA Standard 90.1-1999 and Standard 90.1-2004 respectively.  I’ve heard numerous builders, developers and buyers say, “Yeah, if you’re looking at a new house in Seattle, you’re already looking at a green house.” Right or wrong, there’s a pervasive perception in the marketplace and in the building industry that new homes in Seattle have already undergone a high level of scrutiny to pass Seattle’s increasingly strict energy codes.  Therefore, the perceived delta between the efficiency of a Built Green certified home and a conventional new home in Seattle may seem diminished both for developers and consumers.  

*Green Is Custom-Built

When asked about the current trend of deep green projects being developed and certified in the Puget Sound, the program manager at Built Green, Koben Calhoun, responded:  “We are pleased with the number of projects we have seen come through at the 4 and 5-Star levels. Particularly in the past two years the number of 5-Star projects has increased dramatically. At the end of 2007 we had around 16 or 17 5-Star projects (the 5-Star program started in 2004 so in 3 years we had that many), and now in the past two years we have added about 50 more 5-Star projects. It is definitely exciting and I am hoping we can keep the trend headed that way.” While the numbers for 4 and 5 Star homes seem encouraging for the green market as a whole, many of these deep green homes are custom built, luxury quality and not available for middle market buyers.

*Green – It’s For You, Too

Where will the next wave of certified Green/Energy Efficient housing for the masses come from?  I think the answer is right under our nose.  Existing housing stock in major metropolitan cities across the country can be refurbished and repositioned in the market as certified Green and Energy Efficient housing.  According to the U.S. Department of Energy, almost 75% of the buildings in the country were built prior to 1979[1].  Refurbished Green/Energy Efficient housing resonates with the values held by consumers in metropolitan markets on a number of levels:

*Reduce/Reuse/Recycle – nuff said

*Green home buyers can select close-in neighborhoods in walk able/bike able proximity to employment & goods/service centers

*Reduce greenhouse gas emissions from some of the guiltiest perpetrators (old residential housing)

*Existing housing stock is plentiful and allows for a much more diverse & cost effective Green/Efficient housing options

*Homes built in the 1950’s and earlier are 50% more compact than average new homes today.

More to come…

Post contributed by Aaron Fairchild:

I got back from the West Coast Green building conference recently, and I continue to be struck by issues of contrast. Green “do-gooders” and green “capitalists” mingle about with policy wonks like one big happy family. I have written about this contrast before. But what I continue to find is that, while tension still exists, we are for the most part coming together nicely. There are a lot of people out there who have been fighting for the environment and changing their behaviors for a long time. Some of these folks have a proprietary feeling regarding issues of the environment, but the majority holds open their arms to welcome in the mainstream. I see the convergence of three major sectors around a new green economic imperative or paradigm on the horizon: for-profit business, non-profit, and government.

On the government side, I had the opportunity to talk to a small business owner at West Coast Green named Nathan Doxsey who wanted his city to do more to support sustainability. Nathan owns a small real estate company in the city of Austin, and is focused on marketing Green homes. Nathan was instrumental in helping the city adopt a brilliant ordinance requiring most all residential homes to have an energy audit done during the purchase and sale of a home. Energy audits performed at the point of sale is just smart policy. Energy is a public good and the use and application of energy affects everyone in society. It is already a regulated resource and the thoughtful use and monitoring of energy should not be left entirely up to the free market. The arguments pro and con couldn’t be exhausted in one or even two essays. Needless to say, at G2B Ventures we are promoting a similar policy for the city of Seattle.

At West Coast Green I also listened to panel discussions that were full of good intention and short on actionable ideas. Those panel discussions brought me back a few years, because they had the activist feel without creating pathways to sustainability through profitability. However, I also met Adam Boucher at West Coast Green. His resume need only read: “Entrepreneur with a golden revenue model; eco-capitalist.” Adam is creating financing solutions at the project level in addition to bringing solar panel to over 100 homes in southern California. Go Adam!

More recently, this afternoon I was at a round table discussion at McKinstry sponsored by Climate Solutions talking about Federal regulation. That was the trifecta of for- and non-profit coming together with federal and state policy makers around the issue of climate change and cap and trade. I have rarely seen such as sense of possibility and urgency as I witnessed in that gymnasium.

