Wednesday, February 06, 2008
Kitsap Real Estate Market Report - January 2008
The National Association of Realtors has a current ad campaign promoting two topics, the value of real estate in building wealth and the long term value of housing as an investment. The campaign is a well intended reminder that purchasing a home is, over the long run, a good investment. Historically homes have appreciated in value at an annual rate of about 6%, a little more than than the rate of inflation. The ads do not so well represent the notion that home ownership brings a sense of pride and responsibility, which results in better communities and schools and more desirable places to live, qualities which are probably the sources of the political perks and tax benefits associated with owning a home. Although homes build value they are not easily converted to fund a retirement, since you still have to live somewhere. Also the NAR’s example comparing $10,000 invested in real estate vs the stock market ignores the differences in the costs of owning vs renting and also the not negligible costs of sale. While some savvy real estate investors earn extraordinary profit from periods of rapid appreciation that are part of the business cycle (and some currently suffer from the increased risk during periods of high appreciation), for most of us, real estate serves as a safe and dependable investment that accompanies its primary function of improving the quality of our lives.
Mortgage foreclosures have been the subject of numerous recent articles. According to Realtytrac, the foreclosure rate was up 75% nationally in the 4th quarter of 2007 (compared to a year earlier). About 1% of US households are in foreclosure. Nevada leads the way with about 3.4%. Washington ranks 21st with a little over half a percent. In practical numbers, Kitsap County has over 2000 active listings and Realty Trac lists about 300 properties coming up for auction (use the link for Washington and select Kitsap County from the search menu) and over 200 more so called REO properties (Real Estate Owned - that’s where the bank buys the house at its minimum bid at the auction and puts it on the market for resale). Checking the Realty Trac numbers against other sources (the Northwest MLS), we were only able to find about 100 listed properties, mostly short sales or bank owned properties (REO). Taking the MLS count as minimum and the Realty Trac count as a maximum, then between 5% and 20% of the properties currently on the market are in some stage of foreclosure. At least 20 of the 295 currently pending sales (7%) in Kitsap County are short sales, foreclosure, or REO properties. A recent report from San Diego indicated that more than half of the pending sales are from foreclosure or REO sales.
The home ownership rate is falling (now back to the levels of 2001), and a report from Calculated Risk claimed that the number of vacant new construction, rental, and resale homes could be as high as 1.65 million units, a large number in a market with fewer than 5 million residential resales each year. Another disquieting aspect of the foreclosure business is that distressed sellers are now receiving offers to show how to make an easy exit from their debt and housing problems for a fee. Realtors are receiving offers for fee based training to assist homeowners in renegotiating their mortgage debt. In our view, these offers in most cases are attempting to profit from the plight of others while providing little value for any of the parties. Another aspect of this is that the percentage of homeowners choosing to default when confronted with negative equity has far exceeded the projections of the lenders and securities firms. While some home owners may see walking away from their mortgage obligation as their best option, we would caution that just as the banks are being encouraged to renegotiate terms with borrowers, so might the legal landscape for default be transformed to provide a stiffer penalty to those who choose to walk away when they still possess the ability to fulfill their agreement.
Housing prices tend to be strongly persistent - sellers are reluctant to lower their prices. If you’ve been gaging the Kitsap market by how prices have changed, things may not look too bad - but you should not be misled. If we focus on inventory levels, we can predict that prices must decline. Currently Kitsap County has an inventory turnover rate of about 13 months. In rough terms a neutral inventory is about 6 months supply of homes, so we argue that there is a very substantial possibility that prices will fall to allow the inventory to be reduced. 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 January (2105 listings) was up 9.8% from December and 33% higher than a year ago. The number of year to date pending sales was down 9% compared to a year ago. Pending sales were relatively good in South Kitsap west of Highway 3, West Bremerton, West Central Kitsap, and Poulsbo. The number of YTD closed sales Countywide (see graph below) is minus 25% compared to a year ago - a big drop - and down 16% from last month. Obviously the YTD numbers are the same as the numbers for January. The hope from the pending sales report is that we’ll see some improvement in closed sales next month.
Prices are steady…
The median price has been falling, but January’s median price ($278,553) rose 5% compared to the median closed sale price in the months of November and December. Median price was down 4% percent from the YTD closed sale price in December (see graph below). The median price has fallen less than 1% 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 dropped 1.4% to $344,950 after remaining steady at about $350,000 for most of last year. The inventory turnover (total homes on the market divided by number sold last month) is 13 months, way up from 9.9 months in December. The pending sales in January appear to show that we can expect the turnover to improve in February. A year ago this number was 7.4 months. Today a seller has a 8% 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. Most areas have slipped some in the past month. The year to-date-numbers for the first month of the year are always highly variable, so don’t put too much stock in these yet. Here is a snapshot:
Bainbridge Island -59% (-4% last month)
Poulsbo +17% (+31% last month) - 33 of 42 pending are new construction
Bremerton 0% (-23% last month)
Kingston -50% (-11% last month)
Silverdale -17% (+2% last month)
Port Orchard -36% (-8% last month)
Olalla -29% (-25% last month)
Statistics not compiled or published by NWMLS
