Thursday, July 17, 2008
Mid July 2008 Kitsap Real Estate Outlook
News of real estate markets, home sales, and trends has taken a back seat this week to word of the second largest bank failure ever (IndyMac Bank) and the dramatic sell off of the stock of many commercial and investment banks, as well as the threatened failure of the two largest mortgage servicing companies, Fannie Mae (FNMA) and Freddie Mac (FHLMC), which are sometimes referred to as government sponsored enterprises (GSEs). Fannie and Freddie are private companies who purchase loans from banks and convert them into mortgage backed securities that are sold to investors. The GSEs charge a fee that is essentially the price of risk to them for guaranteeing to their investors that if the loan borrower defaults, the GSE will absorb the loss and continue to pay the principal and interest on the mortgage backed securities. Unfortunately, since they are government created companies with a Federal charter to help promote home ownership, there is an implicit guarantee that the government will step in if they have financial trouble, though senior government officials have denied this repeatedly over the years. This implicit protection and government sponsorship, along with the corporate tax benefits (they don’t pay state and local taxes, for instance), ability to borrow at low interest rates, and reduced capital requirements, has allowed the GSEs to compete very successfully against the private sector and grow to almost unimaginable size. They guarantee $5.2 Trillion in loans, and their executives have become wealthy and powerful - yet they function in some ways like a government agency. At the same time the government hasn’t had to carry the GSEs as a liability on its balance sheet. It appears that all this is about to change.
The GSEs have been protected financially by the underwriting standards they have imposed on banks that want to sell loans to the GSEs. So called conforming loans that meet these standards have low default rates - far lower than the subprime mortgage market. The latest conforming loan default rate is less than 1%. Conforming ARMs have had a higher default rate than fixed rate conforming loans. With house prices falling, this low default rate has been rising. The concern is that the GSEs do not have enough capital to cover their potential losses. The stock price of Fannie Mae has dropped about 80% since last fall, and about 45% last week (and more earlier this week). In response to this and despite previous disavowals of a government guarantee, the President has proposed to Congress a plan for the government to be able to purchase billions of dollars of stock in the GSEs, as well as extend them a line of credit at the Federal Reserve. GSEs can expect that there will be greater regulation in exchange for the goodwill they are receiving. Congressional approval is expected, but with the mortgage relief bill already in process in both houses, it is not clear how these new provisions will be incorporated. The cost to tax payers has been estimated in the tens of billions of dollars.
Almost under the radar of all this turmoil is the cover article in the latest issue of Barron’s Magazine, “Bottom’s up: This Real-Estate Rout May Be Short-Lived.” The article interviews Wellesley economist Chip Case, co-creator of the method for the S&P/Case-Shiller Home Price Indices. While some experts predict that home prices will continue to decline for many months, the article suggests that inventories may be stabilizing, the over supply of new homes has dropped considerably from the peak, and that prices in 8 of the 20 Case-Shiller cities actually rose in the latest report. Case noted that when new home starts have fallen below 1 million units (as is now the case) in the past, the housing market has turned upward shortly thereafter, often surprising the so-called experts. He also looks at affordability much as we do below, and sees that many parts of the country are making progress towards price to income ratios that existed prior to the bubble. While he acknowledges that a painful recession might temper his optimism about a market upturn, he stands out as one analyst who can see some light at the end of the tunnel.
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 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. 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. The affordability index rose slightly to 1.03 in July from 1.02 last month. First time buyer affordability rose to .90 from .89 in June. There is a second graph showing month-to-month affordability progress this year. It's up and down, sort of like the tug-of-war between buyers and sellers, and now reflecting loss of affordability because long term interest rates are rising due to fears about inflation.