In meeting after meeting, I have become more and more convinced the world is changing as you read this. All sectors of our society are pivoting toward green issues. Green had become code for being environmentally and socially responsible. Green equals awareness, but it shouldn’t only equal non-profit “do-gooder” or government bureaucrat. The free, public markets and making money is part of the economic green transformation. Note Apple rejecting the US Chamber of Commerce for its stance on climate change. Note Wal-Mart’s efforts to create a more sustainable supply chain. Note Daniel Pink’s video,  “the surprising science of motivation.” Green gives us a purpose to our businesses and makes those businesses more productive and profitable as a result. The green revolution is not only being televised, it is being brought to you in every sector of your life.

Post contributed by Aaron Fairchild:

I was recently invited by the Federal Reserve Bank of St. Louis to present in Louisville, Kentucky at a symposium on “Green” Finance Investing in Sustainable, Energy Efficient Developments. I was very honored to participate and to share what we are working on at G2B Ventures. You can download a PDF of the agenda here. There were a lot of other very cool programs presented, like The Babylon Project out of Babylon New York, and Enterprise’s Green Communities program.

I headed to Louisville with a healthy dose of humility, expecting to be an outlier from the speaker’s podium, and left there with the impression that I was indeed an outlier, but only because I was one of the only speakers talking about for-profit approaches to improving our existing residential building stock. In fact, G2B was the only group represented on stage with a for-profit solution to improving the energy efficiency of existing single family housing. As a result, I had a great time sharing what we were working on and enjoyed several questions and discussions about how to implement a program similar to ours in Louisville and beyond.

I also left Louisville with a new outlook on the city. They are making big strides toward energy efficiency, and Kentucky is working on retrofitting 10,000 homes with their Clean Energy Corps! I had the opportunity to visit a very progressive and fun hotel / museum, 21C, and would recommend the city to anyone interested in visiting. Thanks for the hospitality Louisville and thanks to the team at the Federal Reserve Bank of St. Louis.

Post contributed by Aaron Fairchild:

Social Capital Markets 2009 (SOCAP09) - “It’s All About the Bag”

Last week I was at a conference in San Francisco called SOCAP09. The focus was social capital markets and the eco-system of related investors and entrepreneurs. The first two lines of the SOCAP Conference Guide read, “There’s so much happening at this conference, it’s hard to know where to begin. But when you get right down to it, SOCAP09 is about the bag.” The organizers decided to highlight a bag created out of Indonesian garbage heaps as an example and symbol of what SOCAP09 is about. The bag and the business model aren’t scalable and nowhere near having the kind of volume or sales and distribution that allows for a sustainable business. In his opening address, conference organizer Kevin Jones talked at length about the bag that the XSProject created through the guidance and vision of Ann Wizer.

After Kevin finished his opening he handed the microphone to Sonal Shah, Director of the White House Office of Social Innovation. Sonal went on to discuss how the government is looking for great ideas that have the ability for scale, and spoke about the Serve America Act and the need for participation across sectors to address our social issues. Nowhere in her discussion or in the panel she was a part of after did they mention the role of for-profit businesses. They spoke to non-profits, foundations, and government programs. Finally, during the Q and A time of the panel someone asked about the role of for-profits and investment capital in search of returns as well as impacts. I thought to myself, “I flew down to San Francisco because here we are on the cusp of a massive, national and global social transformation, and it is all about the bag?” Capital and financial markets have begun investing in companies, organizations, and strategies that take into consideration social and environmental impacts, traditional economists consider these externalities that should be ignored, and it is all about the bag? Investments that account for these externalities are predicted to grow to 5% to 15% of total invested capital by the year 2015, this represents trillions of dollars, and the organizers of Social Capital Markets 2009 highlight a humble bag and non-scalable business model? I left the first day feeling skeptical if not a bit cynical.

I got to the conference early the next morning for some coffee and I ended up running into Kevin Jones. Kevin is a big, red faced man with stony-tint glasses and a very unassuming style. After the pleasantries and congratulations I learned that last year they had just over 600 participants (good for the first year), and that this year they had around 1,000 participants. I asked him where SOCAP was going, and he said they would like to have more entrepreneur grants next year and that he would like to eventually see somewhere around 1,500 entrepreneurs along with the cadre of fund managers and investors large and small. So then I asked where are social capital markets in general headed? He told me the first panel of the morning would be addressing that question. When I pushed him on my observations from the first day and the slant toward non-profits that I felt, he disagreed wholeheartedly and said that his intention for the conference was to highlight and encourage profitable solutions that considered and accounted for environmental and social impacts in their business models. He insisted that capital was flowing in larger and larger amounts in that direction as investors understood that the externalities of yesterday are not the externalities of today. Okay, okay… I decided to approach the morning’s sessions with an open mind.

