Kitsap Real Estate Market Report - April 2008
Since the start of this month the most amazing market trend has been the ability of financial markets to tolerate relatively bad economic news without collapsing. At the end of April stock markets were near their highs for the year. The TED spread, which is the difference between the 3 month Treasury bill interest rate and the 3 month LIBOR and is widely used as a measure of liquidity and the degree to which banks will lend to one another, has fallen below 1% after being higher for most of March and April. (In times of good liquidity, this spread has ranged between .1 and .5%.) During this same period, Fannie Mae reported a $2.2 billion loss, AIG reported a $7.8 billion loss, UBS reported an $11 billion loss, WaMu reported a $1.14 billion loss, and there were as well several other reported institutional losses or near bankruptcies. Apparently the sky is not falling.
A recent article by the Wall St. Journal’s David Wessel neatly summarized the current status of the mortgage crisis.
Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.
Moody’s Economy.com estimates that one in roughly 12 American families with mortgages—four million in all—already owe more than the current value of their homes. They are said to be “underwater.” The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue to pay mortgages on time. Many won’t, and are at risk of losing their homes.
The Treasury Department has been pressuring lenders of the Hope Now Alliance to adopt uniform voluntary criteria to speed the time for qualified borrowers to modify mortgages they cannot afford. The House of Representatives has approved the bill sponsored by Rep. Barney Frank, which would provide for $300 billion to help qualified homeowners facing foreclosure on their present mortgage obtain, in exchange for lenders writing down a portion of the current mortgage, a new fixed rate mortgage insured by the FHA. A weakness of this plan, as well as for the current Treasury efforts with the Hope Now Alliance, is how to address mortgage debt owed to second or subordinate position lenders, who are generally unwilling to cooperate with the commitment of the lender in first position. This is of interest in Kitsap County, which has a higher percentage of second mortgages than most other parts of the country. A new program by Fannie Mae, to be introduced at mid year, would allow refinancing up to 120% (no cash out?) without reduction in principal of the current loan. This may hold some promise.
The fear currently being expressed by leaders in banking, government, and the press is that many homeowners will give back their homes rather than continue to pay once their mortgages are worth more than their homes. While there is anecdotal evidence that investors may be doing this to some extent, a recent LA Times article notes that for most homeowners, the falling house value will not cause them to walk away if their mortgage is affordable. These homeowners understand that housing is a long term investment. Current foreclosure problems are mostly because people don’t know what to do once the huge payment shocks of exotic mortgages finally hit. If government relief can mitigate this circumstance, it will do much to restore order in our market even as home prices continue to fall.
Housing prices tend to be strongly persistent. Sellers are reluctant to lower their prices and tend to hold on to the price they want until a willing buyer can be found. Buyers know that values are falling and therefore seek extra value at a lower price to shield themselves from equity loss in the future. Our market expresses this inability of buyers and sellers to agree on price through a falling number of sales. If we focus on inventory levels, we can predict that prices must continue to decline. Currently Kitsap County has an inventory turnover rate of about 10.7 months. In rough terms a neutral inventory is about 6 months supply of homes, so we argue that prices must fall to allow the inventory to be reduced. Falling home prices will improve affordability (bring home prices back within balance with current incomes), which is vital since the exotic mortgages that artificially propped up prices have been removed from the lender’s shelves. Shown below are graphs of inventory and inventory turnover for Kitsap County in 2007-08 - note that inventory has risen significantly since the end of 2007.
Residential Highlights
Kitsap County residential inventory in April (2301 listings) was up 6% from March and 24% higher than a year ago. The number of year to date pending sales was down 30% compared to a year ago. Pending sales were off significantly even in Poulsbo (down 16%), where pending sales have been up for over a year because of a plentiful supply of low cost new construction undercutting residential resale prices. Poulsbo was plus 7% last month and plus 32% the month before. 41 of 44 current pending sales in Poulsbo are new construction homes. The number of YTD closed sales Countywide (see graph below) is minus 25% compared to a year ago.
Prices are falling…
The median price has been falling, but April’s YTD median price ($270,000) is up just a few dollars from the median in March (see graph below). The YTD median price has fallen 5.3% from a year ago. It’s vitally important for sellers to be the most competitively priced among their competition if they want to generate an offer.
Seller expectations…
The median list price for the year remained nearly level at $349,900. Median list price was steady at about $350,000 for most of last year. It’s interesting that this number has held steady even when the median closed sale price has declined - further evidence that many sellers are holding out for a buyer at their price. The inventory turnover (total homes on the market divided by number sold last month) is 10.7 months, down from 11 months in March. A year ago this number was 6.6 months. Today a seller has a 9% chance of selling his/her home in a given month. Competitive pricing is essential, and almost every offer we see presented is negotiating on price.
The statistics for pending sales (compared to year-to-date sales last year) varied for different parts of the County. Here is a snapshot:
Bainbridge Island -54% (-54% last month)
Poulsbo -16% (+7% last month) - 41 of 44 pending are new construction. The surge in new construction sales started about a year ago.
Bremerton -31% (-32% last month)
Kingston -46% (-53% last month)
Silverdale -39% (-37% last month)
Port Orchard -37% (-39% last month)
Olalla -26% (-16% last month)
