The Blog Calculated Risk has for some time been commenting on the "distressing gap" between the Nation's new home sales and existing home sales. The two categories normally track closely together, but now display a divergence, which in the past Calculated Risk has attributed to the inability of builders to compete with the Foreclosure/REO market, often for similar homes in the same neighborhoods. The gap has recently widened further as a result of the first time homebuyer credit.

We think another factor in the paucity of new construction sales is affordability, as discussed in our most recent monthly evaluation of affordability in the Kitsap real estate market.

According to this report, the first time home buyer tax credit legislation with be expanded to include certain qualifications of move up buyers.

From Calculated Risk blog:

The details:

•  Income eligibility for first-time home buyers stays at $75,000 for individuals and $150,000 for couples.
•  For move-up buyers, income eligibility is $125,000 for individuals and $250,000 for couples.
•  There is a minimum 5 year residency requirement in their current home for move-up home buyers.
•  The tax credit is the lesser of $7,290 or 10% of the purchase price.
•  The credit runs from Dec. 1, 2009 to April 30, 2010, with an additional 60 day period to close escrow. (So end of April to sign contract, end of June to close escrow)
•  Expect bill to be signed by Friday.

Another report earlier in the day from Simon Johnson and James Kwak in the Washington Post argues that this tax credit is throwing good money after bad and making unaffordable homes temporarily affordable.

We've passed earlier information about the economic impact of the $8,000 first time home buyer tax credit. Basically the analysis is that most buyers would have purchased anyway, so the actual cost of each home purchased because of the tax credit is over $40,000 per sale. Still it's hard to evaluate the impact of incentives on motivating people to act.

However, it appears that the first time home buyer credit will be extended, if for no other reason than to make sure that the people currently in the que can obtain the credit. At least one form of proposed extension will phase out the credit over a longer period in 2010.

This month we reflect the impact caused by subprime lending, which at its height allowed borrowers to qualify for loans that were approximately twice what they could have qualified for with current lending standards. A client recently lamented that the offer we were presenting for his property was less than what it cost to build the house. If the value was there, why was no buyer willing to pay? Most people probably assume that the housing market will at some point go up again, but while incentives, low interest rates, and falling prices have spurred the market for homes below $200,000 to approximate that of 2006, sales of homes priced from $300,000 to over $1 million are more than 50% below the levels of 2006.

The Wall St Journal finds a bunch of reasons why there are “Fewer McMansions on the Horizon”.  For instance, they note that people are buying smaller houses because of demographic changes. However, they don’t connect the dots pointing at the change in lending practices, which, despite low interest rates, has greatly reduced the number of buyers who qualify for the higher price ranges. The left over new construction product, geared to be profitable because a large segment of our population could afford to purchase McMansions, now fall in price because the loan qualification income bar has been raised considerably, creating a scarcity of buyers.

Despite the current improvements in the low end of our housing market, affordability has been severely restricted compared to the bubble years, when exotic and risky lending practices greatly expanded buyer’s borrowing capability, resulting in a much larger pool of buyers for higher priced homes. This is described clearly in Marc Hanson’s blog, where he states:

In a nutshell, loan types such as zero to 5% down $500k Pay Option ARMs with a payment rate of 1% and loan features such as stated income made houses very affordable. Houses were so affordable due to leverage in finance that if a buyer could only afford a $300k house on a 30-year fixed, a quick loan type change would double his buying power. This is not the case any longer — today, buyers can only buy what they can afford and qualify for based upon income, assets, debt load and credit. They can’t reach outside of their affordability bands any longer.

In the boom years many $400,000 homes were sold to buyers with household incomes of $50,000, while today, even with record low interest rates, a buyer with $75,000 in household income must struggle to afford this loan, especially the down payment. This reduction in the pool of buyers means not only that these more expensive homes will sell for less, but that the distribution of homes in future new construction developments must also change to accommodate the reduction in borrowing capability. Restoring full employment and a robust economy won’t cause a return to the old market because the lending programs that allowed buyers to borrow up to twice as much as with today’s loan programs are no more.