I could not have been better rewarded for the renewed outlook and came to understand the symbolism of the bag. I found it astounding that the conversations I had throughout the remainder of the conference with investors, fund managers, and entrepreneurs alike often became philosophical and reflective while at the same time there was a transcendent feeling that those of us in this sector are sitting on a geyser.

Charly Kleissner talked about holistic investing and “going away from black and white." He sees investment capital moving away from “or” and to “and." Dan Crisafulli talked about enhanced transparency and larger partnerships between private and government capital as the need to “move the needle” on our social and environmental issues continued to become more intense. Amit Bouri talked about greater standards that are widely accepted by the social capital and financial community alike, such as Impact Reporting and Investing Standards (IRIS). I talked to a Canadian investment adviser about meekness and power appropriately placed.

I also had conversations with 3 other fund managers that in many ways were like listening to recorded conversations we have had within G2B Ventures and our sincere belief that we are pointing the market toward profitable investment in existing residential energy efficiency, and doing our small part to help transform the market and the world. Yet we remain humble and open to advice and dedicated to transparency, we remain optimistic, and we remain convinced that the investments made in triple bottom line ventures like ours will help change a world where economies dictate the way we all live.

On the last day of the conference they convened an open discussion designed to give participants the opportunity to suggest ways that the XSProject could be turned into a viable and sustainable business. Businesses start with a seed idea, the idea takes root and begins to sprout through the thoughtful fertilization of outside ideas and inputs, the germinated seed then grows into a business through careful cultivation, hard work and applied capital. We all understand the cycle; the difference is our determination to make a difference in a world in need of change and that we know we don’t have all the answers and are willing to ask for help. The key to SOCAP was the humility interwoven throughout the conference and the determination to learn from the mistakes of the past while focusing on profitable solutions for our environmental and social problems. I returned to Seattle with my unbridled optimism intact – the bag had done its work.

Post contributed by Aaron Fairchild:

The same day that I received an email from a friend saying that he thought G2B Ventures just might be too early in the space and ahead of the market, I read an article in the Harvard Business Review about how, “smart companies now treat sustainability as innovation’s new frontier." There were a few articles in the September 2009 issue relating to green and sustainability. The lead article says that companies won’t grow unless they throw themselves entirely at green initiatives. I am in the thick of establishing the Efficient Real Estate Investment Fund, so naturally I tend to side with HBR over my thoughtful friend. Frankly, it is just amazing to observe how far we have come in the green and sustainability business world. We couldn’t have done what we are attempting to do in green real estate 5 years ago, but today it just makes sense.

When Harvard is saying the business world MUST go green to grow, you've got to think G2B is in the right space and at the right time, not just because we are doing good for the environment and society, but because we can make money at the same time.

Post contributed by Sonja Gustafson, LEED AP:

This week the New York Times published an article entitled “Some Buildings Not Living Up to Green Label," discussing the energy under-performance of buildings rated with the LEED system. (BTW, LEED stands for Leadership in Energy and Environmental Design, so energy matters!) The article cites various examples of LEED-certified buildings falling short of predicted energy efficiency and notes industry criticism of the lack of accountability in tracking actual energy performance.

I’m glad to see the discussion moving this direction, as any pragmatist will tell you that it’s all about how a building performs according to its green goals, not about some shiny LEED plaque on the wall. I do want to offer two comments about this discussion, however, that provide some perspective on the role of LEED in the building industry.

My first point is that the organization that oversees the LEED system, the non-profit United States Green Building Council, is not fighting the criticism, but in the past 2 years has been tracking the performance of buildings and provided much of the data that pointed out the deficiencies. As a result, last week the USGBC launched its Building Performance Initiative, which not only tracks energy efficiency but provides feedback to building owners to help address performance gaps. It also provides outreach and education to help architects and engineers understand energy issues before they begin building design. Tracking energy performance is now part of the conversation, and I’m glad to see it stick.