| Year | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|---|---|
| Annual Average interest rate | 6.54 | 5.83 | 5.84 | 5.87 | 6.41 | 6.34 | 6.22 |
| Median Income | $52,701 | $53,160 | $53,923 | $54,582 | $58,304 | $60,719 | $65,000 |
| Median Price | $165900 | $184000 | $206900 | $250000 | $275000 | $290343 | $267450 |
| Monthly payment | $880 | $867 | $975 | $1182.43 | $1378 | $1443 | $1313 |
| 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 | 1.03 |
| 1st time buyer payment | $674 | $693 | $780 | $946 | $1102 | $1155 | $1051 |
| 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 | .902 |
Here are the current statistics for Pending - Inspection (formerly called Subject To Inspection (STI)) and Active Listings (comparing the number in mid July to the number in mid June). 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 07/15 | Pending Inspection 06/15 | Active Listings 07/15 | Active Listings 06/15 |
|---|---|---|---|---|
| S. Kitsap W. of HWY 3 | 4 | 4 | 229 | 212 |
| S. Kitsap E. of HWY 3 | 5 | 5 | 196 | 184 |
| Port Orchard | 7 | 4 | 165 | 164 |
| Retsil/Manchester | 4 | 3 | 160 | 139 |
| Seabeck/Holly | 2 | 2 | 118 | 112 |
| Chico | 3 | 0 | 39 | 35 |
| Silverdale | 0 | 4 | 142 | 125 |
| W. Bremerton | 8 | 7 | 259 | 232 |
| E. Bremerton | 7 | 5 | 144 | 126 |
| E. Central Kitsap | 10 | 6 | 179 | 180 |
| Hansville | 1 | 0 | 62 | 58 |
| Kingston | 3 | 1 | 108 | 102 |
| Port Gamble | 1 | 1 | 24 | 17 |
| Lofall | 2 | 0 | 56 | 46 |
| Finn Hill | 0 | 2 | 104 | 87 |
| Poulsbo | 7 | 5 | 174 | 157 |
| Suquamish | 1 | 1 | 42 | 41 |
| Indianola | 2 | 2 | 39 | 39 |
| Bainbridge | 7 | 6 | 300 | 298 |
| Totals | 74 | 56 | 2540 | 2354 |
The number of STI deals in July rose by 32% compared to the first two weeks in June. The activity is (incredibly) 32% higher than it was in July 2007. The number of active listings (2540) in our residential inventory increased by 7.9%, increasing in almost every area. The ratio of sales to number of active listings rose to 2.9% from 2.4%. About 81% of the sales were under $400,000 (up from 79% last month) and 70% were under $300,000 (up from 66% last month).
Here is a graph of the mid month sti data for the past year:
July's APR is 6.606% on a 30-Year and 6.252% on a 15-Year, both Conforming. June's rates were 6.733% on a 30-Year and 6.378% on a 15-Year, both Conforming. As you can see, interest rates have fallen slightly 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/.
Thursday, July 10, 2008
Kitsap Real Estate Market Report - June 2008
The economic turmoil that began with our housing market last fall has become more complicated and widespread. Your judgments about how to proceed in local real estate transactions depend upon your having a time horizon for when these more general economic conditions might improve. A starting point might be a recent article by New York University Professor Noriel Roubini, ”A deadly cocktail mix: the 1973 & 1979 “Stagflation” meets the 1990 and 2001 “Asset/Credit Bust” with the result being an ugly U.S. recession and sharp global slowdown.” Without going into any of the details, here is a simple list of factors that are influencing our local economy:
1. Real Estate asset bubble - so far about $300 billion in non performing loans have been reported by major banks, but with falling home prices, the number of homeowners who owe more than their property is worth is expected to approach 12 million. Potentially the losses could increase significantly, and several estimates say losses could top $1 Trillion. These losses reduce investment and economic output (moving us towards recession) and cause interest rates to go up.
2. Oil and commodity price shock. Oil has risen from $80 to $140 per barrel since last fall. While speculation might in some small way be contributing to this rise, world oil demand is currently exceeding world oil production. As in the ‘70s, this increases costs across a broad spectrum of the economy, reducing output (moving us towards recession) and increasing prices (inflation). Together these factors are called stagflation.
3. US twin deficit. Since about 2003, the budget has had the combination of both a government budget deficit and a trade deficit. This twin deficit reduces economic output (moving us towards recession) and causes inflation.
4. Exchange rates pegged to the dollar. Since the collapse of the Bretton Woods agreement in 1969, most major countries float their currency exchange rates up and down with the market, but China and several other Asian countries effectively peg their currency exchange rates to the US dollar. In the case of China, this has allowed the country to accumulate large net export surpluses to foster domestic investment and to focus on growth of exports. In effect this has kept our prices at Wal Mart unrealistically low for an extended period. If these currencies were allowed to float, they would have appreciated in value, reducing the Asian net exports and raising prices for their goods in the US. By continuing to undervalue their currencies, these countries have also helped foster commodity price inflation. As US purchases of consumer goods have faltered, the economies of these countries have begun to falter because they lack the domestic demand to balance this loss.
