Thursday, June 07, 2007
Kitsap Real Estate Market Report - May 2007
Sales at Prowse and Company seem to be picking up after a month where many of our sellers chose to reduce price. The statistics in some ways belie the appearance of a very sluggish market that confronts us. The Wall St Journal this week reported that the listing inventory nationwide was rising at an uncharacteristic pace, and that the greatest rise in the country was in Seattle. The Kitsap County listing inventory has continued to rise sharply for the 3rd month in a row, and inventory turnover has fallen - it will now take 7.2 months to deplete the current inventory in Kitsap County. This rise in inventory is expected to put downward pressure on prices. Year to date pending sales are down slightly, and the number of closed sales is down about 10%. Pending and closed sales in Poulsbo are booming, with a significant portion of these coming from new construction. The Bainbridge Island market continues to improve also. Median sales prices have continued to rise despite the weakness of the market.
Residential Highlights
Kitsap County residential inventory in May (2199 listings) was up 12% from April. Inventory rose 13% in April and 6% in March. The May inventory was 44% higher than last year. Inventory levels in Kitsap County have not been this high since 1997. The number of year to date pending sales was down 5% compared to a year ago - down from minus 2% last month. Countering the downward trend, Poulsbo YTD pending sales are up 58% compared to a year ago. Of 56 current pending sales in Poulsbo, 39 are new construction, and most of these are presales that never appeared as active listings. Bainbridge Island year to date pending sales are up 14% from a year ago (they were up 2% last month). The number of YTD closed sales is minus 10% compared to a year ago - down from minus 9% last month. Poulsbo YTD closed sales are up 31% from a year ago. 16% of this year’s closed sales are new construction - mostly at Poulsbo Place II. Confounding the seeming hot market appearance in Poulsbo is that the days on the market for closed sales are 152 days - the longest wait to sell in Kitsap County. Poulsbo’s active listing inventory is actually lower this year than last - despite the huge inventory gains elsewhere. You may recall that the number of Poulsbo closed sales in 2006 were down about 25% compared to 2005 - the biggest decline in Kitsap County last year. Bainbridge Island closed sales were up 11% from a year ago.
Prices are rising…
The YTD median sales price of $289,141 rose 1.4% April after remaining steady for 3 months. This is up 8.7% from a year ago. It’s still important for sellers to be striving to be most competitively priced among their competition.
Seller expectations…
The median list price for the year rose 1.4% to $354,950 after remaining steady for more than 3 months. This is about 4.7% higher than a year ago - a gap that continues to narrow. The inventory turnover (total homes on the market divided by number sold last month) is 7.2 months, up from 6.6 months in April. A year ago this number was 4.3 months, and that was already reflecting a market slowdown from its 2005 levels. Today a seller has a 14% chance of selling his/her home in a given month, and that percentage is even lower if you come from a community with new construction, since new construction sales tend to displace residential resales. Competitive pricing is essential, and almost every offer we see presented is negotiating on price.
The statistics for pending sales varied for different parts of the County. Areas where sales were depressed the most last year (Bainbridge, Poulsbo) appear to have benefited most in this year’s market. Here is a snapshot:
Bainbridge Island +14% (+2% last month)
Poulsbo +58% (+41% last month) - 39 of 56 pending are new construction
Bremerton -19% (-13% last month)
Kingston +7% (+13% last month)
Silverdale +6% (+7% last month)
Port Orchard +8% (+8% last month)
Olalla -29% (-28% last month)
Saturday, June 02, 2007
How Psychology of Loss Affects Present Home Sales
Normally our market reports deal with pretty tangible information - how many homes sold this month compared to last, what percentage increase in the number of listings on the market, etc. This report concerns a softer, fuzzier topic - psychological factors we use to confront loss. Rather than represent this material as literal fact, we offer it as information for our buyer’s and seller’s consideration when they negotiate purchases or sales of real estate.
Burton Malkiel’s classic book about stock market investing, ”A Random Walk Down Wall Street”, contains a section devoted to behavioral finance. Malkiel cites the work of two psychologists, Daniel Kahneman and Amos Tversky, who disputed whether people are as rational as the economic models assume. He discusses some of the irrational ways we use to justify decisions meant to increase our profits or decrease our losses. Among these are overconfidence (80-90% of college students consider themselves to be safer, more skillful drivers), biased judgments (seeing trends that no longer exist based on past performance of stock or housing markets), and herding (following the conventional wisdom - such as daytrading and the furious chase after internet stocks in the late ‘90s). His section concerning loss aversion relates directly to our current housing market.
In a coin toss game where I offer to pay you $100 if it comes up heads but you pay me $100 if it comes up tails, researchers found that most people would not play the game. They had to increase the positive payoff to $250 (heads - I pay you $250, tails - you pay me $100) before a majority would play. Thus they concluded that a dollar loss was about 2.5 times as painful as a dollar gain was desirable. When confronted with a game where loss is certain, individuals prefer to gamble. For example in a study where individuals were offered the choice of A) Paying $750 or B) Draw Straws where they have a 75% chance of paying $1000 or a 25% chance of paying nothing, 90% chose B, even though the probabilities of A and B are the same. This same hope against the odds causes sellers to hold on to a higher price waiting for that special buyer who will pay more while losing out on other buyers who want to pay less.
A study of 10,000 clients at a large brokerage house showed a clear disposition among investors to sell their winning stocks and to hold on to their losing investments, avoiding the more painful effects of regret and loss. This aspect of our human nature is not rational and can work against an investor or home seller if not challenged.
“A similar reluctance to take losses appears to be evident in the residential housing market. When house prices are rising, the volume of sales rises and houses tend to sell quickly at asking prices or higher. During periods of falling prices, however, sales volumes decline and individuals let their homes sit on the market for long periods of time with asking prices well above market prices. Extreme loss aversion helps explain sellers’ reluctance to sell their properties at a loss.” Burton Malkiel, A Random Walk Down Wall Street
To overcome this reluctance to take losses, home sellers need to reframe on a larger scale the loss and its impact. What will be the income and costs associated with renting the property and not selling? If you have to move, will you still be ahead after several years if you buy a new home without selling and rent this one? Are you willing to rent at your new location so you can hang on to the house you don’t want to sell now? Do you have the time and desire to become a property manager? Have you accounted for the costs of maintaining the condition of your property after you rent it? How long in a new situation will it take to make up for this loss?
Homeowners who have held their properties for more than a couple years will in many cases not be taking an actual loss, only losing compared to their perceived peak market home value. They are willing to bet that the market will soon turnaround and resume its upward climb rather than selling for less now.
None of us is immune to this protective aspect of our human nature. However, once you become aware of the tendency, it might be beneficial for you to ask the questions and consider the long term impact of holding on to avoid the pain of loss.
Statistics not compiled or published by NWMLS