My other point has to do with why a building owner may elect to get LEED certification. “Green” covers a wide spectrum, and although energy use is certainly one of the most important (and required) components of LEED, there are other ways to reduce carbon emissions in building green. For example, a building owner might choose to locate her project in an urban setting in order to provide building users/tenants greater access to public transportation and services. Or, if the building is a redevelopment, it might conserve enormous amounts of energy by using materials and infrastructure that are already embodied in the existing building. Energy use by a building might be lower if the project were built from the ground up on undeveloped suburban land, but the carbon footprint might in fact be higher than a redevelopment due to increased commuting, parking needs, and greater need for virgin materials. Other buildings may choose indoor air quality as a top priority which will require additional energy consumption in ventilation systems. Green goals matter, so looking at a green building may require looking not only at energy consumption, but at the larger spectrum of green.

I’m glad to see the scrutiny being paid to LEED’s (ahem) leadership of energy performance. This rising tide of accountability will float all boats at a new level and perhaps even generate discussion on the variety of issues that matter in green buildings.

Post contributed by Aaron Fairchild:

Not too long ago I gave a talk at Bloom!, a local Seattle function where sustainable business entrepreneurs have 18 minutes on the clock to tell their story, answer questions and then move on.

It is a jazzy and frenetic format, and I had a lot of fun being part of the party-like speaking event. A week or so afterwards I asked the event organizers if they received any feedback on my talk, good or bad. The response was for the most part positive, except one person who commented that I was, well, “too capitalistic.” Pause… Deep breath… Contemplative grin…

I cut my green teeth nearly 20-years ago, at what was then, the hippy liberal University of Western Washington, taking classes on environmental justice and ethics. At the time I lived with Johnny D, an Earth First activist who used our kitchen as the hub that the local Earth First crew used to plan out their next monkey-wrenching action against the man. We thought that a career in environmentalism meant that you were either going to be an activist, an advocate in a non-profit somewhere, or an academic. No one at that time was considering capitalism’s role in the environmental movement. We considered capitalism to be the cause of our environmental problems, and not one of many remedies that can be used to cure them.

I understand where the comment after the speaking event comes from, and it continues to cause me to smile when I reflect on it. I don’t begrudge that perspective; I welcome the discussion as long as we don’t get bogged down in it. I continue to think it is amazing that there is even a discussion to be had, which is a sign of how far we have come. The fact is, markets that are allowed to run free within the regulatory framework imposed by society have efficiency, scope and scale far beyond academia, advocacy, and activism. However, we shouldn’t embrace free markets and capitalism at the expense of the others. They all need to co-exist and be cross-functional and supportive, but we must recognize that economy rules our world, and a fringe issue that is not embraced by the economy will always remain on the fringe. Until capitalism goes green, or the green movement goes capitalistic, society will continue creating brown fields, brown skies and toxic resources at the expense of future generations. Let’s take a peek into where capitalism is heading…

Daniel Goleman, the nationally known social psychologist and author of the #1 bestseller, Emotional Intelligence, recently completed a new book, Ecological Intelligence. In his book he explores how to remedy the lack of insight and understanding into the ecological impacts of the products we buy. He argues that by boosting our “ecological intelligence” we will collectively increase our understanding of the hidden ecological impacts and in so doing, bolster our resolve to improve them. He discusses how brain researchers examining purchase decisions have demonstrated that consumers’ emotional reactions to products’ ecological impacts matter for sales. Goleman examines how companies in several industries such Wal-Mart and industrial chemical production companies are already changing the way they manage their supply chains to address the need to limit their impacts and position the business to thrive in a radically transparent marketplace. He states that his mission is to, “alert businesses to a coming wave, one that will wash over any company that markets a man-made product.” He calls for “radical transparency” in the marketplace that allows consumers to be ecologically intelligent about the products they purchase.

Another new arrival on the marketplace scene is the L3C. The L3C is a “Low-Profit, Limited Liability Corporation.” This is a new type of LLC that is designed to attract private investors and philanthropists in ventures designed to provide a social benefit. An argument can be made that a new legally designated entity doesn’t need to be created in order for organizations to provide a social benefit. If a profit maximizing organization tackled the same business sector as a low-profit organization I would submit that it could provide a far greater social benefit. There are several issues that would need to be addressed to flesh out the argument, but the fact that there is an argument to be had is encouraging. The L3C is yet another sign of our progress and the nature of our progressive times.

