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)
Statistics not compiled or published by NWMLS
