You can view or download the Prowse and Company December 2009 Newletter at this link:

http://www.kitsaphomefinder.net/news/decnews09web.pdf

Happy New Year!

This has been an eventful year for our Kitsap real estate market and for the national market as well. Here are some of the landmark events from the past year (with links to find more detail):

• Congress passed the American Recovery and Reinvestment Act: Job creation from the $800 billion stimulus has not gone as predicted in January. In June we realized that unemployment numbers were much higher than the predicted worst case, even though the stimulus had been passed. Kitsap County, with a higher percentage of government jobs, has about 7.6% unemployment, compared to the national rate of about 10% and a state rate of about 9.2%.
• The first time homebuyer tax credit resulted in many renters pursuing purchases of low priced homes as prices in the low end fell dramatically and sales increased. One study showed that the actual cost to obtain a new buyer in the program was $43k per home sold. Rental vacancy rates have reached record highs.
• Treasury's Financial Stability Plan was developed to get credit flowing by conducting bank stress tests. Results in May showed none of the 19 largest banks were to be failed, but that some needed to raise capital.
• Treasury introduced the Home Affordability and Stability Plan: Home Affordable Modification Program (HAMP) offered $75 billion assistance to help 7 to 9 million homeowners with mortgage mods or refinancing. Few mortgage mods have been made permanent thus far. Recently approved new guidelines for short sale and deed-in-lieu for non GSE loans to go into effect next April. Support for Bankruptcy law modification to permit mortgage cram downs by bankruptcy judges did not pass in Congress. To strengthen the GSEs (Fannie Mae and Freddie Mac), Federal Reserve purchases of GSE mortgage backed securities and debt have helped maintain historically low interest rates for fixed rate conventional loans.
• In July 2009 we saw reports that the world was pulling out of the recession.
• By late summer the number of conventional conforming mortgages began to greatly exceed other forms of home loans in number of defaults as the toll of falling home prices took effect. 14% of all loans in the US are in default or foreclosure.
• The percentage of new construction sales nationwide has fallen behind the percentage of residential resales by a considerable margin this year, whereas normally the two categories track closely together. One expert surmises that this is because builders cannot compete in price with the foreclosure market, where banks are operating with a much different motivation to rid themselves of problem properties and loans. Recovery of the real estate market is in large part dependent upon recovery of the new construction business. Kitsap County's construction sector is faring poorly much as elsewhere in the country. The recently announced closure of Parker Lumber in Bremerton testifies to this.
• The number of Kitsap County closed sales for 2009 exceeds the number in 2008. There is speculation that prices in the higher price ranges will continue to fall in the coming year, whereas the lower price ranges may be approaching a bottom. Listing inventory (1526 homes in November) has fallen to its lowest level in several years, but there is again speculation that there is still a considerable shadow inventory of bank owned properties not on the market, potential foreclosures currently pursuing loan modifications, and sellers holding out for a better market (we estimate about 1000 total). Pending sales were running well ahead of closed sales for most of the year because of long lead short sales and REO sales. Pending sales declined significantly at year end.
• While the large banks are being protected and enabled by government policy, there have been 140 community and regional bank failures. Westsound Bank in Bremerton failed in the spring. Frontier Bank, Golf Savings Bank, and American Marine Bank in Kitsap County have received FDIC letters. Experts anticipate that more banks will fail next year than this year.
• Although affordability for conventional loans has improved significantly this year as prices have fallen and interest rates have remained low, buyers cannot borrow anywhere close to as much as they could several years ago when exotic loans could be obtained. As a result, many homes were built in the higher price ranges where now the pool of buyers has become much smaller, first because buyers with a given income cannot borrow nearly as much, and secondly because buyers must now have a large downpayment whereas a few years ago large sums could be borrowed with no money down.