Compare year-to-date closed sales in 2009 with 2006 (when exotic loans were still widely available) in the table and graph below. Although sales $200,000 and below compare well in 2009 with 2006, between $300,000 and about $1 million current sales are only about half what they were in 2006. Unlike then, despite lower interest rates now, buyers must now provide down payments, must prove their income, and no longer receive super low teaser interest rates on their loans.

 Year-to-date Kitsap Residential Sales - 2006 vs 2009

Price range	2006	2009	%diff 2009 vs 2006
0-100k	26	66	+153%
100k to 200k	533	492	-8%
200k-300k	1378	819	-40%
300k-400k	631	311	-51%
400k-500k	279	126	-54%
500k-600k	161	56	-65%
600k-700k	86	43	-50%
700k-800k	58	22	-62%
800k-900k	46	17	-63%
900k-1000k	35	11	-68%
1000k-1250k	28	13	-53%
1250k-1500k	8	9	12.5%
1500k-1750k	6	3	-50%
1750k-2000k	2	1	-50%

Note that in this same $300k - $1 Million range the shape of the 2007 (when the number of listings and the median sales price were near peak) and 2009 listings for sale showed a slight bulge in inventory compared with the shape of the curves for listings sold. Also see how the inventory in this price range has fallen in 2009 compared to 2007, while the inventory in the $200k and under market is larger now than it was in 2007.

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. Note that unlike the discussion above these calculations only compare the affordability of standard conventional loans, not the different types of loan products that have been offered. 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 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 2003, 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 some buyers cannot afford to purchase. Our numbers for 2009 are estimates using the latest monthly data for median prices and interest rates (2008 has been updated with average annual values), and an estimated median family income for 2008 and 2009. With interest rates falling from 5.22% last month to 5.15% in October for a typical 30 year fixed rate conforming loan and the median price rising a couple percent in October to $250,000, affordability is very good. Keeping in mind how median prices can be deceptive, you should be aware that the bulk of sales are concentrated below $400,000, with considerably fewer than normal in the higher price ranges. The affordability index degraded slightly to 1.24 in September from 1.25 in August. First time buyer affordability degraded to 1.08 from 1.10 last month. Below is a  graph of the year-to-year changes in affordability and a second graph showing month-to-month affordability progress over the past year.

Year	2003	2004	2005	2006	2007	2008	2009
Annual Average interest rate	5.83	5.84	5.87	6.41	6.34	5.80	5.15
Median Income	$53,160	$53,923	$54,582	$58,304	$60,719	$65,000	$65,000
Median Price	$184000	$206900	$250000	$275000	$290343	$265000	$250000
Monthly payment	$867	$975	$1182.43	$1378	$1443	$1244	$1092
Affordable payment	$1,108	$1,123	$1,137	$1,215	$1,265	$1,354	$1,354
Affordability Index	1.28	1.15	0.96	0.88	0.88	1.09	1.24
1st time buyer payment	$693	$780	$946	$1102	$1155	$995	$874
1st time buyer affordable payment	$775	$786	$796	$850	$885	$948	$948
1st time buyer affordability index	1.12	1.01	0.84	0.77	0.77	.953	1.08

October's APR is 5.191% on a 30-Year and 4.700% on a 15-Year, both Conforming. September's rates were the same. If you qualify for FHA or VA loans (or the newly popular USDA loans), these programs have are attractive for low downpayment buyers. Limits for FHA and conventional conforming loans went up with the stimulus bill signed earlier this year. FHA maximum is $475,000, and the conventional conforming limit has returned to $475,000. Lending programs for jumbo loans have improved considerably, with the larger banks starting to come back to this market. A typical 30 year fixed jumbo APR (with total costs of the loan, not just the rate factored in) is 5.895% on one major bank web site. Local credit unions and savings and loans may be able to beat this rate for some jumbo loans. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/.

