Tuesday, February 19, 2008
Mid February Kitsap Real Estate Outlook
Since the start of February, the national news has focused on a few new aspects of the current real estate market. Congress approved and the President signed an economic stimulus bill that will provide rebate checks to many households and also raised the loan limits for FHA loans and for loans conforming to the underwriting standards for Fannie Mae and Freddie Mac. Current loan limits of $417,000 are to be increased to as high as $729,750 in areas with the highest median home prices. In other news, a Federal anti-trust suit in New York has been filed against the four largest title insurance companies for alleged kickbacks that increase the cost of title insurance to homeowners. The State of Washington recorded its first ever (since records were started in 1994) year over year price decline. Median prices were down 2.5% statewide in the 4th quarter of 2007 compared to 2006.
Much news is now being devoted to the plight of monoline insurers (companies who insure municipal bonds and mortgage backed securities against default) such as FGIC Corp, MBIA, Inc., and Ambac Financial Group, Inc. These companies face lower credit ratings as a result of their exposure to subprime mortgage defaults. They have insured the collateralized debt obligations and other securities backed by home mortgages, and thus have guaranteed to pay the principal and interest on these securities in the event the issuer fails to do so. With the large rise in foreclosures, these securities have plunged in value, and the monoline insurers are suffering large losses. In turn the large losses are eroding their credit rating, which has always been AAA and served as a symbol of confidence in all the securities that they insure. While insuring mortgage backed securities has grown their business in the past few years, these companies were first formed to insure the municipal bonds of cities and communities. When the insurer’s rating falls, so do the ratings of the municipal bonds they insure, and this has resulted in falling municipal bond prices. Well heeled rivals such as Warren Buffett’s Berkshire Hathaway Assurance Corporation have proposed to step in and take over the municipal bond insurance business from the troubled monoline companies. They may be forced to split their businesses in two, cleaving the riskier mortgage backed securities insurance portion from the municipal bond and other insurance programs. One aspect of the market affects another - Buffett’s offer to reinsure $800 billion worth of municipal bonds caused investors to sell treasuries and mortgage backed securities so they could buy municipal bonds, which they now view as a safer investment. This caused treasury and mortgage backed security prices to fall and ultimately raised mortgage rates, reducing housing affordability, which we’ll discuss in the next section.
As we demonstrated last month, 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. Last month we reported that affordability had improved significantly in recent months. 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 2001 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. The affordability index fell to 1.02 in February from 1.11 last month. First time buyer affordability fell to .89 from .97 in January.
| Year | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|---|---|
| Annual Average interest rate | 6.54 | 5.83 | 5.84 | 5.87 | 6.41 | 6.34 | 5.96 |
| Median Income | $52,701 | $53,160 | $53,923 | $54,582 | $58304 | $60719 | $65000 |
| Median Price | $165900 | $184000 | $206900 | $250000 | $275000 | $290343 | $278553 |
| Monthly payment | $880 | $867 | $975 | $1182.43 | $1378 | $1443 | $1330 |
| Affordable payment | $1,098 | $1,108 | $1,123 | $1,137 | $1,215 | $1,265 | $1354 |
| Affordability Index | 1.25 | 1.28 | 1.15 | 0.96 | 0.88 | 0.88 | 1.02 |
| 1st time buyer payment | $674 | $693 | $780 | $946 | $1102 | $1155 | $1064 |
| 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 | 0.89 |
Here are the current statistics for Subject To Inspection (STI) and Active Listings (comparing the number in mid February to the number in mid January). You'll recall that STI represents a newly signed around contract prior to the buyer and seller agreeing on the home inspection. Below we show the number of STI contracts signed around in the first 2 weeks of the month. The number of STI contracts is the best gauge for telling us in near real time how many sales are occurring. Some of these sales will fall apart before they become pending sales.
| Area | STI 02/15 | STI 01/15 | Active Listings 02/15 | Active Listings 01/15 |
|---|---|---|---|---|
| S. Kitsap W. of HWY 3 | 7 | 4 | 160 | 148 |
| S. Kitsap E. of HWY 3 | 6 | 2 | 152 | 139 |
| Port Orchard | 8 | 7 | 173 | 168 |
| Retsil/Manchester | 3 | 3 | 130 | 120 |
| Seabeck/Holly | 3 | 4 | 96 | 96 |
| Chico | 0 | 4 | 31 | 34 |
| Silverdale | 6 | 4 | 111 | 101 |
| W. Bremerton | 9 | 4 | 218 | 228 |
| E. Bremerton | 9 | 4 | 94 | 99 |
| E. Central Kitsap | 6 | 5 | 149 | 140 |
| Hansville | 2 | 1 | 53 | 46 |
| Kingston | 1 | 0 | 78 | 74 |
| Port Gamble | 0 | 1 | 25 | 23 |
| Lofall | 4 | 1 | 33 | 34 |
| Finn Hill | 0 | 4 | 77 | 67 |
| Poulsbo | 5 | 3 | 139 | 128 |
| Suquamish | 1 | 1 | 43 | 40 |
| Indianola | 2 | 0 | 36 | 35 |
| Bainbridge | 4 | 5 | 218 | 185 |
| Totals | 76 | 57 | 2016 | 1905 |
STI deals in February increased by 33% compared to the first two weeks in January. The activity is down 39% compared with February 2007. The number of active listings in our residential inventory increased by 6%. The inventory fell in some areas and increased in others. The ratio of sales to number of active listings rose from 3.0% to 3.8%. About 80% of the sales were under $400,000 and 58% were under $300,000.
We have been doing this mid month review for more than a year now. Here are graphs of the cumulative data.
As we said above, interest rates rose as investors moved away from treasuries and mortgage backed securities. February’s APR is 6.48% on a 30-Year and 6.126% on a 15-Year, both Conforming. January’s rates were 5.846% on a 30-Year and 5.368% on a 15-Year, both Conforming. Interest rates have risen more than they fell last month. If you qualify for FHA or VA loans, these programs have become much more attractive for low downpayment buyers. 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://www.wellsfargo.com/mortgage/rates.
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
