Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.

Moody’s Economy.com estimates that one in roughly 12 American families with mortgages—four million in all—already owe more than the current value of their homes. They are said to be “underwater.” The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue to pay mortgages on time. Many won’t, and are at risk of losing their homes.

The Treasury Department has been pressuring lenders of the Hope Now Alliance to adopt uniform voluntary criteria to speed the time for qualified borrowers to modify mortgages they cannot afford.  The House of Representatives has approved the bill sponsored by Rep. Barney Frank, which would provide for $300 billion to help qualified homeowners facing foreclosure on their present mortgage obtain, in exchange for lenders writing down a portion of the current mortgage, a new fixed rate mortgage insured by the FHA.  A weakness of this plan, as well as for the current Treasury efforts with the Hope Now Alliance, is how to address mortgage debt owed to second or subordinate position lenders, who are generally unwilling to cooperate with the commitment of the lender in first position. This is of interest in Kitsap County, which has a higher percentage of second mortgages than most other parts of the country. A new program by Fannie Mae, to be introduced at mid year, would allow refinancing up to 120% (no cash out?) without reduction in principal of the current loan. This may hold some promise.

The fear currently being expressed by leaders in banking, government, and the press is that many homeowners will give back their homes rather than continue to pay once their mortgages are worth more than their homes. While there is anecdotal evidence that investors may be doing this to some extent, a recent LA Times article notes that for most homeowners, the falling house value will not cause them to walk away if their mortgage is affordable. These homeowners understand that housing is a long term investment. Current foreclosure problems are mostly because people don’t know what to do once the huge payment shocks of exotic mortgages finally hit.  If government relief can mitigate this circumstance, it will do much to restore order in our market even as home prices continue to fall.

Housing prices tend to be strongly persistent. Sellers are reluctant to lower their prices and tend to hold on to the price they want until a willing buyer can be found. Buyers know that values are falling and therefore seek extra value at a lower price to shield themselves from equity loss in the future.  Our market expresses this inability of buyers and sellers to agree on price through a falling number of sales. If we focus on inventory levels, we can predict that prices must continue to decline. Currently Kitsap County has an inventory turnover rate of about 10.7 months. In rough terms a neutral inventory is about 6 months supply of homes, so we argue that prices must fall to allow the inventory to be reduced. Falling home prices will improve affordability (bring home prices back within balance with current incomes), which is vital since the exotic mortgages that artificially propped up prices have been removed from the lender’s shelves. 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 April (2301 listings) was up 6% from March and 24% higher than a year ago. The number of year to date pending sales was down 30% compared to a year ago. Pending sales were off significantly even in Poulsbo (down 16%), where pending sales have been up for over a year because of a plentiful supply of low cost new construction undercutting residential resale prices. Poulsbo was plus 7% last month and plus 32% the month before.  41 of 44 current pending sales in Poulsbo are new construction homes. The number of YTD closed sales Countywide (see graph below) is minus 25% compared to a year ago.

Prices are falling…
The median price has been falling, but April’s YTD median price ($270,000) is up just a few dollars from the median in March (see graph below).  The YTD median price has fallen 5.3% from a year ago. 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 remained nearly level at $349,900. Median list price was steady at about $350,000 for most of last year. It’s interesting that this number has held steady even when the median closed sale price has declined - further evidence that many sellers are holding out for a buyer at their price. The inventory turnover (total homes on the market divided by number sold last month) is 10.7 months, down from 11 months in March. A year ago this number was 6.6 months. Today a seller has a 9% 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. Here is a snapshot:

Bainbridge Island -54% (-54% last month)
Poulsbo -16% (+7% last month) - 41 of 44 pending are new construction. The surge in new construction sales started about a year ago.
Bremerton -31% (-32% last month)
Kingston -46% (-53% last month)
Silverdale -39% (-37% last month)
Port Orchard -37% (-39% last month)
Olalla -26% (-16% last month)

Bremerton Real Estate
Statistics we refer to are for that part of Bremerton encompassing the downtown core and west to Kitsap Lake. The market for other parts of Bremerton and its suburbs should have approximately similar trends. Homes in Bremerton were selling for a YTD median price of about $175,300 at the end of March, about 14% lower than a year ago. The March median price for closed sales was 6.7% lower than the median for last month. Kitsap County median prices have fallen 5.3% over the past year. The YTD number of closed sales is down 32% from a year ago (compared to a Countywide drop of 26%), and the YTD number of pending sales is down 32% from last year. The number of active listings (251) is up 37% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 16.7 months, a sharp increase from last month’s 5.8 month turnover rate. Despite a significant drop in prices, sales have slowed in Bremerton from last month.