We've just updated our web site with the October waterfront update, which you can see by visiting the Kitsap Waterfront page or by downloading the waterfront update itself.

Each month we publish a snapshot of several local markets to show variations in our larger Kitsap County real estate market. September's inventory of homes for sale fell by 25% from a year ago and was 3% lower than in August. The listing inventory fell sharply late last year and has never recovered this year, implying that there is a considerable shadow inventory of homes with sellers waiting for a better market. The County has a listing inventory turnover rate of about 6.9 months, somewhat better than August's 7.4 months, and considerably better that we've seen for the past year and a half. Inventory turnover varies greatly by price, with an inventory turnover as low as 3 months for the lower price ranges and 120 months turnover for homes priced above $900,000. September's closed sale median price ($250,000) was up 2% from August and was down 5% percent compared to a year ago.  The number of pending sales in September was up 8% from a year ago and just about the same as in August. The links to regional market trends below will show both tables and graphs that further enhance the data reported below.

See graphs at http://www.bprowse.com/kitsap_market_trends

Bainbridge Island Real Estate
Bainbridge Island residential properties were selling for an September median price of $592,000, about 11% lower than in August. The more stable three month moving average of closed sale price fell 17% from last month to $580,417 and is 2% lower than it was a year ago (recall that the median price can be misleading when the price distribution of sales is changing). Sales at the top of the market lagged - there was only 1 closed sale above $900k in Kitsap County last month. The Kitsap County 3 month moving average median price has fallen 8% over the past year. Note that prices tailed off at the end of last year so we expect this gap to close in the coming months. The 3 month moving average for Bainbridge Island's number of  closed sales is 15% higher than a year ago - a testament to last months jump in sales. The 3 month moving average number of pending sales in September rose 30% from a year ago. The 3 month moving average of closed sales is up 14% Countywide from a year ago. The number of active listings on Bainbridge (242) is down 9% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 9.3 months, a jump improvement from the 13.9 month turnover rate of last month . Bainbridge Island is a buyers market.

See tables and graphs at http://www.bprowse.com/bainbridge_island_market_

Bremerton Real Estate
Statistics are for the Bremerton downtown core and west to Kitsap Lake. The market for other parts of Bremerton and its suburbs should be similar. Bremerton homes were selling for a month end median price of $159,000 at the end of September, about 18% lower than a year ago and down 4% from last month. The more stable 3 month moving average was 13% lower than a year ago.  The Kitsap County 3 month moving average median price has fallen 8% over the past year.  Bremerton's 3 month moving average for number of closed sales is up 11% from a year ago. The number of closed sales is up 14% Countywide from a year ago. The 3 month moving average number of Bremerton pending sales is up 46% from last year, but recall this number includes pending short sales that may not close. The number of Bremerton active listings (178) is 31% lower than a year ago. The inventory turnover (total Bremerton homes on the market divided by number sold last month) is 6.1 months (better than the 8.2 last month but definitely improved from 14.1 months a year ago). The Bremerton market is probably still a buyers market because of shadow inventory that has been pulled off unsold.

See tables and graphs at http://bprowse.com/bremerton_market 

North Kitsap Real Estate
Statistics here are for Kingston, the largest housing market in North Kitsap. Activity in Kingston should be representative of the other areas in North Kitsap. Kingston homes were selling for a month end median price of about $309,500 at the end of September, 26% lower than a year ago. The low sales volume can produce large fluctuations when one or two high priced homes sell.  The more stable 3 month moving average of closed sale prices is down 22% compared to a year ago.  The Kitsap County 3 month moving average median price has fallen 8% over the past year.  The 3 month moving average number of Kingston closed sales fell 14% from a year ago, while the number of pending sales is 50% higher than a year ago. Recall our current pending sales include pending short sales that may not close. The number of closed sales is up 14% Countywide from a year ago. The number of active listings in Kingston (59) is down 39% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 9.8 months (worse than the 13.6 months last month). Sales in North Kitsap still seem to be slower than farther south in the County. Kingston is a buyer's market.

