Mid January Kitsap Real Estate Outlook
The Dow Jones Industrial Average is rapidly approaching 12,000 (going down), mostly related to new revelations in the problems with financial markets and the housing market. In our last mid month report we jumped upon the bandwagon crowing about differences between median family incomes and median home prices. It would be good to present now the counterpoint, voiced by the National Association of Realtors, that there are other factors besides income to be considered in what is affordable.
“For a homebuyer, what is relevant is not home price in relation to income, but rather the mortgage payment in relation to income. Since 1990, interest rates have generally trended down, thereby permitting more purchasing power with the same level of income. Furthermore, the fees associated with taking out a mortgage have fallen from about 2% to less than 0.5%. As such, any home price analysis needs to taken into account the lower overall mortgage borrowing costs.”
Let’s analyze this point of view in our local circumstances. First we must understand that NAR presents in their Seattle Area analysis a graph showing that this historical average cost to to servicing (loan principal plus interest plus taxes and insurance) ratio is about 20%, and that this is an aggregate number, not a percentage that your lender would use to qualify you for a loan. Lenders used to use a standard of loan servicing ratio of 28% to qualify applicants. Underwriting standards now vary considerably more depending upon income and other borrower debts. Since some buyers are wealthier and exceed the minimum qualifying standards, the aggregate number lowers to 20%. Unfortunately NAR does not provide enough information to allow us to reproduce the calculation for the Kitsap market. However, Glenn Crellin at the Washington Center for Real Estate Research provides local affordability calculations that we can use to test the NAR assertion.
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. The table and graph below are for Kitsap County from 2001 - 2008. For the first time in many months, we actually report some good news. If we can assume that December’s median home price represents 2008 and that current mortgage rates will continue for some time, affordability has suddenly and dramatically improved to the levels of mid 2004! The NAR’s assertion that the market might bottom out in the coming quarter may not be as far fetched as it seems. It’s an excellent time for qualified buyers to purchase! The table below shows calculations year by year.
| Kitsap County Housing Affordability 2001 - 2008 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 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 | 5.625 |
| Median Income | $51,560 | $52,701 | $53,160 | $53,923 | $54,582 | $58304 | $60719 | $65000 |
| Median Price | $155000 | $165900 | $184000 | $206900 | $250000 | $275000 | $290343 | $265500 |
| Monthly payment | $822 | $880 | $867 | $975 | $1182.43 | $1378 | $1443 | $1223 |
| Affordable payment | $1,074 | $1,098 | $1,108 | $1,123 | $1,137 | $1,215 | $1,265 | $1354 |
| Affordability Index | 1.31 | 1.25 | 1.28 | 1.15 | 0.96 | 0.88 | 0.88 | 1.11 |
| 1st time buyer payment | $658 | $674 | $693 | $780 | $946 | $1102 | $1155 | $978 |
| 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 | 0.97 |
You may be wondering why Countrywide Home Loans was recently rumored to be going bankrupt and was quickly purchased by Bank of America for $4 billion, about a third of its book value. Of the over $100 billion in “write downs” (non performing financial assets that have lost their value) reported thusfar by large banks, Countrywide has only lost $1 billion, but they service a huge portfolio of loans, about $1.5 Trillion. You might remember that late in 2007 Countrywide received an investment of about $2 billion from Bank of America. How did the money run out so quickly? A recent LA Times article reported that loan servicers, the large ones include Countywide, Wells Fargo, Washington Mutual, and Chase, face huge problems when loan delinquencies rise. Until they can foreclose on a late payer, the servicer must continue to make interest, tax and insurance payments to the investor. Tax and insurance payments must be made even after foreclosure until the property is sold. With a large reduction in the number of new loan originations and a large increase in the servicing payments for delinquent mortgages, they were rapidly running out of cash to continue operations. Countrywide’s stock value sank from $27 billion to about $3 billion over the past year. The stock was under $5 per share when Bank of America acted to protect their investment. The purchase, scheduled to be completed later this year, has quelled speculation on the stock. Countrywide will continue to operate under its own name.
You might also be wondering how Countrywide lenders are doing. According to our source, Diane Dahl at Countrywide Home Loans in Poulsbo, it’s business as usual. Current rates are just about as low as they have ever been. Many homeowners who have purchased in the past couple years are choosing now to refinance, rolling a first and second mortgage at higher rates into one. There are also a good number of qualified buyers taking advantage of the current very low interest rates in making purchases. Unfortunately, the current great loan opportunities do not extend to those homeowners who have poor credit and are looking for relief from adjustable rate mortgages.
Here are the current statistics for Subject To Inspection (STI) and Active Listings (comparing the number in mid January to the number in mid December). 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 01/15 | STI 12/15 | Active Listings 01/15 | Active Listings 12/15 |
|---|---|---|---|---|
| S. Kitsap W. of HWY 3 | 4 | 3 | 148 | 154 |
| S. Kitsap E. of HWY 3 | 2 | 4 | 139 | 150 |
| Port Orchard | 7 | 4 | 168 | 169 |
| Retsil/Manchester | 3 | 1 | 120 | 121 |
| Seabeck/Holly | 4 | 1 | 96 | 109 |
| Chico | 4 | 1 | 34 | 36 |
| Silverdale | 4 | 10 | 101 | 106 |
| W. Bremerton | 4 | 7 | 228 | 233 |
| E. Bremerton | 4 | 1 | 99 | 105 |
| E. Central Kitsap | 5 | 7 | 140 | 153 |
| Hansville | 1 | 0 | 46 | 45 |
| Kingston | 0 | 2 | 74 | 80 |
| Port Gamble | 1 | 1 | 23 | 24 |
| Lofall | 1 | 0 | 34 | 35 |
| Finn Hill | 4 | 0 | 67 | 73 |
| Poulsbo | 3 | 2 | 128 | 126 |
| Suquamish | 1 | 1 | 40 | 43 |
| Indianola | 0 | 0 | 35 | 39 |
| Bainbridge | 5 | 2 | 185 | 199 |
| Totals | 57 | 47 | 1905 | 2000 |
Not much is happening yet in the first two weeks in January - but it’s early. STI deals in January increased by 21% compared to the first two weeks in December. The market is better but is still pretty slow. The number of active listings in our residential inventory decreased by 5%, showing that sellers were continuing to take their properties off the market and have not yet relisted. Our experience is that lots of listings are coming back on the market now. The ratio of sales to number of active listings rose from 2.4% to 3.0%. Similar to last month, about 86% of the sales were under $400,000 and almost 75% were under $300,000.
The big story this month is falling interest rates. January’s APR is 5.846% on a 30-Year and 5.368% on a 15-Year, both Conforming. December’s rates were 6.353% on a 30-Year and 5.999% on a 15-Year, both Conforming. Interest rates have fallen half a point or more in the last month. If you qualify for FHA or VA loans, these programs have become much more attractive for low downpayment buyers. 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.
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