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 rising from 5.02% last month to 5.34% in December for a typical 30 year fixed rate conforming loan and the median price falling in December to $240,000, affordability is improved slightly and remains very good even though rates fell into the mid 4% range in the interim. The outlook for rates is that they will continue to rise in the coming year, with some experts predicting theyll reach 6% by the end of 2010. 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 improved to 1.27 in November from 1.24 in October, despite the rise in interest rates. First time buyer affordability improved to 1.11 from 1.09 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	5.34
Median Income	$53,160	$53,923	$54,582	$58,304	$60,719	$65,000	$65,000
Median Price	$184000	$206900	$250000	$275000	$290343	$265000	$240000
Monthly payment	$867	$975	$1182.43	$1378	$1443	$1244	$1070
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	1.27
1st time buyer payment	$693	$780	$946	$1102	$1155	$995	$856
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	1.11

December's APR is 5.444% on a 30-Year and 4.952% on a 15-Year, both conforming. November's rates were 5.065% on a 30-Year and 4.573% on a 15-Year, both conforming. 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 - unchanged from last month. 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/.

That's about all we have to say in 2009. We at Prowse and Company wish you a Happy New Year!

Prowse and Company’s December 2009 Kitsap Waterfront Update is now ready for download. You can view the waterfront page here or download the newsletter here.

The headlines today are about November's 7.4% rise in the number of closed home sales nationally. This spike in sales was fueled by the expiring 1st time homebuyer tax credit - 51% of the sales were to first time buyers. However, we want to talk about the inventory of homes for sale. The National Association of Realtors reported that the national inventory of homes for sale is at a 44 month low. The inventory of homes for sale in Kitsap County has been very low this year compared to the last two years, as shown in this graph.

You'll see in the local area write-ups below that although the inventory turnover has fallen to 6 months or less in some areas, we continue to predict that we have a buyer's market because of shadow inventory. Recently an article in Housing Wire cited a report from First American Core Logic stating that nationally there are now 1.7 million homes in the shadow market as of September 2009, up from 1.1 million a year ago (about a 55% increase).

How many homes are there in the Kitsap County shadow market? The shadow market consists of bank owned properties not yet on the market, foreclosures in process and seriously delinquent loans, new high rise condos (not significant in our area), and homeowners waiting for a better market. If we make the assumption that the shadow market consists entirely of underwater or near underwater homeowners, we can come up with an approximate number for our county. According to Census information, there are 100,924 total housing units in Kitsap County, with about 63,029 owner occupied units. Of these, 47,105 have mortgages. We choose only to look at owner occupied units because the Home Affordable Modification Program (HAMP) only applies to owner occupied units, and the mortgage modifications of this program are delaying the majority of foreclosures.

The number of homeowners with negative or nearly negative equity varies greatly by state, as shown in this article in Calculated Risk. In Washington State, the percentage of homeowners underwater or nearly underwater is about 19%, about in the middle nationally. So in Kitsap County there might be 8,949 owner occupied units underwater or nearly (within 5%) underwater. If nationally there are 10.7 million homes with negative equity plus 2.3 million with near negative equity (total 13 million), and the shadow inventory is 1.7 million, and the greatest number in the shadow inventory come from those with negative equity, we can approximate the shadow inventory in Kitsap County by using the ratio of national shadow inventory to national negative equity - about 13%. That would mean about 1,092 Kitsap homes could be in the shadow inventory. This calculation is inexact, but probably a reasonable order of magnitude.

Since there are currently only about 1500 homes listed for sale in Kitsap County, flooding our market with a thousand more units of shadow inventory might mean that there will be another dip in the housing market, prices again falling as a small pool of buyers purchase only the best values available. Some groups, like Radar Logic in a report on Housing Wire, assert that the banks are now controlling the rate at which foreclosures now come on the market so that there won't be a flood of new foreclosure inventory if a large number of loan modifications don't convert to permanent.

"Thanks to federal bailout money and a general improvement in their financial health, banks have been relieved of the urgent need to liquidate their assets. As a result, lenders and government entities like Fannie Mae and the FDIC have been able to curtail sales to raise prices and avoid recording losses on properties", according to the report.

Meanwhile an analysis from Deutsche Bank states that nationally prices will drop another 10-12% in the coming year as the governments policy actions will be no match for high unemployment, tight credit, and rising negative equity. Just to add a little confusion, there are conflicting reports about whether current prices are going up or down. The Case Shiller Index, which is yet to be released, has shown a modest rise recently. A Housing Wire article states that Global Insight shows a .2% rise in prices over the 3rd quarter, but warns against extrapolating on the trend. The same article noted that FHFA's index is rising. Now Calculated Risk has reported that October home prices are falling based on First American Core Logic's Loan Performance House Price Index.