North Kitsap Real Estate
Using the example of Kingston - the largest housing market in North Kitsap - homes were selling for a median price of about $355,000 at the end of March, down about 1% from a year ago and up about 6.3% from last month. Kingston prices fluctuate more than some of the other markets because of the lower listing and sales volume. Kitsap County median prices have fallen 5.3% over the past year. The YTD number of closed sales is down 39% from a year ago, and the YTD number of pending sales is down 53%. The number of closed sales is down 26% Countywide from a year ago. The number of active listings in Kingston (93) is up 41% from a year ago and up 11 percent since last month. The inventory turnover (total homes on the market divided by number sold last month) is 18.6 months - only 5 sales closed in Kingston last month.

Poulsbo Real Estate
Statistics we refer to are for that part of Poulsbo encompassing the downtown core, from the head of Liberty Bay southeast to Ne-Si-Ka Bay, including parts north to Sawdust Hill Rd. The market for other parts of Poulsbo and its suburbs should have approximately similar trends. Homes in Poulsbo were selling for a median price of about $349,006 at the end of March, down about 7.2% from a year ago. Kitsap County median prices have fallen 5.3% over the past year. The number of closed sales YTD has fallen 3% compared to last year (a sharp decrease from last month’s plus 23%), and the number of YTD pending sales has increased 7%. This compares to a drop of 26% since a year ago for Kitsap County as a whole. A large portion of the currently pending sales is from presales at one moderately priced new construction development - homes that never appeared as active listings. The Poulsbo listing inventory (160) has risen by 47% compared to a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 7.3 months. Calculating inventory turnover in this manner is artificially low since a number of the new construction homes closing did not show as active listings. Of 48 current pending sales, 43 are new construction. Using only the 100 non-new construction active listings in Poulsbo and the 10 non new construction sales closed last month, the inventory turnover would be 10 months.

Silverdale Real Estate
Homes in Silverdale were selling for a median price of about $330,000 at the end of March, up about 4% from a year ago. However, the YTD median dropped about 15% from its value last month, so the distribution of sales is becoming more like in past years for this market. The March median closed sale of $295,000 was 11% less than a year ago. Kitsap County median prices have fallen 5.3% over the past year. The number of YTD closed sales was down 42% from a year ago, compared to a drop in closed sales of 26% for the County as a whole. The number of pending sales YTD is down 37% from a year ago. The number of active listings in Silverdale (133) is 25% higher than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 14.8 months, a sharp increase from 9.8 months in February.

This month we again 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 April from 1.02 last month. First time buyer affordability rose to 1.02 from .89 in March. This month we include 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.

Here are the current statistics for Subject To Inspection (STI) and Active Listings (comparing the number in mid April to the number in mid March). 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 04/15	STI 03/15	Active Listings 04/15	Active Listings 03/15
S. Kitsap W. of HWY 3	8	8	192	182
S. Kitsap E. of HWY 3	4	10	164	150
Port Orchard	10	11	179	176
Retsil/Manchester	8	4	130	138
Seabeck/Holly	6	5	106	105
Chico	1	1	35	32
Silverdale	7	7	125	116
W. Bremerton	11	2	227	224
E. Bremerton	4	7	116	101
E. Central Kitsap	3	6	167	151
Hansville	2	1	55	57
Kingston	5	1	93	80
Port Gamble	2	3	29	28
Lofall	0	2	39	31
Finn Hill	1	6	85	78
Poulsbo	2	1	156	150
Suquamish	2	0	38	43
Indianola	3	0	39	43
Bainbridge	6	8	262	245
Totals	84	86	2237	2130

