Monday, November 10, 2008
Kitsap Real Estate Market Report - October 2008
We devote a portion of this report to the state of the economy and housing market as government gets ready to change hands. While there is a great deal of uncertainty, gloom, and doom in the news, Pacific Northwest Regional Economist Bill Conerly said that he sees the credit crunch ending by the end of 2008 (profitable businesses and qualified consumers will be able to borrow money again), consumers beginning to spend again by spring, and the housing/new construction markets remaining depressed for another year or so while we work off the excess inventory. Consumer confidence is a fundamental part of restoring the health of the economy. Hopefully this information will provide some reassurance that current policies, mostly monetary, are facilitating changes in the economy that we’ll soon enough be able to see and believe in. Here is a snapshot of our current situation:
Except for automobiles and housing, corporate balance sheets are still relatively healthy. Unemployment is rising. Most economists agree that we are in a recession, and that we can expect low growth in the economy in 2009. Credit markets remain tight, with most of the key liquidity indicators improving but still hovering above normal. Lending standards have been tightened not only for home mortgages but also for commercial lending. Companies with unhealthy balance sheets will suffer from a lack of liquidity much more than healthy ones. Since about half of business investment is financed by credit, this is a key area in limiting our growth. Start up funding is much more difficult to obtain, and municipal bond issues have abnormally high interest rates. This is a factor in the discussion in Poulsbo to delay construction of the new city hall. There is a widespread belief that increased regulation is needed in capital markets to prevent today’s troubles from recurring. There is also a danger that new regulations might create an overly conservative system that fails to provide the capital and allow the risks that are necessary for future economic growth.
The unsold national inventory of new construction homes is about 400,000, and the residential resale inventory is about 4.2 million homes. Both these inventory numbers now appear to be declining as we work through excess inventory. Residential resale activity rose 1.4% nationally in August as a result of falling prices, particularly in distressed sales in the most hard hit areas. The Case Shiller home price index has reported 20 consecutive months of declines, with record year over year declines in each of the past 11 months. The year over year decline in August was 17.7%.
In a recent survey on Zillow.com, 49% of homeowners thought that their homes were worth the same or more than the previous year. Zillow reported that 75% of the homes had actually fallen in value. This is an important aspect of consumer sentiment that somehow has escaped the pessimism in consumption and investment.
So we turn our discussion to the housing market. King County median sale price fell below $400,000 for the first time in 2.5 years, and sales plunged as well. In Kitsap County, pending sales, which had been up in September, fell 20% from a year ago. The number of closed sales fell by 5% - which reflects last month’s increase in pending sales.
Currently Kitsap County has an inventory turnover rate of about 9.1 months, an improvement over last month’s 10.6 months. A good part of this may be the result of people pulling their properties off the market until next spring, but the trend over time indicates that we are reducing inventory in Kitsap. In rough terms a neutral inventory is about 6 months supply of homes, so prices must continue to fall to allow the inventory to be reduced. Falling home prices will improve affordability (bring home prices back within balance with current incomes). One aspect of inventory turnover deserves more discussion - not all homes will sell in this amount of time. Many homes will never sell because they are priced too high. Currently only about 30% will actually sell. Homes priced to sell will sell more quickly than the turnover rate. Shown below are graphs of inventory and inventory turnover for Kitsap County in 2007-08. Also shown is a graph of probability of sale, showing historically what percentage of the homes listed for sale will actually sell.
Residential Highlights
Kitsap County residential inventory in October (2156 listings) fell 7% from September and is in seasonal decline. Inventory is 7% lower than a year ago. The number of year-to-date pending sales was down 22% compared to a year ago and 28% from last month. The number of YTD closed sales Countywide (see graph below) is minus 24% compared to a year ago, and October closed sales were down 5% from a year ago.
Prices are falling…
The median price has been falling. October’s YTD median price ($269,975) is down about 1 percent from the median in September (see graph below). The YTD median price has fallen 9.5% from a year ago. The October median closed sale price ($252,000) fell 4% from September and is down 11% 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. Our calculation shows that Kitsap County affordability is now about where it was at the end of 2004. By this standard, the median price would need to fall to about $235,000 before affordability would be back to the level of 2002. While it’s not likely that this will happen soon, the more likely scenario is for prices to fall gradually for a longer period while incomes rise to restore more favorable conditions. In the interim, the number of sales will remain weak.
Seller expectations…
The YTD median list price remained at $350,000, approximately the same as it has been for more than a 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 9.1 months, better than 10.5 months in September. A year ago this number was 9.3 months (not a good market back then). While it would appear that a seller has an 11% chance of selling his/her home in a given month, the truth is that only about 30% of homes are selling at all, and on average these sell in less than 4 months. Sellers must also be aware that the inventory turnover varies significantly by price range. Higher priced homes are moving much more slowly than lower priced homes. See the graph below for a better perspective. Competitive pricing is essential, and almost every offer we see presented is negotiating on price. Sellers must understand that with listing inventory up and closed sales down, we don’t have the same market that we had in 2005. Below is a historical depiction of the changes in the ratio of listings to closed sales.
The statistics for pending sales (compared to year-to-date sales last year) varied for different parts of the County. Again this month several areas have improved in pending sales. One area, East Central Kitsap, is actually +17% YTD compared to last year. Here is a snapshot:
Bainbridge Island -38% (-42% last month)
Poulsbo -24% (-32% last month)
Bremerton -23% (-22% last month)
Kingston -32% (-48% last month)
Silverdale -36% (-34% last month)
Port Orchard -27% (-29% last month)
Olalla -22% (-21% last month)
Statistics not compiled or published by NWMLS
