Thursday, April 24, 2008
April 2008 Mid Month Kitsap Real Estate Outlook
The real estate and finance crisis continues to sort itself out. Banks have been revealing huge additional losses on their quarterly earnings statements. Banks and brokerage houses continue to struggle with liquidity and have tightened their lending standards. The dollar remains weak, and this weakness along with speculation and demand for commodities and begun to worry some economists and government leaders because of the prospects for rising inflation. As a result of these inflationary concerns coupled with improvements in equity markets, futures markets now indicate a reduced probability for additional rate cuts by the Federal Reserve. The housing market remains very slow, and home prices continue to fall. The NAR reported this week that in March the seasonally adjusted annual sales rate for existing homes dropped another 2% to 4.93 million. New home sales are at their weakest level since 1991. On the other hand, the stock market has been buoyed by the poor but better than expected financial reports and by the unanticipated strength of Google, IBM, Intel, Caterpillar, and other manufacturing and technology companies. A graph of industrial production looks un-recession like.
The major current economic concern regards falling real estate prices and a scenario where the number of foreclosures will increase, causing further lowering of prices and foreclosures in a catastrophic spiral. While prices must fall to restore the relationship between incomes and home prices, falling prices are leaving a huge number of homeowners with negative or no equity and little incentive to pay up once they start to fall behind in payments. The recent report of a 327% rise in the California foreclosure rate from a year ago is indicative of this trend. Concerned that the time is rapidly running out to avert a major financial system failure from foreclosure losses, FDIC Chairman Sheila Bair recently mentioned a new possibility for rapid government intervention - using $50 billion to pay down 20% of the principal on a million mortgages. In her view the government must act quickly and directly to stem the tide. Her opinion was that current proposals by the White House and in Congress either don’t do enough or ask too much of a government agency (the FHA) in dealing with modifying loans one at a time. San Francisco Fed President Janet Yellen also keys on falling prices as the best predictor of subprime delinquency rates (in fact delinquency rates for all types of mortgages closely correlate to falling prices). Taking a different tack, John Makin of the American Enterprise Institute suggested that the Federal Reserve promote inflation as a means of reducing the toll of falling prices.
This month we again 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 to 1.16 in April from 1.02 last month. First time buyer affordability rose to 1.02 from .89 in March. This month we include 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.
| Year | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|---|---|---|
| Annual Average interest rate | 6.97 | 6.54 | 5.83 | 5.84 | 5.87 | 6.41 | 6.34 | 6.15 |
| Median Income | $51,560 | $52,701 | $53,160 | $53,923 | $54,582 | $58,304 | $60,719 | $65,000 |
| Median Price | $155000 | $165900 | $184000 | $206900 | $250000 | $275000 | $290343 | $269888 |
| Monthly payment | $822 | $880 | $867 | $975 | $1182.43 | $1378 | $1443 | $1312 |
| Affordable payment | $1,074 | $1,098 | $1,108 | $1,123 | $1,137 | $1,215 | $1,265 | $1,354 |
| Affordability Index | 1.31 | 1.25 | 1.28 | 1.15 | 0.96 | 0.88 | 0.88 | 1.03 |
| 1st time buyer payment | $658 | $674 | $693 | $780 | $946 | $1102 | $1155 | $1049 |
| 1st time buyer affordable payment | $752 | $769 | $775 | $786 | $796 | $850 | $885 | $948 |
| 1st time buyer affordability index | 1.14 | 1.14 | 1.12 | 1.01 | 0.84 | 0.77 | 0.77 | .904 |
Here are the current statistics for Subject To Inspection (STI) and Active Listings (comparing the number in mid April to the number in mid March). 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 04/15 | STI 03/15 | Active Listings 04/15 | Active Listings 03/15 |
|---|---|---|---|---|
| S. Kitsap W. of HWY 3 | 8 | 8 | 192 | 182 |
| S. Kitsap E. of HWY 3 | 4 | 10 | 164 | 150 |
| Port Orchard | 10 | 11 | 179 | 176 |
| Retsil/Manchester | 8 | 4 | 130 | 138 |
| Seabeck/Holly | 6 | 5 | 106 | 105 |
| Chico | 1 | 1 | 35 | 32 |
| Silverdale | 7 | 7 | 125 | 116 |
| W. Bremerton | 11 | 2 | 227 | 224 |
| E. Bremerton | 4 | 7 | 116 | 101 |
| E. Central Kitsap | 3 | 6 | 167 | 151 |
| Hansville | 2 | 1 | 55 | 57 |
| Kingston | 5 | 1 | 93 | 80 |
| Port Gamble | 2 | 3 | 29 | 28 |
| Lofall | 0 | 2 | 39 | 31 |
| Finn Hill | 1 | 6 | 85 | 78 |
| Poulsbo | 2 | 1 | 156 | 150 |
| Suquamish | 2 | 0 | 38 | 43 |
| Indianola | 3 | 0 | 39 | 43 |
| Bainbridge | 6 | 8 | 262 | 245 |
| Totals | 84 | 86 | 2237 | 2130 |
STI deals in April decreased by 2% compared to the first two weeks in March. The activity is down 5% compared with April 2007. The number of active listings in our residential inventory increased by 5%. The inventory fell in some areas and increased in others. The ratio of sales to number of active listings rose from 4% to 3.8%. About 82% of the sales were under $400,000 and 69% were under $300,000.
Here is a graph of the mid month sti data for the past year:
As we said above, interest rates rose as investors moved away from treasuries and mortgage backed securities. April’s APR is 6.353% on a 30-Year and 5.999% on a 15-Year, both Conforming. March’s rates were 5.973% on a 30-Year and 5.494% on a 15-Year, both Conforming. Interest rates have risen significantly since last month, reflecting continued tight money and uncertainty in financial markets. 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://www.wellsfargo.com/mortgage/rates.
Statistics not compiled or published by NWMLS