STI deals in April decreased by 2% compared to the first two weeks in March. The activity is down 5% compared with April 2007. The number of active listings in our residential inventory increased by 5%. The inventory fell in some areas and increased in others. The ratio of sales to number of active listings rose from 4% to 3.8%. About 82% of the sales were under $400,000 and 69% 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. April’s APR is 6.353% on a 30-Year and 5.999% on a 15-Year, both Conforming. March’s rates were 5.973% on a 30-Year and 5.494% on a 15-Year, both Conforming. Interest rates have risen significantly since last month, reflecting continued tight money and uncertainty in financial markets. 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.

Housing prices tend to be strongly persistent - sellers are reluctant to lower their prices.  The rise (or bounce back) in this month’s Kitsap median closed sale price (see graph below) along with continuing decline in the number of sales is evidence of the continuing struggle by sellers to hold on to their price until a willing buyer can be found. Buyers know that values are falling and therefore seek extra value at a lower price to shield themselves from equity loss in the future. 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 continue to decline. Currently Kitsap County has an inventory turnover rate of about 11 months. In rough terms a neutral inventory is about 6 months supply of homes, so we argue that prices must 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 March (2301 listings) was up 4% from February and 33% higher than a year ago. The number of year to date pending sales was down 33% compared to a year ago. Pending sales were off significantly from a year ago except in Poulsbo, where pending sales were up 7% last month compared to year ago. Poulsbo was plus 32% last month - the drop this month reflects the starting surge of presales at the Quadrant Homes Stendal Ridge development about a year ago.  43 of 48 current pending sales in Poulsbo are new construction homes. The number of YTD closed sales Countywide (see graph below) is minus 26% compared to a year ago.

Prices are falling…
The median price has been falling, but March’s YTD median price ($269,888) rose 1.8% compared to the median closed sale price in February. Median price for closed sales only in March rose 10% percent from the closed sale price in February (see graph below).  The monthly closed sales price had fallen 10% last month from January. The YTD median price has fallen 5.3% from a year ago (last month it was minus 6%). 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 remained nearly level at $349,900. Median list price was steady at about $350,000 for most of last year. It’s interesting that this number has held steady even when the median closed sale price has declined - further evidence that many sellers are holding out for a buyer at their price. The inventory turnover (total homes on the market divided by number sold last month) is 11 months, down from 12 months in February. Nationally this number was 9.6 months in February. A year ago this number was 5.2 months. Today a seller has a 9% 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. Here is a snapshot:

Bainbridge Island -54% (-60% last month)
Poulsbo +7% (+26% last month) - 43 of 48 pending are new construction. The surge in new construction sales started about a year ago.
Bremerton -32% (-36% last month)
Kingston -53% (-38% last month)
Silverdale -37% (-32% last month)
Port Orchard -39% (-36% last month)
Olalla -16% (-30% last month)

Some articles have reported that a major factor in falling prices has been the resale of foreclosed properties. There is no easy way to assemble these statistics for our area, but using typical keywords and seller names, we found about 100 listed properties in some stage of short sale, foreclosure, or bank owned resale - about 3.5% of our market. We found about 5% of the closed sales were from this group of distressed sales.

We have published this article monthly for most of the past year to explore some of the significant variations in the Kitsap Real Estate market. February’s inventory of homes for sale rose by 5% from January. Median year to date closed sale prices fell 5% in February compared to January and were down 6% percent compared to a year ago. We try to breakout the new construction sales from the resale market in Poulsbo to give a more accurate presentation of conditions there. Below are graphs of the month-to-month market fluctuations of total listings, number of closed sales, and median sales price for each areas. The descriptive comments for each area below cite the more consistent year-to-date numbers.

