Mid November 2008 Kitsap Real Estate Outlook
Several readers have encouraged us to be more upbeat in reporting about the Kitsap housing market. We certainly find the Noriel Roubini approach (US Recession to be worst in 50 years) to be almost gleefully depressing. On the other hand, today Citigroup sells for under $5 per share, the S&P 500 is at its 1997 level, manufacturing is at its lowest level since 1990, unemployment is at its highest level since 1982, and treasury yields are at a record low, with the 2 year T - bill falling below 1% for the first time. There are good reasons for most of the trading that is causing these steep negative trends. All sorts of leveraged financial positions are being unwound all over the globe as banks and funds are forced to sell to take tax losses, redeem mutual funds, distribute capital gains, respond to margin calls, cash out hedge fund investors, unwind carry trades, and a host of other reasons. This huge amount of leveraged debt has been compared to a large amount of cotton candy spun from a very small amount of sugar. Andy Kessler in the Wall St Journal advised investors to “Ignore the Stock Market Until February,” because the short term and year end issues are clouding the picture. What becomes clear in studying the various opinions is that no one has a handle on how things will turn out, people are doing the best they can, and it will be awhile before things start to get better.
Compared with the national economic and financial news, the real estate market in Kitsap County is positively sleepy. Home prices are falling - the median price is down 9.5% from a year ago and the number of closed sales is down 24%. Compare this with the San Francisco Bay area, where sales are at their best in 17 months after the median price has fallen over 40%. The trade off for our sales price remaining higher is that homes are more difficult to sell. The good news (in a sense) is that our affordability is improving, and prices are likely to fall further, helping to clear the excess inventory. The graphs below highlight how the number of sales and chance of making a sale have fallen over the past several years. The 2008 estimate shows YTD sales vs listings. Think of it as telling you that 70% of the homes coming on the market will not sell.
We can look at affordability as a means of seeing how close our market is to returning to its pre bubble conditions. The Washington Center for Real Estate Research provides local affordability calculations that we can use to check on housing affordability using current median prices and interest rates. Affordability improved at the end of last year when median sales prices fell significantly. We assume that a buyer making the median family income puts 20% down on the median priced home and obtains a 30 year fixed rate mortgage. We assume that a first time buyer making 70% of the median income puts 20% down and on a house priced at 80% of the median and obtains a 30 year fixed rate mortgage. We assume that both buyers can afford to spend a maximum of 25% of their monthly income on the principal plus interest of the loan. Using the annual averages of median price, median income, and average annual 30 year fixed interest rate since 2002 we plot an affordability index equal to the maximum affordable payment divided by the actual payment. When the index is greater than 1, the loan is affordable to the typical buyer. When it is less than 1 then some buyers cannot afford to purchase. Our numbers for 2008 are estimates using the latest monthly data for median prices and interest rates, and an estimated median family income for 2008. Since the Fannie and Freddie bail out, interest rates have dropped. The affordability index improved markedly to 1.11 in October from 1.01 last month. First time buyer affordability dropped to .970 from .89 last month. There is a second graph showing month-to-month affordability progress this year. Last month was the first month in since last spring that we’ve seen a significant improvement in affordability. Based on the pending sales from October, we expect that this trend will continue.
| Year | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|---|---|
| Annual Average interest rate | 6.54 | 5.83 | 5.84 | 5.87 | 6.41 | 6.34 | 6.10 |
| Median Income | $52,701 | $53,160 | $53,923 | $54,582 | $58,304 | $60,719 | $65,000 |
| Median Price | $165900 | $184000 | $206900 | $250000 | $275000 | $290343 | $252000 |
| Monthly payment | $880 | $867 | $975 | $1182.43 | $1378 | $1443 | $1222 |
| Affordable payment | $1,098 | $1,108 | $1,123 | $1,137 | $1,215 | $1,265 | $1,354 |
| Affordability Index | 1.25 | 1.28 | 1.15 | 0.96 | 0.88 | 0.88 | 1.11 |
| 1st time buyer payment | $674 | $693 | $780 | $946 | $1102 | $1155 | $977 |
| 1st time buyer affordable payment | $769 | $775 | $786 | $796 | $850 | $885 | $948 |
| 1st time buyer affordability index | 1.14 | 1.12 | 1.01 | 0.84 | 0.77 | 0.77 | .970 |
Here are the current statistics for Pending - Inspection and Active Listings (comparing the number in mid November to the number in mid October). You'll recall that Pending Inspection status represents a newly signed around contract prior to the buyer and seller agreeing on the home inspection. Below we show the number of Pending Inspection contracts signed around in the first 2 weeks of the month. The number of Pending Inspection contracts is the best gauge for telling us in near real time how many sales are occurring. Some of these sales will fall apart as a result of the home inspection results.
| Area | Pending Inspection 11/15 | Pending Inspection 10/15 | Active Listings 11/15 | Active Listings 10/15 |
|---|---|---|---|---|
| S. Kitsap W. of HWY 3 | 7 | 6 | 201 | 213 |
| S. Kitsap E. of HWY 3 | 4 | 0 | 181 | 184 |
| Port Orchard | 2 | 8 | 128 | 129 |
| Retsil/Manchester | 2 | 1 | 131 | 144 |
| Seabeck/Holly | 1 | 3 | 104 | 109 |
| Chico | 0 | 0 | 32 | 33 |
| Silverdale | 1 | 5 | 116 | 121 |
| W. Bremerton | 9 | 4 | 218 | 246 |
| E. Bremerton | 2 | 2 | 137 | 134 |
| E. Central Kitsap | 4 | 6 | 179 | 183 |
| Hansville | 0 | 2 | 51 | 56 |
| Kingston | 1 | 1 | 94 | 94 |
| Port Gamble | 0 | 0 | 17 | 22 |
| Lofall | 0 | 2 | 40 | 38 |
| Finn Hill | 0 | 3 | 82 | 90 |
| Poulsbo | 1 | 3 | 153 | 155 |
| Suquamish | 1 | 0 | 42 | 38 |
| Indianola | 2 | 0 | 40 | 37 |
| Bainbridge | 6 | 3 | 229 | 260 |
| Totals | 43 | 49 | 2178 | 2286 |
After a drop of nearly 50% last months from the level in September, the number of Pending Inspection deals in November fell by 12% from the first two weeks in October. The activity is 40% lower than it was in November 2007. The number of active listings (2178) in our residential inventory dropped about 5% from October and mirrors the seasonal decline we saw last year. The ratio of sales to number of active listings fell from 2.1% to 2.0%. About 77% of the sales were under $400,000 (down from 86% as last month) and 65% were under $300,000 (down from 76% last month).
Here is a graph of the mid month Pending Inspection data for the past year:
November's APR is 6.226% on a 30-Year and 6.126% on a 15-Year, both Conforming. October's rates were 6.48% on a 30-Year and 6.378% on a 15-Year, both Conforming. As you can see, 30 year interest rates have dropped since last month. If you qualify for FHA or VA loans, these programs have become much more attractive for low downpayment buyers. Limits for FHA and conventional conforming loans have risen recently to $475,000. Check with your lender to see if you qualify. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/.