Stay tuned - there are lots of conflicting statements and signals in our market right now.

The blog Calculated Risk points out that this month's Federal Reserve Open Market Committee assessment of the state of the housing market was weaker than last month's. A the article notes in comparing the two statements:

The other important point in the Fed statement was the recognition that the housing sector is not as strong as it appeared in November.

The wording change was small:

Dec: "The housing sector has shown some signs of improvement over recent months."

Nov: "Activity in the housing sector has increased over recent months"

As I noted this morning, existing home sales will be very strong in November (as buyers rushed to beat the initial tax credit deadline), but the indicators for residential investment have been mostly flat to weak in Q4. This includes the NAHB housing market index, housing starts, new home sales and the MBA purchase index.

Residential investment (RI) is the best leading indicator for the economy, and I expect the recovery in RI to be sluggish. In the fourth quarter GDP will be strong because of inventory restocking and stimulus spending, but my guess is 2010 will mostly be weak (I'll try to quantify this soon).

Just to accentuate the point, note that pending existing home sales in our area fell dramatically.

William Connerly, the Northwest Economist who is sponsored by Viking Bank to make an annual presentation to business customers of the bank, publishes a monthly newsletter with simple graphs and handwritten comments. It's useful because it's easy to understand.

You can see it here.

Each month we publish a snapshot of several local markets to show variations in our larger Kitsap County real estate market. November's inventory of homes for sale fell by 26% from a year ago and was 5% lower than in October. 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 6.1 months, somewhat better than October's 6.4 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 4 months for the lower price ranges and as much as 50 months turnover for homes priced above $700,000. November's closed sale median price ($240,000) was dropped 5% from October and was 8% less than a year ago.  The number of pending sales in November was up 31% from a year ago (recall that November 2008 was a very bad month for our economy) even though pending sales fell by 43% in October. Some regional numbers look like eye popping improvements, but recall that there were quite a few buyers trying to beat the end of November deadline for the first time homebuyer tax credit, so who knows whether this trend will continue.  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 November median price of $492,000, about 1% lower than in October. The more stable three month moving average of closed sale price fell 6% from last month to $501,667 and is 15% lower than it was a year ago. Sales at the top of the market, while still pretty slow, did improve somewhat compared to previous months. The Kitsap County 3 month moving average median price has fallen 4% 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 38% higher than a year ago. The 3 month moving average number of pending sales in November rose 11% from a year ago. The 3 month moving average of closed sales is up 22% Countywide from a year ago. The number of active listings on Bainbridge (188) is down 13% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 11.7 months, a sharp drop off from the 8.7 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 $164,975 at the end of November, about 24% lower than a year ago and about 3% higher than last month. The more stable 3 month moving average was 22% lower than a year ago.  The Kitsap County 3 month moving average median price has fallen 4% over the past year.  Bremerton's 3 month moving average for number of closed sales is up 24% from a year ago. The number of closed sales is up 22% Countywide from a year ago. The 3 month moving average number of Bremerton pending sales is up 17% from last year, but recall this number includes pending short sales that may not close. The number of Bremerton active listings (151) is 27% lower than a year ago. The inventory turnover (total Bremerton homes on the market divided by number sold last month) is 5.4 months, a little worse than the 6.7 last month. It’s a good bet that the Bremerton market benefitted from the rush to beat the first time home buyer tax credit expiration. 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 $275,000 at the end of November, 12% higher 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 15% compared to a year ago.   The Kitsap County 3 month moving average median price has fallen 4% over the past year.  The 3 month moving average number of Kingston closed sales rose 50% from a year ago, while the number of pending sales is 140% 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 22% Countywide from a year ago. The number of active listings in Kingston (52) is down 43% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 8.7 months (worse than the 3.9 months last month). While we definitely see evidence of lower prices and higher sales, we suspect that Kingston will continue to be 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 November median sales price for Poulsbo was $291,378, down about 14% from a year ago. The more stable three month moving average closed sale price was $298,293, about 10% lower than in November 2008. The Kitsap County 3 month moving average median price has fallen 4% over the past year. The 3 month moving average number of closed sales in Poulsbo rose 18% from a year ago. The number of closed sales is up 22% Countywide from a year ago.  November pending sales were up 11% from a year ago in Poulsbo. Recall this number includes pending short sales and new construction that may not close soon. The Poulsbo listing inventory (84) is 45% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 4.2 months, a little worse than the 3.9 months reported last month. Poulsbo’s market has been humming along for the past several months, but it is probably still a buyers market because of the shadow inventory of homes pulled off the market in the past year without selling.