See tables and graphs at http://bprowse.com/north_kitsap_market

Poulsbo Real Estate
These statistics are for Poulsbo, including the downtown core, from the head of Liberty Bay southeast to Ne-Si-Ka Bay, and parts north to Sawdust Hill Rd. Other parts of Poulsbo and its suburbs should have similar trends. The September median sales price for Poulsbo was $301,000, down about 8% from a year ago. The more stable three month moving average closed sale price was $291,987, about 11% lower than in September 2008. The Kitsap County 3 month moving average median price has fallen 8% over the past year. The 3 month moving average number of closed sales in Poulsbo rose 5% from a year ago. The number of closed sales is up 14% Countywide from a year ago.  September pending sales were down 7% in Poulsbo. Recall this number includes pending short sales and new construction that may not close soon. The Poulsbo listing inventory (98) is 36% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 5.2 months, somewhat worse than the 4.4 months reported last month - but still very good. Poulsbo is probably still a buyers market because of the shadow inventory of homes pulled off the market in the past year without selling, but looks like it has improved recently.

See tables and graphs at http://bprowse.com/poulsbo_market

Silverdale Real Estate
Homes in Silverdale were selling for a September median price of about $275,000. This median is down 8% percent from a year ago. Silverdale's more stable 3 month moving average median closed sale prince in September of $284,333 was down about 4% from a year ago. The Kitsap County 3 month moving average median price is down 8% compared to a year ago.  The 3 month moving average for Silverdale's number of closed sales was 67% higher than a year ago, compared to a rise in closed sales of 14% for the County as a whole. The number of Silverdale pending sales in September is up 7% from a year ago, but recall this number includes pending short sales that may not close. The number of active listings in Silverdale (93) is 23% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 5.5 months, same as last month and very good compared to many areas. Silverdale is looking now like a seller’s market, but there appears to be a large shadow inventory of unsold homes not currently on the market that will deter prices from rising.

See tables and graphs at http://bprowse.com/silverdale_market  

There is lot of evidence that the real estate sales in the 4th quarter this year should easily surpass the rapidly declining numbers from last year and that the total for closed sales this year may well exceed the numbers in 2008. At the same time there is no real evidence that there has been a turn around in prices. Closed sales this year are 2% behind last year (4% behind last month), pending sales are running 24% ahead (27% ahead last month). The County has a listing inventory turnover rate of about 6.9 months, improved from August's 7.4 months. In August, there were 243 closed sales and 348 pending sales. In September there were 253 closed sales and 350 pending sales. Shown below is a graph of month-by-month pending sales vs closed sales. 

 

A typical pending sale should close within 60 days, so we should see the closed sales lagging pending sales by about 2 months. However, in our situation the closed sales level has not reached the pending sales level for 6 months, so something else is up. Tighter lending standards, delays in approving short sale offers, and sellers and bank owned properties with little room to give have made it more difficult for Realtors to close sales. Shown below are graphs of inventory and inventory turnover for Kitsap County in 2007-09.  The inventory turnover (total homes on the market divided by number sold last month) is 6.9 months, somewhat better than the 7.4 months in August yet a little worse than in July. The inventory turnover also varies significantly by price range, with higher priced homes selling more slowly than lower priced homes. See the graph below for a better perspective. In the higher price ranges it is definitely improving even though it is still slow. Every seller is in a price war and beauty contest at the same time. If your price is not best among comparable properties, the chance of sale is very small. Below is a historical depiction of the changes in the ratio of listings to closed sales.

Listing Inventory

Kitsap County's residential inventory in September (1739 listings) is about 3% lower than August and down about 25% from a year ago. The rise and fall in this year’s number of listings is counter to most years and suggests  that a portion of last year's sellers may be waiting for conditions to improve.  Inventory has been held down artificially by the accounting for short sales, where properties with offers still awaiting bank approval are shifted to pending status even though many of these properties are still open to receive other offers.

