kitsap-market-blog
Wednesday, October 22, 2008
Mid October Kitsap Real Estate Outlook
The volume of California home sales is rising, with some 50% of the sales being foreclosure properties. This is important because California has about 35% of the non conforming mortgages (loans securitized by banks instead of being sold to Fannie Mae and Freddie Mac). This is a sizable portion of the mortgages backing illiquid toxic securities that are at the heart of current bank liquidity problems. Mortgage interest rates jumped on news of the US Treasury taking a stake in banks to help improve liquidity in the banking system. Investors sold debt in government securities and in Fannie Mae and Freddie Mac to purchase higher yielding commercial bank debt once the government became an investor. This required that Fannie and Freddie offer significantly higher yields on their bonds to attract investors, driving up mortgage interest rates in the process. The stock market is on a roller coaster ride. The dollar has posted historic gains against the British Pound and the Euro. The various activities of central banks world wide have improved liquidity in the financial markets somewhat - one can only hope that the trend can continue.
Our gage of the current market fell in the first 2 weeks of October after promising pending sales were reported in September. This isn't surprising given all the financial market turmoil. We think that home prices will continue to fall until affordability is again in line with income. With up to 18% of the property sales in our market being distressed properties, you can see that there is downward pressure. In Kitsap County, home prices have not fallen that far. The trade off for this benefit is that homes have become much more difficult to sell. The graphs below highlight how the number of sales and chance of making a sale have fallen over the past several years. The 2008 estimate shows YTD sales vs listings. Think of it as telling you that 75% of the homes coming on the market will not sell.
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 2002 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. Since the Fannie and Freddie bail out, interest rates have dropped. The affordability index dropped to 1.01 in September from 1.05 last month. First time buyer affordability dropped to .89 from .92 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. The past several months have been relatively flat.
| Year | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|---|---|
| Annual Average interest rate | 6.54 | 5.83 | 5.84 | 5.87 | 6.41 | 6.34 | 6.29 |
| Median Income | $52,701 | $53,160 | $53,923 | $54,582 | $58,304 | $60,719 | $65,000 |
| Median Price | $165900 | $184000 | $206900 | $250000 | $275000 | $290343 | $269975 |
| Monthly payment | $880 | $867 | $975 | $1182.43 | $1378 | $1443 | $1335 |
| 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 | 1.05 |
| 1st time buyer payment | $674 | $693 | $780 | $946 | $1102 | $1155 | $1068 |
| 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 | .888 |
Here are the current statistics for Pending - Inspection and Active Listings (comparing the number in mid October to the number in mid September). 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 10/15 | Pending Inspection 09/15 | Active Listings 10/15 | Active Listings 09/15 |
|---|---|---|---|---|
| S. Kitsap W. of HWY 3 | 6 | 4 | 213 | 230 |
| S. Kitsap E. of HWY 3 | 0 | 8 | 184 | 187 |
| Port Orchard | 8 | 14 | 129 | 149 |
| Retsil/Manchester | 1 | 2 | 144 | 159 |
| Seabeck/Holly | 3 | 6 | 109 | 118 |
| Chico | 0 | 1 | 33 | 36 |
| Silverdale | 5 | 5 | 121 | 135 |
| W. Bremerton | 4 | 9 | 246 | 255 |
| E. Bremerton | 2 | 7 | 134 | 133 |
| E. Central Kitsap | 6 | 6 | 183 | 184 |
| Hansville | 2 | 1 | 56 | 60 |
| Kingston | 1 | 5 | 94 | 99 |
| Port Gamble | 0 | 0 | 22 | 21 |
| Lofall | 2 | 2 | 38 | 44 |
| Finn Hill | 3 | 6 | 90 | 98 |
| Poulsbo | 3 | 6 | 155 | 173 |
| Suquamish | 0 | 3 | 38 | 37 |
| Indianola | 0 | 1 | 37 | 38 |
| Bainbridge | 3 | 6 | 260 | 275 |
| Totals | 49 | 92 | 2286 | 2431 |
The number of Pending Inspection deals in October fell by 48% from the first two weeks in September. This was not entirely unexpected given the recent activity in the stock market. The activity is 40% lower than it was in October 2007. The number of active listings (2286) in our residential inventory dropped about 6% from September and mirrors the seasonal decline we saw last year. The ratio of sales to number of active listings fell from 3.8% to 2.1%. About 86% of the sales were under $400,000 (up from 84% as last month) and 76% were under $300,000 (up from 70% last month). Properties at the low end of the market are moving much better than anything above $400k.
