Monday, March 17, 2008
Mid March Kitsap Real Estate Outlook
On Sunday JP Morgan Chase agreed to acquire Bear Stearns (for $2 per share - down from about $70 per share last week), the shocking and rapid demise of one of the 5 largest investment banks. In addition to being the product of subprime mortgage defaults and extensive collateralized debt obligations, this failure was also somehow a product of the leveraging schemes used by hedge funds and other investors. The role of leverage in the failure of this bank and its threat to other banks and funds has not been well explained, and perhaps underlies much of the uncertainty in financial markets. Sunday’s Washington Post had a simple description of the problem, which may well continue to dog the recovery in banking and financial institutions. Inability to find the cheap short term cash loans that facilitate much of an investment bank’s business is another factor. Yet another factor was that hedge funds and other investors began closing their accounts at Bear Stearns and moving funds elsewhere - sort of a bank run by big investors.
As reported by the Wall St Journal, the Federal Reserve and Chairman Ben Bernanke have acted quickly to create “a new lending tool to help its network of primary dealers - securities firms that interact with the Fed but don’t fall under its direct banking supervision.” It also lowered the overnight lending rate between banks by 1/4 point and extended the duration for these loans from 30 to 90 days. These moves continue the Fed’s unprecedented efforts to short circuit the feedback of problems at one institution from propagating and amplifying throughout the financial system.
Separately, efforts continue to alleviate foreclosure pressures on homeowners. Rep Barney Frank has released a draft plan for $300 billion in “short refi’s” (that is to use FHA guaranteed loans to help owner refi with the bank taking less than the original loan amount in repayment). A detailed review of the bill on the blog Calculated Risk indicates that this bill balances incentives and protections against abuse. It’s unclear at this point the impact such a program might have on the number of foreclosures over the next couple years.
Benjamin Bernanke himself presented an extensive program to improve mortgage lending and foster sustainable home ownership. He addresses the causes of the current crisis, falling home equity, weak underwriting standards, resetting of ARMs to higher rates, etc. He reveals that 45% of the foreclosures are on prime or near prime, government backed mortgages. He outlines the Fed’s efforts thus far to correct problems in subprime lending practices, advertising, and incentives. If enacted, these regulatory changes would require all lenders to comply with the Fed’s guidelines, not just the banks that it regulates. There is quite a bit of meat in the article - more than we can adequately cover here.
The past several months we have been looking 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. For the past 2 months we reported that affordability had improved significantly in recent months. 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 March from 1.02 last month. First time buyer affordability rose to 1.02 from .89 in February. Things are headed the right direction.
| Year | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|---|---|
| Annual Average interest rate | 6.54 | 5.83 | 5.84 | 5.87 | 6.41 | 6.34 | 5.75 |
| Median Income | $52,701 | $53,160 | $53,923 | $54,582 | $58304 | $60719 | $65000 |
| Median Price | $165900 | $184000 | $206900 | $250000 | $275000 | $290343 | $250000 |
| Monthly payment | $880 | $867 | $975 | $1182.43 | $1378 | $1443 | $1167 |
| Affordable payment | $1,098 | $1,108 | $1,123 | $1,137 | $1,215 | $1,265 | $1354 |
| Affordability Index | 1.25 | 1.28 | 1.15 | 0.96 | 0.88 | 0.88 | 1.16 |
| 1st time buyer payment | $674 | $693 | $780 | $946 | $1102 | $1155 | $934 |
| 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 | 1.02 |
Here are the current statistics for Subject To Inspection (STI) and Active Listings (comparing the number in mid March to the number in mid February). 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 03/15 | STI 02/15 | Active Listings 03/15 | Active Listings 02/15 |
|---|---|---|---|---|
| S. Kitsap W. of HWY 3 | 8 | 7 | 182 | 160 |
| S. Kitsap E. of HWY 3 | 10 | 6 | 150 | 152 |
| Port Orchard | 11 | 8 | 176 | 173 |
| Retsil/Manchester | 4 | 3 | 138 | 130 |
| Seabeck/Holly | 5 | 3 | 105 | 96 |
| Chico | 1 | 0 | 32 | 31 |
| Silverdale | 7 | 6 | 116 | 111 |
| W. Bremerton | 2 | 9 | 224 | 218 |
| E. Bremerton | 7 | 9 | 101 | 94 |
| E. Central Kitsap | 6 | 6 | 151 | 149 |
| Hansville | 1 | 2 | 57 | 53 |
| Kingston | 1 | 1 | 80 | 78 |
| Port Gamble | 3 | 0 | 28 | 25 |
| Lofall | 2 | 4 | 31 | 33 |
| Finn Hill | 6 | 0 | 78 | 77 |
| Poulsbo | 1 | 5 | 150 | 139 |
| Suquamish | 0 | 1 | 43 | 43 |
| Indianola | 0 | 2 | 43 | 36 |
| Bainbridge | 8 | 4 | 245 | 218 |
| Totals | 86 | 76 | 2130 | 2016 |
STI deals in March increased by 13% compared to the first two weeks in February. The activity is down 31% compared with March 2007. The number of active listings in our residential inventory increased by 6%. The inventory fell in some areas and increased in others. The ratio of sales to number of active listings rose from 3.8% to 4%. About 76% of the sales were under $400,000 and 59% 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. March’s APR is 5,973% on a 30-Year and 5.494% on a 15-Year, both Conforming. February’s rates were 6.48% on a 30-Year and 6.126% on a 15-Year, both Conforming. Interest rates have fallen about half a point since last month. 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