There are more examples of capitalism gone green, from Socially Responsible Investing (SRI) to sustainable supply chain management. In fact, there are so many examples that I simply can’t mention them all, however, one example that is close to home remains. At G2B Ventures we are actively engaged in helping to support efforts in profitable environmental enterprise. We are working hard to demonstrate the value of smart energy efficient refurbishments in the residential housing market using a market-based approach that is acutely aware of public policy overlap into the sector. By being focused on profit maximization, and working with several local stakeholders to develop a market-driven premium for energy efficient homes, we will capitalize on the enhanced returns of energy efficiency to the benefit of our investors. If we can do this, we will be one more example that when green goes capitalistic, society and the environment are beneficiaries as well as the investor.

Post contributed by Aaron Fairchild:

Welcome to the residential world of green home living.  You can now buy a green built home with a variety of different certifications. From LEED for homes to Built Green 3, 4, and 5 stars to Earth Advantage homes, environmentally green homes are more and more available to interested home buyers. In fact, in the Seattle region 25% of all new residential home construction is built to a green building certification. But what about homes for rent? While there has been a lot of attention paid to “green leases” in the commercial real estate market, if you are in the residential rental market, and concerned about your utility costs and environmental impact, there are next to zero green rental options available to you. What gives?

The issue of “split incentives” is the culprit. In a capsule the issue is that the landlord generally doesn’t pay the energy bill and wouldn’t benefit from lower energy costs that come from investing in enhanced energy efficiency, and the tenant doesn’t own the home and is therefore unlikely to invest in energy efficient appliances or systems. This issue is of particular interest to me.

I am the Managing Partner at G2B Ventures, LLC. G2B is establishing an energy efficient residential real estate investment fund. The Efficient Real Estate Fund will buy primarily single family homes at deep discounts and then refurbish them with an eye toward energy efficiency. Once the investment properties are acquired and refurbished we will be renting them out to capture rental income during the life of the Fund.

Our property management team will tell you that newly refurbished or constructed homes generally command higher rents. While this helps us at the Fund, we will eventually recapture all of the costs of energy efficient and general improvements when we sell the properties.  But how do we increase our rents to help recapture the costs of energy efficient up-grades more quickly?

We are currently developing a model that shares the benefits of energy efficiency between the landlord, which in our case is the Fund, and the tenants. Here is what we are working on:

Step 1:

The landlord must start with an understanding of the energy costs associated with normal or average energy consumption and then baseline the property. For example, the landlord determines that during the winter months the average utility bill runs roughly around $250 and in the summer the rough bill is $200.

I am using easy to absorb numbers and I know this is a rough analysis so read on…

Now the landlord does the energy improvements and using the kWh savings for every measure installed she can easily calculate the monthly cost savings. Using our data for the Seattle area we roughly calculate that a smart $10k investment in energy efficiency can save roughly $50 per month. Using a $50 dollar per month savings we can now assume that during the winter months the average home occupant will spend $200 per month and during the summer he will spend $150.

Step 2:

The landlord will now offer the home for rent that includes the utilities within the rent payment. The rental rate is determined based on market rents plus the pre-retrofitted utility cost projection.  Rent including utilities is normally avoided because the tenant is not incentivized to conserve energy, which could end up costing the landlord dearly. However, in our model, if the tenant uses less than the baseline utility monthly expense ($200 in winter and $150 in summer), the landlord will share the savings with the tenant 50/50. Instead of a split incentive, we are aiming for a “shared incentive.” For example, if the tenant’s bill in the month of January were only $150, the tenant would receive a check for $25, and the remaining $25 would go back to the landlord.

Clearly this model requires enhanced sophistication on behalf of the landlord. Good tracking systems and transparency are absolutely necessary. However, the benefit is clear for the landlord…

Cons

•    Difficulty tracking
•    Cost of retrofit
•    Calculating the savings borne through efficiency

Pros

•    More quality tenants
•    Better relationship with tenant
•    Enhanced property cash flow
•    Enhanced asset value

…and for the tenant.