Here is a graph of the mid month Pending Inspection data for the past year:
October's APR is 6.48% on a 30-Year and 6.378% on a 15-Year, both Conforming. September's rates were 6.353% on a 30-Year and 6.252% on a 15-Year, both Conforming. As you can see, 30 year interest rates have risen since last month. The bigger story is that rates surged from below 6% just a couple weeks ago to the present levels as a result of the Treasury’s plan to invest in bank stocks. Investors sold government bonds, including the debt of Fannie Mae and Freddie Mac, to purchase higher yielding bank bonds now that the government has taken a stake. The sell off has caused mortgage rates to surge as much as half a percent. We are seeing Jumbo loans vary as much as 3% between different lenders - shows big banks just don’t want to make this loan. 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/.
Sunday, October 19, 2008
Kitsap Local Real Estate Markets in September 2008
The US Treasury and other central banks are purchasing bank stock to infuse liquidity that the banks can use to get the system working again. The Treasury’s initial rescue idea to purchase toxic assets (such as mortgage backed securities for which the value of the underlying loans is difficult to estimate) through a reverse auction process has not been implemented yet. Saturday’s Wall St Journal notes that injecting capital into the banks through stock purchases is fighting the problem of the Great Depression, while the current battle concerns how to value and rid the banks of the toxic debt such as mortgage backed securities. The toxic debt has reduced trust between banks and financial institutions that would otherwise lend to each other to solve the liquidity problem. Here are just a few ideas in the press recently about important aspects of the credit crisis - why it wasn’t noticed, the role of government policies, and how leverage is a critical part of the problem:
Dr. William Connerly, consultant to a number of banks and businesses in the Pacific Northwest, wrote recently about how economists missed the housing bubble:
“Back in the old, old days, like the 1980s, we had all become monetarists. Professor Friedman taught that money supply growth rates should be stable and low. Then financial deregulation, sweep accounts, and other innovations made the money supply numbers hard to interpret. So we economists looked at inflation, and the gap between actual output and potential output, to assess whether the Fed was being loose or tight with monetary policy.
Chairman Greenspan kept interest rates extremely low from 2002 through 2004, and very low in 2005. We weren’t seeing inflation, and output didn’t seem to be surging excessively, so it seemed that the Fed was not too loose with money.
A few folks worried about asset bubbles being nurtured by easy money. DeLong cites Michael Mussa, former research director at the International Monetary Fund, and calls this view “Mussaism." The view actually goes back to much older theories (Don Patinkin for you economists) that can be thought of this way: folks have three types of assets: money, investment assets, and consumption assets. If you increase the money supply through easy monetary policy, then people try to get into asset allocation balance again, by selling money (also called “spending") and buying the other assets. When they are buying consumption goods, we worry about inflation.Well, the easy money of the early 2000s did not lead to above-trend consumer spending; it led to above-trend buying of houses. Some of that buying led to construction of new houses, but a great portion of the effect was to induce a run-up of homes prices. Easy money WAS leading to inflation, just not inflation of consumer goods, but rather housing inflation. Thus the housing boom, which resulted in the oversupply of housing, the over-optimism about sub-prime home loans, and the subsequent financial crisis. Man, I loved Alan Greenspan, but it turns out that he is to blame for today’s problems.”
UCLA Economics Professor Lee Ohanian, reflecting upon policies that might make current situation worse, gave this brief description of how government policies went wrong and caused the Great Depression:
“There are many historical precedents of bad policies following crises. The worst case was after the stock-market crash in October 1929, which produced a truly perfect storm of bad policies. Tax rates rose, tariffs rose (reflecting special interest groups attempting to insulate domestic producers from foreign competition), and both Presidents Herbert Hoover and Franklin Roosevelt strongly promoted industry-labor cartels that were designed to stifle domestic competition.
