Wednesday, June 25, 2008
Mid June 2008 Kitsap Real Estate Outlook
The return of summer weather has done little to brighten the outlook in national real estate markets. Harvard University’s Annual State of the Nation’s Housing was released earlier in the week. This report is loaded with statistics and has been criticized sometimes in the past as being overly optimistic, but this year’s report takes no prisoners in predicting, “The current housing slump is shaping up to be the worst in 50 years.” Since March the FBI has arrested more than 300 members of the real estate industry in a crackdown on mortgage fraud, including 6 people from the Seattle area. Recently announced updates to the Case-Shiller and OFHEO home price indexes show that prices nationwide are back to the levels of 2004, though our local estimates put current prices closer to those at the start of 2005. At least one article has warned of the increased difficulty small and mid sized banks are having in attracting new capital because of the poor track record of most of the banking deals in past several months. Also current accounting rules make buyers of troubled assets mark them to market, further contributing to poor financial results. The fear is that a spate of bank failures might occur in the near future because banks in trouble will have no source of capital to bail them out.
Congress is in the process of reconciling the House and Senate versions of the $300 billion foreclosure rescue bill - final passage of a bill is expected in mid July. During recent weeks it was revealed that several high government officials, including Christopher Dodd, one of the bill's chief sponsors, received special rate home loans arranged by then Countrywide CEO Angelo Mozilo. Since the bill is in some sense a bailout of the banks, there have been some calls for an ethics investigation of the political officials who may have benefited. The Hope Now Alliance, a coalition of banks backed by the President with a voluntary alternative to the Congressional plan, announced that it has modified its rules to speed up efforts to help struggling homeowners. The new rules, expected to be implemented within 60 days, shorten the time in which banks pledge to respond to requests, encourage lenders to accommodate borrowers seeking to sell for less than their mortgage balance (facilitating short sales), and under some circumstances resolve the concerns of second-lien holders to keep them from having to sacrifice to allow a workout to proceed. This could be a significant improvement in our area, where many of the troubled loans have second liens. While the Congressional plan brings significant new duties and responsibilities for the FHA, some recent articles have also pointed out that the agency lost $4.6 billion in 2007, particularly through failed loans in its down payment assistance program. This is a program where a non-profit or seller essentially makes the down payment for the buyer. Agency officials are advocating doing away with such programs, while home builders and Congressional advocates continue to support these programs as providing economic opportunity and allowing more buyers to enter this otherwise difficult lending market.
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 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 fell to 1.02 in June from 1.16 last month. First time buyer affordability fell to .89 from 1.02 in May. 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.
| Year | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|---|---|
| Annual Average interest rate | 6.54 | 5.83 | 5.84 | 5.87 | 6.41 | 6.34 | 6.27 |
| Median Income | $52,701 | $53,160 | $53,923 | $54,582 | $58,304 | $60,719 | $65,000 |
| Median Price | $165900 | $184000 | $206900 | $250000 | $275000 | $290343 | $269950 |
| Monthly payment | $880 | $867 | $975 | $1182.43 | $1378 | $1443 | $1333 |
| 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 | 1.02 |
| 1st time buyer payment | $674 | $693 | $780 | $946 | $1102 | $1155 | $1066 |
| 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 | .889 |
Here are the current statistics for Subject To Inspection (STI) and Active Listings (comparing the number in mid June to the number in mid May). 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 06/15 | STI 05/15 | Active Listings 06/15 | Active Listings 05/15 |
|---|---|---|---|---|
| S. Kitsap W. of HWY 3 | 4 | 4 | 212 | 205 |
| S. Kitsap E. of HWY 3 | 5 | 3 | 184 | 173 |
| Port Orchard | 4 | 7 | 164 | 169 |
| Retsil/Manchester | 3 | 2 | 139 | 137 |
| Seabeck/Holly | 2 | 5 | 112 | 107 |
| Chico | 0 | 4 | 35 | 32 |
| Silverdale | 4 | 6 | 125 | 126 |
| W. Bremerton | 7 | 11 | 232 | 239 |
| E. Bremerton | 5 | 9 | 126 | 122 |
| E. Central Kitsap | 6 | 5 | 180 | 178 |
| Hansville | 0 | 1 | 58 | 56 |
| Kingston | 1 | 2 | 102 | 104 |
| Port Gamble | 1 | 0 | 17 | 28 |
| Lofall | 0 | 3 | 46 | 47 |
| Finn Hill | 2 | 4 | 87 | 86 |
| Poulsbo | 5 | 7 | 157 | 156 |
| Suquamish | 1 | 1 | 41 | 45 |
| Indianola | 2 | 2 | 39 | 36 |
| Bainbridge | 6 | 12 | 298 | 273 |
| Totals | 56 | 88 | 2354 | 2319 |
The number of STI deals in June dropped by 36% compared to the first two weeks in May. The activity is down 40% compared with June 2007. The number of active listings (2354) in our residential inventory increased by 1.5%, falling in some areas and increasing in others. The ratio of sales to number of active listings fell from 4 to 2.4%. About 79% of the sales were under $400,000 (up from 74% last month) and 66% were under $300,000 (up from 56% last month).
Here is a graph of the mid month sti data for the past year:
June's APR is 6.733% on a 30-Year and 5.378% on a 15-Year, both Conforming. May's rates were 6.226% on a 30-Year and 5.873% on a 15-Year, both Conforming. As you can see, interest rates have risen almost half a point since last month, reflecting the premium borrowers are having to pay because of inflation fears. 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/.
One last note - while the tone of this article might seem very pessimistic, consumer sentiments are even more so. Consumer confidence (expectations for the economy in the next 6 months) is at its lowest level since measurements began in 1967. As over optimism leads the market upward, so over pessimism leads it down. Barron’s Magazine this week predicts that oil is at its peak and that the bubble may burst soon. Our economic and real estate markets are changing quickly every day, and the prospects for improvement are getting better all the time.
Statistics not compiled or published by NWMLS