Cons

•    Generally higher rental rates
•    Landlord knows the utility consumption behaviors
•    Greater interaction with the landlord

Pros

•    Newly refurbished / clean / healthier rental
•    Rental characteristics align with values
•    Ability to receive energy savings checks every month the energy costs are below baseline.
•    Greater interaction with the landlord

by Aaron Fairchild:

You can’t go to a cocktail party these days without someone saying now would be a good time to invest in real estate. Of course, one question that always arises is, “When are we going to hit the bottom?” This is a question my father and I have been debating for the last several months. He owns and runs a local bank and my partners and I invest in real estate. He believes that the bottom is still out a fair bit, whereas I see clues that the bottom will be sooner than later. He is fond of telling me stories from the early to mid-seventies; these stories inform both of our opinions. To him, they indicate how bad it could get, and to me, they form a stunning contrast to today’s current market realities.

Let’s take a look at some of these historical clues that indicate the health of the Seattle market.  The first set of clues to examine appeared during the period from the mid 1970’s through the first quarter of 1988.  This period represented 13 difficult and depressed years in the region; the regional economic gorilla was Boeing, and they had just eliminated over 60% of their workforce, 64,000 people. According to my father, “during that time loan officers carried around quit claim deeds in their briefcases to take control of homes that laid-off Boeing engineers could no longer afford.” Furthermore, during that time he was typically lending to single-income households. There were fewer women in the workplace than today, and even if a woman wanted her income to count, FHA underwriting guidelines required a letter stating that she was using contraception.  Loan officers called it the “pill letter.”

Another story from my father relates to local consumer confidence.  At that time, he used to tell his loan officers that one of their jobs was to convince depressed real estate agents that they could actually find a client to help buy or sell a home.  People were leaving Seattle in droves, and driving past the famous billboard that read, “The last person to leave Seattle, turn out the lights.” It is hard to imagine how low consumer confidence really was, when today Seattle has far more employers than it did back then, and attracts a steady and diversified flow of employees capable of home purchases. The last time Seattle saw more people leaving than coming was in 1982.

Now let’s look at further clues that arose after the “Boeing Bust” that show what a sustainable real estate market looks like.  For the most part, my father and I agree that from 1988 until late 2000 was a period of stability in the market. Interest rates dropped into single-digit ranges, allowing homeowners cheaper and easier access to mortgages.  Inflation was low, and the economy in general was moving along steadily.  Most importantly, incomes were able to keep pace with increases in home values; as more households took on second incomes, there was more money in the household to buy or upgrade homes.  Fortunately, while there was easier access to capital than in the 1970’s, underwriting guidelines remained conservative.  To put less than 20% down on a property, you generally needed to purchase Mortgage Insurance and stringent debt-to-income underwriting ratios provided sustainability in an otherwise solid real estate market.   During this time, the correlation between incomes and housing prices remained generally constant.  This was a time of prosperity and sustainability where housing values increased at a rate of roughly 5% per year between 1990 and 2000.

The run up in property values between 2000 and 2007 provides a dramatic backdrop to where we find ourselves today. The incredible rise in property values came as a result of easy access to capital due to lax underwriting guidelines. These loans were unsustainably constructed by banks to sell into profit-thirsty debt markets.

The result in this chaos is, of course, the recent reckoning where mortgages defaulted, banks were forced to write off huge amounts of bad loans, and a glut of homes fell in foreclosure precipitating a concurrent drop in housing prices.  Now we see our final clues to indicate the market has or will soon reach bottom: we observe a return to rational lending practices, an end to wanton speculation, and unprecedented government intervention in stopping the flow of home foreclosures and increasing consumer confidence.  Finally, the real estate market is now showing signs of normalizing to more predictable, rational levels as they relate to income levels and affordability.  The Seattle housing market has not been more affordable anytime during the last thirty years.

Although it is too early to tell who will win our debate, my father and I agree that the factors which drove down housing prices are finally correcting.  Time will tell where the bottom of the market is, but the question still remains at the heart of our debate, “Could it get as bad as it was during the depressed time of the early-to-mid 70’s?” My father’s stories create the backdrop to my outlook on our local real estate market and provide valuable insight and lessons; however it is hard to imagine going back to a time where Seattle experienced negative population growth, 12% unemployment, with predominately single-income households, and only one major employer.

The clues of contrast examined through his stories and prior economic indicators provide us with lessons from our past and demonstrate just how far we have come over the last 35 years. We have certainly made mistakes and have been guilty of greed, and as a result we have paid the price in a substantial drop in property values and the vaporization of wealth borne from home equity. However, when contrasted with the clues from our past, returning to the market conditions that existed in the 1970’s seems unlikely. I believe we are likely near the bottom of a fundamentally sound Seattle real estate market.