In the absence of these policies, the Great Depression would almost certainly have been like every other U.S. recession—short-lived and relatively mild. Normal recovery didn’t begin until the most onerous of these policies were reversed, a process that didn’t begin until the end of the 1930s when antitrust activity was resumed, and during World War II when the National War Labor Board reduced union bargaining power by limiting negotiated wage increases to cost-of-living adjustments only....”
Robert Sameulson recently gave this commentary on the role of leverage in the financial turmoil:
“What we’ve discovered is that the real problem is bigger. Large parts of the financial system are too thinly capitalized and too dependent on unreliable short-term debt. Leverage ratios often reached 30-1 for investment banks and hedge funds ($30 of debt for every $1 of capital). The presumption was that the MBA types had learned how to “manage risk.” That false conceit backfired. Low capital didn’t adequately protect against losses. Confidence and trust evaporated, because no one knew which institutions held suspect securities, how much the losses were and who was ultimately safe.
“Deleveraging”—a shift from excessive debt toward more capital—is inevitable and desirable in the long run. The trouble is that, in the short run, it may destabilize the economy if it proceeds too rapidly.
Consider stocks. Their plunge has been driven in part by hedge fund selling. Hedge funds often buy stocks by borrowing from their “prime dealers”—firms like Goldman Sachs and Morgan Stanley, which in turn borrow from commercial banks. If banks “deleverage” by reducing loans to prime dealers, then prime dealers tighten up on hedge funds, which react by selling stocks. “It’s a big piece of why the stock market is down,” says Michael Decker, former chief economist for the Securities Industry and Financial Markets Association and now co-head of the Regional Bond Dealers Association.”
It’s a complicated world where there’s no sure-fired way to value mortgaged backed securities until the bottom is reached in home prices, where inflation may appear in an asset (housing) while not appearing in consumer prices, where the actions of government to alleviate the financial problem may instead make it worse, and where unwinding leveraged investments can cause markets and confidence to plummet uncontrollably.
Each month we publish a snapshot of several local markets to show variations in our larger Kitsap County real estate market. September’s inventory of homes for sale fell by 6% from August and is in seasonal decline. It’s not clear from the turnover rates that sales are bringing inventory back to more normal levels. Median year to date closed sale prices were about the same in September compared to August and were down 8.8% percent compared to a year ago. Pending sales in September were up 33% from a year ago and 16% from August - we’ll see if this continues. 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. These regional statistics are updated each month on our website at http://www.bprowse.com.
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 $608,500 at the end of September, a drop of 10.5% from a year ago. The median price for closed sales occurring in September ($638,750) was down about 10.7% from a year ago. Kitsap County YTD median price has fallen 8.8% over the past year. The YTD number of Bainbridge closed sales is down 49% from a year ago, and the YTD number of pending sales is down 42%. These numbers have improved slightly as the in the past couple months. The number of closed sales is down 26% Countywide from a year ago. The number of active listings on Bainbridge (266) is up 14% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 14.8 months, a slowdown from the 11.6 month turnover rate of 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 similar trends. Homes in Bremerton were selling for a YTD median price of about $185,000 at the end of September, about 14% lower than a year ago. The September median price for closed sales ($195,000) was 7% higher than the median for last month but still 15% lower than a year ago. Kitsap County YTD median price has fallen 8.8% over the past year. The Bremerton YTD number of closed sales is down 32% from a year ago (compared to a Countywide drop of 26%). The YTD number of pending sales is down 22% from last year, but the September pending sales were up 35% from a year ago. The number of active listings (239) has fallen 8% from last month and 6% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 14 months, but may be improving based on recent pending sales. The Bremerton market is still a buyers market.