Total listings on the market by month for various Kitsap communities



Number of Closed Sales each month for various Kitsap communities



Variations in Median Price Month by Month for Closed Sales in various Kitsap communities

Bainbridge Island Real Estate
Residential homes on Bainbridge Island were selling for a median price of about $617,000 at the end of February, a drop of 7% from a year ago. The February median price for closed sales was 9.5% higher than last month’s median price of $563,500. Kitsap County median prices have fallen 6% over the past year. The YTD number of Bainbridge closed sales is down 52% from a year ago, and the YTD number of pending sales is down 60%. No doubt the Bainbridge market is suffering from the current lending environment, which prices 30 year fixed rate jumbo loans higher than conforming 30 year fixed rate loans. The number of closed sales is down 19% Countywide from a year ago. The number of active listings on Bainbridge (236) is up 37% from a year ago. The Bainbridge listing inventory has also risen 9% since January. The inventory turnover (total homes on the market divided by number sold last month) is 11.8 months. Bainbridge Island is a strong buyers market.

Bremerton Real Estate
Statistics we refer to are for that part of Bremerton encompassing the downtown core and west to Kitsap Lake. The market for other parts of Bremerton and its suburbs should have approximately similar trends. Homes in Bremerton were selling for a YTD median price of about $180,000 at the end of February, about 13% lower than a year ago. The February median price for closed sales was about the same as the median for last month. Kitsap County median prices have fallen 6% over the past year. The YTD number of closed sales is down 7% from a year ago (compared to a Countywide drop of 19%), and the YTD number of pending sales is down 37% from last year. The number of active listings (242) is up 49% from a year ago. The listing inventory has 8.5% since January. The inventory turnover (total homes on the market divided by number sold last month) is 5.8 months. Much better than average!

North Kitsap Real Estate
Using the example of Kingston - the largest housing market in North Kitsap - homes were selling for a median price of about $355,000 at the end of February, down about 3% from a year ago and down about 9.6% from last month. Kingston prices fluctuate more than some of the other markets because of the lower listing and sales volume. Kitsap County median prices have fallen 6% over the past year. The YTD number of closed sales is down 40% from a year ago, and the YTD number of pending sales is down 38%. The number of closed sales is down 19% Countywide from a year ago. The number of active listings in Kingston (84) is up 33% from a year ago and up 11 percent since last month. The inventory turnover (total homes on the market divided by number sold last month) is 28 months - only 3 sales closed in Kingston last month.

Poulsbo Real Estate
Statistics we refer to are for that part of Poulsbo encompassing the downtown core, from the head of Liberty Bay southeast to Ne-Si-Ka Bay, including parts north to Sawdust Hill Rd. The market for other parts of Poulsbo and its suburbs should have approximately similar trends. Homes in Poulsbo were selling for a median price of about $343,513 at the end of February, down about 4% from a year ago. Kitsap County median prices have fallen 6% over the past year. The number of closed sales YTD has risen 23% compared to last year, and the number of YTD pending sales has increased 26%. This compares to a drop of 19% since a year ago for Kitsap County as a whole. A large portion of the currently pending sales is from presales at one moderately priced new construction development - homes that never appeared as active listings. The Poulsbo listing inventory (158) has risen by 52% compared to a year ago and is 8% higher than it was at the end of January. The inventory turnover (total homes on the market divided by number sold last month) is 7.5 months. Calculating inventory turnover in this manner is artificially low since a number of the new construction homes closing did not show as active listings. Of 43 current pending sales, 34 are new construction. Using only the 81 non-new construction active listings in Poulsbo and the 10 non new construction sales closed last month, the inventory turnover would be 8.1 months.

Silverdale Real Estate
Homes in Silverdale were selling for a median price of about $387,500 at the end of February, up about 29% from a year ago. This rise in prices is not across the board, but instead reflects an increased number of sales in higher price ranges. Kitsap County median prices have fallen 6% over the past year.  The number of YTD closed sales was down 33% from a year ago, compared to a drop in closed sales of 19% for the County as a whole. The number of pending sales YTD is down 32% from a year ago. The number of active listings in Silverdale (118) is 19% higher than a year ago, and it’s also 17% higher than it was at the end of January. The inventory turnover (total homes on the market divided by number sold last month) is 9.8 months. 

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.

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.