5. Government fiscal and monetary policy has been used to mitigate the effects of the factors above. The Federal Reserve has cut the federal funds rate (monetary policy) to stimulate demand for investment and implemented other strategies to restore liquidity to financial markets. These actions tend to counter the trend toward recession, but they also increase the money supply, which will cause inflation. The fear of rising inflation is why the Federal Reserve is talking about raising interest rates in the near future. Congress and the President passed a stimulus package that also added about $100 billion of government spending for citizens to apply towards economic output, but this also contributes to our budget deficit, and thus contributes to higher inflation.
6. The first 3 factors above move us towards recession and all 5 move us towards higher inflation.
A growing number of analysts foresee that this economic downturn will become a recession deeper than in 1990-91 and 2001, and subsequently will take a year or more for recovery. We have no crystal ball for the future, but if you are a home seller trying to predict when prices might turn around, you might make an assumption that closed sale home prices will fall at least another 5% in your area over the next year, and then rise at the rate of inflation for several years following. We think this scenario is pretty optimistic. It gives you an optimistic estimate of when home prices might return to the price you want for the sale of your home. You definitely cannot expect a resumption of the price appreciation that we saw the past few years. As a check on using the inflation rate as the rate of increase, we note that Kitsap County new construction prices rose at a 5.9% annual rate between 1998 and 2003.
The Seattle Times reported that June closed sales in Seattle were down 33.7% from a year earlier and that the median closed sale price had fallen 6% compared to a year earlier. In Kitsap County closed sales in June were down 32.4%, and the median closed sale price had fallen 12% from a year earlier. Kitsap County has a 10.6 month inventory of homes, where King County has a 5.9 month supply. The Kitsap market is much more of a buyer’s market.
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 10.6 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). Shown below are graphs of inventory and inventory turnover for Kitsap County in 2007-08.
Residential Highlights
Kitsap County residential inventory in June (2462 listings) unexpectedly fell 2.4% from May. Inventory is 5.3% higher than a year ago. To put this in perspective, there were 580 new listings and only 232 sales, so more than 400 sellers took their property off the market last month without a sale. The number of year to date pending sales was down 31% compared to a year ago. Pending sales were off significantly even in Poulsbo (down 39%), where pending sales have been up for over a year because of a plentiful supply of low cost new construction undercutting residential resale prices. 25 of 33 current pending sales in Poulsbo are new construction homes, but the pace of new construction sales has fallen off. The number of YTD closed sales Countywide (see graph below) is minus 32% compared to a year ago.
Prices are falling…
The median price has been falling, but June’s YTD median price ($267,450) is down less than a percent from the median in May (see graph below). The YTD median price has fallen 12% 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 $350,000. 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 10.6 months, somewhat improved from 11.9 months in May. A year ago this number was 7.2 months (not a good market back then). 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 -50% (-52% last month)
Poulsbo -39% (-31% last month) - 25 of 33 pending are new construction. The surge in new construction sales started about a year ago.
Bremerton -27% (-30% last month)
Kingston -56% (-42% last month)
Silverdale -38% (-42% last month)
Port Orchard -40% (-43% last month)
Olalla -26% (-23% last month)
Sunday, July 06, 2008
Kitsap Local Real Estate Markets in May
We have published this article monthly for most of the past year to explore some of the significant variations in the Kitsap Real Estate market. At the end of the first quarter the national home price data reported in the Case Shiller Index showed a drop of 14.1% compared to a year earlier. At the end of 2007, the index showed only an 8.9% drop. This story, of accelerating price drops across the nation, while not obvious in our local market, has been taking place here the same way it has been taking place in other parts of the country. Areas of lower priced homes where more subprime loans occurred have steeper price drops than in the higher priced areas. Foreclosure sales are a greater percentage of the sales in these areas too. Below are graphs of the month-to-month market fluctuations of total listings, number of closed sales, and median sales price for each areas. The descriptive comments for each area below cite the more consistent year-to-date numbers.
