Wednesday, May 21, 2008
Mid May Kitsap Real Estate Outlook
In each of these articles we try to relate knowledge of economics and news about real estate and financial markets and to apply them to benefit your decisions about buying and selling real estate in Kitsap County. Our Presidential campaign has offered a number of examples of candidates suggesting policies that will appeal to voters in spite of not agreeing with the wisdom of competitive markets and sound economic policies. Economists were critical of the candidates who advocated cutting the gas tax this summer. They criticized the candidates who advocated that provisions of NAFTA be repealed. They criticized the candidates who support the farm bill currently before Congress. You might wonder about how the economists view the current proposals to use taxpayer funds to help homeowners in financial distress.
Economists, bankers, and politicians are concerned that the current wave of foreclosures is the result of falling prices, a different mechanism than the usual misfortunes that produce foreclosures and one that provides little recourse or incentive for the homeowner to correct. Federal Reserve Chairman Ben Bernanke has given tacit approval to the Congressional bill requiring lenders to write down a portion of the current loan principal, perhaps combined with refinancing by the FHA or another lender. Noriel Roubini, an Economics professor at NYU and one of the more pessimistic voices in analysis of the real estate and credit liquidity crisis, is a forceful advocate for the bill in Congress, calling it "nationalization of mortgages". Roubini's basic argument is that banks will lose about twice as much on each loan if they have to foreclose instead of negotiating using the Congressional plan, and that the vicious cycle of loss that results will cause severe price drops and recession and will cause many banks to fail. Robert Shiller, one of the principal developers of the Case-Shiller Price index for real estate in 20 large metropolitan areas, presented an appeal to basic human compassion rather than a technical argument as his reason for advocating passage of the bill. "...it is important to consider the psychological trauma of foreclosure. No one is likely to starve or sleep on the streets as an immediate result of a foreclosure, and the authorities no longer dump a family's furniture on the sidewalk when it happens. Nonetheless, there is deep trauma."
Shiller's position led others to criticize, such as on the Economics Blog Naked Capitalism, where Yves Smith wrote, "Now admittedly, this is not a validated instrument, but a widely used stress scoring test puts loss of spouse as 100 and divorce at 73. Foreclosure is 30, below sex difficulties (39), pregnancy (40), or personal injury (53). Change in residence is 20."
Others, such as economics writer Robert Samuelson at Real Clear Politics, object that the politicians merely want to be seen as "doing good", and that the program puts responsible tax payers in the position of paying off the loans of one to two million of the weakest borrowers.
This variability in economic opinion points out that the assumptions and validity of the calculations that underlie the bill are much in doubt. Although the Wall St. Journal reported that Moodys.com projects that by early 2009 some 12 million homeowners will have no or negative equity in their homes, the Congressional housing bill is projected to assist only about 500,000. No definitive analysis of the problems, costs, and benefits has yet been posted. It appears that the beneficiaries of the plan will be concentrated in a fairly small number of regions such as California, Nevada, Colorado, Arizona, Florida, Ohio and Michigan. A Wall St Journal article predicts that people don't want to stay in some of these areas anyway (such as the interior areas of California) because the location of the tracts are turning out to be bad bets for suburban growth. Commerce and development are not materializing as expected, so people might as well go back to the city. Falling prices, the distribution of adjustable rate mortgages, and the number scheduled to reset in the next 12 months could produce large numbers of foreclosures in other parts of the country, including Washington State. The Blog Calculated Risk reports that neighborhoods with a large number of foreclosures have seen much larger price drops than the average numbers in their community. Meanwhile, the Federal Reserve appears to be getting ready to raise interest rates to fight inflation. Then there's the small matter that home sales are rising (compared to last month) in California. Perhaps another downturn is coming that will revive the necessity. The information conflicts are confusing.
Still, there is little doubt that a version of the bill will soon become law. Though portions have not been finalized, the bill appears to have most of the following provisions:
Frank - Dodd Congressional Bill (still being negotiated)
- $300 Billion for FHA insured loans
- Lenders accept payoff of 85% of current appraised value
- 2nd liens must also be extinguished
- Lender issues new FHA insured 90% loan
- Owner occupied only, first mortgage issued between Jan 2005 thru Jul 2007
- Owner must certify inability to pay current mortgage
- Owner must meet 40% total debt to income ratio (with exceptions)
- 5% MIP (insurance premium) at closing
- 1.5% per year premium part of payments
- Reform Fannie Mae and Freddie Mac oversight, capital requirements, etc.
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 rose to 1.16 in May from 1.02 last month. First time buyer affordability rose to 1.02 from .89 in April. 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.
| Year | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|---|---|
| Annual Average interest rate | 6.54 | 5.83 | 5.84 | 5.87 | 6.41 | 6.34 | 5.80 |
| Median Income | $52,701 | $53,160 | $53,923 | $54,582 | $58,304 | $60,719 | $65,000 |
| Median Price | $165900 | $184000 | $206900 | $250000 | $275000 | $290343 | $270000 |
| Monthly payment | $880 | $867 | $975 | $1182.43 | $1378 | $1443 | $1267 |
| 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 | 1.07 |
| 1st time buyer payment | $674 | $693 | $780 | $946 | $1102 | $1155 | $1014 |
| 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 | .935 |
Here are the current statistics for Subject To Inspection (STI) and Active Listings (comparing the number in mid May to the number in mid April). 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 05/15 | STI 04/15 | Active Listings 05/15 | Active Listings 04/15 |
|---|---|---|---|---|
| S. Kitsap W. of HWY 3 | 4 | 8 | 205 | 192 |
| S. Kitsap E. of HWY 3 | 3 | 4 | 173 | 164 |
| Port Orchard | 7 | 10 | 169 | 179 |
| Retsil/Manchester | 2 | 8 | 137 | 130 |
| Seabeck/Holly | 5 | 6 | 107 | 106 |
| Chico | 4 | 1 | 32 | 35 |
| Silverdale | 6 | 7 | 126 | 125 |
| W. Bremerton | 11 | 11 | 239 | 227 |
| E. Bremerton | 9 | 4 | 122 | 116 |
| E. Central Kitsap | 5 | 3 | 178 | 167 |
| Hansville | 1 | 2 | 56 | 55 |
| Kingston | 2 | 5 | 104 | 93 |
| Port Gamble | 0 | 2 | 28 | 29 |
| Lofall | 3 | 0 | 47 | 39 |
| Finn Hill | 4 | 1 | 86 | 85 |
| Poulsbo | 7 | 2 | 156 | 156 |
| Suquamish | 1 | 2 | 45 | 38 |
| Indianola | 2 | 3 | 36 | 39 |
| Bainbridge | 12 | 6 | 273 | 262 |
| Totals | 88 | 84 | 2319 | 2237 |
The number of STI deals in May increased by 5% compared to the first two weeks in April. The activity is down 13% compared with May 2007. The number of active listings in our residential inventory increased by 4%. The inventory fell in some areas and increased in others. The ratio of sales to number of active listings remained steady at 4%. About 74% of the sales were under $400,000 (down from 82% last month) and 56% were under $300,000 (down from 69% last month). A greater proportion of higher priced homes is selling now than in the past 5 months.
Here is a graph of the mid month sti data for the past year:
May's APR is 6.226% on a 30-Year and 5.873% on a 15-Year, both Conforming. April's rates were 6.353% on a 30-Year and 5.999% on a 15-Year, both Conforming. Interest rates declined somewhat since last month - reflecting that credit markets are somewhat better. 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/.
Statistics not compiled or published by NWMLS
