Wednesday, March 05, 2008
Kitsap Real Estate Market Report - February 2008
Our housing market is in its “deepest, most rapid downswing since the Great Depression,” according to the chief economist for the National Association of Homebuilders.” January new home sales were at their slowest pace since 1995, and existing home sales were at a 9 year low. The decline in sales in 2007 was the largest seen in 25 years. Both the Case Shiller and OFHEO home price indexes showed their largest declines in their histories. The Case Shiller is a big city index that may not reflect our local situation, but does use information from many different types of home sales. The OFHEO (Office of Federal Housing Enterprise Oversight) index covers all communities, but only considers conforming loans. At the end of 2007 it registered its first year over year drop, and data in November and December showed rapid deterioration of prices. Differences in the Case Schiller and OFHEO data demonstrate some of the difficulties in providing sellers with firm price information. Use of median prices (the middle price in the group of properties being considered) is more representative than the average price, but the drop in median price often underestimates the amount prices have fallen. Additionally, recent monthly data have shown a much steeper drop than is revealed by comparing the less volatile year-to-date numbers. In surveying all this bad news, we believe that as the best of the pundits could not forecast the market’s demise, so must the most pessimistic of the critics not be able to see the positive factors that will eventually turn the market again.
There are now diverging points of view about how best to help struggling homeowners. For instance, Dean Baker of the Center for Economic Policy and Research proposed that most middle class homeowners won’t be helped by the bailout because 1) they won’t accumulate equity and will end up having to sell at a loss and 2) their annual cost of renting (about 5% of sales price after the recent run up in prices) is well under their cost of ownership (8% - assuming a 6% mortgage, 1% in property tax, and 1% in maintenance). Economist Steve Landsburg in Slate Magazine sets the case in favor of foreclosures - basically one family’s misfortune is another’s good fortune, since in most cases a new family will acquire the property at a much lower price. A group of banks with the support of the Treasury Department called the Hope Now Alliance claims to have given relief either in a temporary (repayment plan) or more permanent (reduction in payment terms) form to about one million homeowners with distressed mortgages. An estimated 1.5 million homeowners lost their homes in foreclosure last year, and another 2 million are expected to do so this year. Treasury Secretary Paulson opposes a government bail out as is now being proposed by members of Congress. Fed Chairman Bernanke agrees that the effort should be voluntarily undertaken by banks rather than mandated by government, but advocates that lenders should consider reduction of principal on loans as a more effective means of avoiding foreclosure. Although the press has much hyped the concept of homeowners who have little or no equity simply walking away from their homes and mortgages, there is little evidence of widespread occurrence. Some members of Congress have proposed government assistance programs, including a 90 day freeze on foreclosures, a 5 year freeze on sub prime interest rates, a $10 billion buyout of troubled loans, allowing bankruptcy judges to alter the terms of existing loans, and various government guaranteed loan programs to allow owners of distressed properties to refinance. Other than the efforts of the Hope Now Alliance, none of these proposals has advanced beyond the proposal stage. Opponents of the various Congressional proposals cite that there is no need for the government to bail out the financial institutions and that arbitrarily changing the terms of existing loans to reduce foreclosures will eventually be passed to consumers in the form of making future loans more difficult to obtain.
Housing prices tend to be strongly persistent - sellers are reluctant to lower their prices. If you’ve been gaging the Kitsap market by how prices have changed, things may not look too bad - but you should not be misled. If we focus on inventory levels, we can predict that prices must decline. Currently Kitsap County has an inventory turnover rate of about 12 months. In rough terms a neutral inventory is about 6 months supply of homes, so we argue that there is a very substantial possibility that prices will fall to allow the inventory to be reduced. Shown below are graphs of inventory and inventory turnover for Kitsap County in 2007-08 - note that inventory has risen significantly since the end of 2007.
Residential Highlights
Kitsap County residential inventory in February (2212 listings) was up 5.1% from January and 36% higher than a year ago. The number of year to date pending sales was down 25% compared to a year ago. Pending sales were off significantly from a year ago except in Poulsbo, where pending sales were up 32% last month compared to year ago (35 of 43 current pending sales are new construction homes). The number of YTD closed sales Countywide (see graph below) is minus 19% compared to a year ago.
Prices are falling…
February’s YTD median price ($265,000) fell 4.9% compared to the median closed sale price in January. Median price for closed sales In February was down 10% percent from the closed sale price in January (see graph below). The YTD median price has fallen 6% from a year ago, and appears to be accelerating downward based on the significant drop from last month. It’s vitally important for sellers to be the most competitively priced among their competition if they want to generate an offer.
Seller expectations…
The median list price for the year rose about $4000 from last month to $349,000. Median list price remained steady at about $350,000 for most of last year. The inventory turnover (total homes on the market divided by number sold last month) is 12 months, down from 13 months in January - not much improvement and well below the national average of about 10 months. A year ago this number was 7.8 months. Today a seller has an 8% chance of selling his/her home in a given month. Competitive pricing is essential, and almost every offer we see presented is negotiating on price.
The statistics for pending sales (compared to year-to-date sales last year) varied for different parts of the County. Most areas have slipped some in the past month. Here is a snapshot:
Bainbridge Island -60% (-59% last month)
Poulsbo +26% (+17% last month) - 35 of 43 pending are new construction
Bremerton -36% (0% last month)
Kingston -38% (-50% last month)
Silverdale -32% (-17% last month)
Port Orchard -36% (-36% last month)
Olalla -30% (-29% last month)
Statistics not compiled or published by NWMLS