Total listings on the market by month for various Kitsap communities
Number of Closed Sales each month for various Kitsap communities
Variations in Median Price Month by Month for Closed Sales in various Kitsap communities
Bainbridge Island Real Estate
Residential homes on Bainbridge Island were selling for a YTD median price of about $640,000 at the end of May, a drop of 1.5% from a year ago. The May YTD median price for closed sales was about half a percent lower than last month’s median price; however, it is noteworthy that the median price for closed sales occurring in May ($537,000) was down 12% from the price of closed sales in April ($607,000). This is the second month in a row where monthly closed sale prices have dropped significantly. Kitsap County YTD median price has fallen 6.6% over the past year. The YTD number of Bainbridge closed sales is down 48% from a year ago, and the YTD number of pending sales is down 52%. The number of closed sales is down 26% Countywide from a year ago. The number of active listings on Bainbridge (311) is up 29% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 19.4 months, up from 16.7 months last month. Bainbridge Island is a strong buyers market.
Bremerton Real Estate
Statistics we refer to are for that part of Bremerton encompassing the downtown core and west to Kitsap Lake. The market for other parts of Bremerton and its suburbs should have approximately similar trends. Homes in Bremerton were selling for a YTD median price of about $178,000 at the end of May, about 19% lower than a year ago. The May median price for closed sales was 1.3% lower than the median for last month. Kitsap County YTD median price has fallen 6.6% over the past year. The YTD number of closed sales is down 29% from a year ago (compared to a Countywide drop of 26%), and the YTD number of pending sales is down 30% from last year. The number of active listings (252) is up 10% from a year ago, but has been nearly constant for the past 3 months. The inventory turnover (total homes on the market divided by number sold last month) is 10.5 months, an improvement from 11.8 months last month. The Bremerton market is weak, but showing signs that it is stabilizing.
North Kitsap Real Estate
Using the example of Kingston - the largest housing market in North Kitsap - homes were selling for a median price of about $340,000 at the end of May, down about 11% from a year ago and down about 18% from last month. Kingston prices fluctuate more than some of the other markets because of the lower listing and sales volume. Kitsap County YTD median price has fallen 6.6% over the past year. The YTD number of closed sales is down 44% from a year ago, and the YTD number of pending sales is down 43%. The number of closed sales is down 26% Countywide from a year ago. The number of active listings in Kingston (104) is up 25% from a year ago and up 5% since last month. The inventory turnover (total homes on the market divided by number sold last month) is 17 months. Kingston is a buyer’s market.
Poulsbo Real Estate
Statistics we refer to are for that part of Poulsbo encompassing the downtown core, from the head of Liberty Bay southeast to Ne-Si-Ka Bay, including parts north to Sawdust Hill Rd. The market for other parts of Poulsbo and its suburbs should have approximately similar trends. Homes in Poulsbo were selling for a median price of about $325,372 at the end of May, down about 9.3% from a year ago. Kitsap County YTD median price has fallen 6.6% over the past year. The number of closed sales YTD is down 6% from a year ago, and the number of YTD pending sales is down by 31%. This compares to a drop of 26% in YTD closed sales compared to a year ago for Kitsap County as a whole. That portion of currently pending sales coming from new construction presales (29 of 42) has fallen significantly, so the pace of new construction sales is falling. The Poulsbo listing inventory (176) has risen by 48% compared to a year ago and is up 3.5% since last month. The inventory turnover (total homes on the market divided by number sold last month) is 12.6 months.
Silverdale Real Estate
Homes in Silverdale were selling for a YTD median price of about $305,000 at the end of May, up less than a percent from a year ago. The YTD median rose about 4% from its value last month after falling significantly the previous two months. The May median closed sale of $315,500 was about the same as the May median a year ago. Kitsap County YTD median price has fallen 6.6% over the past year. The number of YTD closed sales was down 41% from a year ago, compared to a drop in closed sales of 26% for the County as a whole. The number of pending sales YTD is down 42% from a year ago. The number of active listings in Silverdale (141) is 14% higher than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 9.4 months, which makes Silverdale one of the better markets in the County.
Statistics not compiled or published by NWMLS