Kitsap Listing Inventory

Pending and Closed Sales

The number of pending sales in September was up 8% compared to a year ago and about the same as August. The statistics for September pending sales (compared to September sales last year) varied for different parts of the County. Below is a cluttered graph showing the 3 month moving average of pending sales for different parts of the County.

The 3 month moving average number of closed sales Countywide is up 14% compared to a year ago, improved from plus 12% last month.

Median Sales Price
The median price in Kitsap County has been pretty steady this year, and is up slightly from the beginning of the year. September's median price ($250,000) was up 2% from August (see graph of 3 month moving average below), and is about 5% lower than a year ago. This low median price coupled with historically low interest rates (but higher than earlier this year) has maintained good affordability. Conventional mortgage rates have fallen a bit recently. Jumbo loans are becoming more accessible - they are offered at about .8 to .9% higher than the 30 yr fixed rate conventional.  With passage of the President's Stimulus Program, the conventional, VA, and FHA loan limits were restored to $475,000 in Kitsap County, which should give a lift to sales of higher priced homes. We have reworked our median price graphs to show a 3 month moving average of prices, which will better show trends and reduce the month-to-month fluctuations.

Kitsap Median List Price

The September median list price rose slightly from $337,500 to $338,950. This market is in transition, with the percentage of sales in the upper price ranges still depressed compared to the past several years and what could be a large number of listings withdrawn into a shadow inventory that could return to the market if prices improve.

As the economy jives and shimmies its way out of recession, an observer confronted with the facts of high unemployment and continued banking and credit problems nevertheless might conclude that though the picture doesn’t look too good, there is a certain optimism. Mortgage rates for 30 year fixed rate loans have again fallen below 5% (driven down by Federal Reserve policies) and jobs don’t appear to be coming back. The local Kingston Share Net food bank sees no drop off in demand.

Credit markets are still hurting. Consumers and small businesses find themselves unable to get credit - while large well capitalized companies can obtain credit easily. The problem is that many investors are reluctant to buy securitized debt, which funded most credit in the past few years. The blog Baseline Scenario mused that there is no reason why the next bubble has to be in securitized debt - why not something else, and Paul Krugman is cited for his advocacy of a return to traditional bank lending. The exception to this credit shortage is housing, where consumers can still get low downpayment loans from FHA, VA, and Department of Agriculture. Now there is concern that FHA may need a bail out as their reserves have fallen below the minimum required by Congress. Also, while the well capitalized big banks have picked up more than half of the home mortgage lending market, small independent mortgage lenders have been frozen out by the high cost of capital and lack of access. Now Fannie Mae has launched a program to guarantee the debt of these smaller lenders providing they make home loans conforming to standards of Fannie and Freddie Mac. Since Fannie is already guaranteeing the debt of these loans, some observers think this is just another opportunity for Fannie to fail.

So with all of these negative reports related to the progress of our recovery, the Central Bank of Australia surprised everyone last week by raising their short term interest rate target - which is to say they think the boom is coming and are acting now to prevent inflation. The exchange rates for the US Dollar plummeted against most major currencies as investors fled safety to pursue opportunity and higher interest rates elsewhere. While the favored political position is always to back a strong dollar, the weakening of our currency is an opportunity to sell more US exports and relieve our country’s trade imbalance.

We have repeatedly advocated more government and banking industry support for short sales as the most efficient course to sell off most of the distressed property inventory. The government recently announced that the Home Affordable Modification Program has met its goal of 500,000 trial loan modifications. Almost at the same time, the Congressional Oversight Committee challenged the efficacy of the program, noting that only slightly more than 1% of the trial modifications had thus far become permanent. As an aside, much of the  current debate in government policy concerns whether the government has the wisdom to implement efficient policies to correct our economic problems - versus a point of view that these problems are so complex and unpredictable that the unintended consequences will not be worth the effort. New York Times columnist David Brooks recently provided a clever depiction of the problem.