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/.
Statistics not compiled or published by NWMLS