North Kitsap Real Estate
Using the example of Kingston - the largest housing market in North Kitsap - homes were selling for a YTD median price of about $372,500 at the end of September, up about 6% from a year ago and up about 3% 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 8.8% over the past year. The YTD number of closed sales is down 28% from a year ago, and the YTD number of pending sales is down 31%. However, September pending sales were 13% higher than a year ago. The number of closed sales is down 26% Countywide from a year ago. The number of active listings in Kingston (96) is down 9% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 16 months, but this may be improving based on the pending sales. 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 YTD median sale price of about $334,126 at the end of September, down about 5.9% from a year ago and down 1% from last month. Poulsbo’s September median sale price was $325,900, about the same as in September 2007. Kitsap County YTD median price has fallen 8.8% over the past year. The number of Poulsbo closed sales YTD is 1% lower than a year ago, and the number of YTD pending sales is down by 26%. The large difference in pending versus closed sales reflects the backlog of new construction pending sales that are now closing. There was a drop of 28% 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 is 22 of 41. The pace of new construction sales has fallen along with the rest of the market. The Poulsbo listing inventory (171) has risen by 12% compared to a year ago but has fallen 11% since last month. The inventory turnover (total homes on the market divided by number sold last month) is 8 months - better than average but a return to a more expected turnover rate from the abnormally good 5 months reported last month.
Silverdale Real Estate
Homes in Silverdale were selling for a YTD median price of about $300,000 at the end of September, down 6.2 percent from a year ago. The September median closed sale of $300,000 was about 14% less than the September median a year ago. Kitsap County YTD median price has fallen 8.8% over the past year. The number of Silverdale YTD closed sales was down 39% 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 34% from a year ago. The number of active listings in Silverdale (121) is 13% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 9.3 months, which is pretty typical of this price range in the County and is a return to normal from the abnormally low turnover reported last month.
Tuesday, October 14, 2008
Distressed Property Sales in Washington
Our latest market report highlights that sales of bank owned and distressed properties are increasingly impacting our local real estate market. Within the Northwest MLS (not including foreclosure auction sales) we calculated that at 6% of the properties listed and 18% of the pending sales were from bank owned properties or short sales (where a distressed seller obtains lender concurrence to close the sale of the property with a payoff less than the full amount of the loan). In Washington a Distressed Home is an owner occupied primary residence (single, duplex, triplex, 4-plex) in the process of foreclosure or in danger of foreclosure because the owner has defaulted on a mortgage, because the seller is at least 30 days delinquent on a loan secured by the property, because the seller believes that he/she is likely to default on such mortgage or loan within 4 months due to lack of funds, or because the seller is at risk of loss due to non payment of taxes. In some parts of the country, real estate agents have shifted their business full time to assisting distressed sellers in negotiating with lenders a sales price to complete a home sale or negotiate a loan work out with their lender to allow the seller to remain in the house. There’s even a Certified Distressed Property Expert designation available to agents completing certain approved courses of instruction.
However, since Washington’s State Legislature passed a distressed homes law last June (HB2791), Washington real estate agents have had a strong negative incentive to become involved with distressed sellers. The law was modeled after bills in several other states to prevent equity skimming, which is a practice where a buyer offers to take over a distressed seller’s house payments, let the seller remain in the house and pay rent, and ultimately evict the seller and pocket the seller’s equity. The law now requires that anyone offering to perform certain services to assist the distressed seller in renegotiating to prevent foreclosure or in purchasing a distressed home within 20 days of foreclosure be designated as a Distressed Home Consultant, and real estate agents fall into this category. As such, the Consultant must enter into a special form of contract and be subject to the punitive consequences of the state’s Consumer Protection Act. Licensed mortgage brokers, financial institutions, non-profit credit counselors, and attorneys have been exempted from the law, and so it is to this group that the distressed sellers must turn for assistance.
We recently received a presentation from a company called XtraMile Investment Solutions that specializes as Distressed Home Consultants. Undoubtedly others in our area (or in your area) are fulfilling the same function. XtraMile’s program provides sellers of Distressed Homes with a dedicated advocate who can meet the requirements of the new law while working out a price that the lender will accept and make possible the sale of the home before foreclosure. Their program allows real estate agents to perform the normal duties of the listing agent in completing the sale, while avoiding the pitfalls agents face if they choose to also be the Distressed Home Consultant. Please call us if you would like more information about their program.
Statistics not compiled or published by NWMLS