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

Silverdale Real Estate
Homes in Silverdale were selling for a November median price of about $275,000. This median is up 17% percent from a year ago. Silverdale's more stable 3 month moving average median closed sale price in November of $275,750 was up about 3% from a year ago. Silverdale’s median price fell sooner and has remained fairly stable over the past year. The Kitsap County 3 month moving average median price is down 4% compared to a year ago.  The 3 month moving average for Silverdale's number of closed sales was unchanged from a year ago, compared to a rise in closed sales of 22% for the County as a whole. The number of Silverdale pending sales in November 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 (74) is 24% lower than a year ago. There are only about half as many homes on the market now as there were at peak inventory in mid 2007. The inventory turnover (total homes on the market divided by number sold last month) is 5.7 months, better than the 8.1 months reported last month. Silverdale has been one of the area’s better markets, 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  

Our November 2009 Kitsap Real Estate Market Report has been posted at ProwseRealEstate.com. It is reposted here in its entirety.

Each month this year we’ve devoted a portion of our newsletter to the major national economic stories at the time of publication, usually related to housing or lending. In this year’s lull between Thanksgiving and Christmas, there are still huge issues to be resolved before any meaningful real estate recovery can begin, but these are mostly out of the media spotlight, as if the public has become numb to the millions of Americans owing more than their homes are worth and millions facing default or foreclosure. Unemployment still exceeds 10%, more than 8 million homeowners are in default or foreclosure, and 23% of all loans owe more on the home than the property is worth.

There has been some mention that the Home Affordable Modification Program (HAMP) is not helping many distressed homeowners obtain loan modifications to avoid foreclosure. Although loan servers report nearly 700,000 trial loan modifications have been started, as of December 13th, only 31,382 had been converted to permanent modifications. HAMP modifications apply only to the first mortgages of the owners primary residence (a one to four unit home). A new program, called Home Affordable Foreclosure Alternatives Program (HAFA), allows HAMP applicants who are turned down or fail to obtain a permanent loan modification to request consideration for a short sale or deed-in-lieu of foreclosure as an alternative to foreclosure. You can find out more about short sale and deed-in-lieu of foreclosure by downloading our free report. A recent article from Housing Wire states that the program will be implemented in April 2010 and lays out some of the incentives that Treasury is offering qualified Loan Servicers to complete these alternatives to foreclosure. We take this newest initiative as a positive step by the government to provide underwater homeowners with some better tools to avoid foreclosure and to help banks rid themselves of non performing assets.

The HAFA program is voluntary for Loan Servicers. The President has stepped up pressure on the large banks to better support government initiatives for small-business lending, mortgage modifications, executive compensation and financial regulation.

Our real estate market has reached a milestone as the number of closed sales this year has finally surpassed the year-to-date number from 2008, but there was a big drop in pending sales last month. Kitsap County closed sales this year are 1.4% ahead of last year (1.4% behind last month), pending sales are running 27% ahead of last year (27% ahead last month). In October, there were 249 closed sales and 359 pending sales. In November there were 252 closed sales and 205 pending sales. Shown below is a graph of month-by-month pending sales vs closed sales.

We expect a gap between the number of closed sales and the number of pending sales to continue. 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. 

 

 

 

Residential Highlights
Kitsap County's residential inventory in November (1526 listings) is about 4% lower than October and down about 26% 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. The number of pending sales in November was up 31% compared to a year ago (even though it dropped 43% from last month). You may recall that financial crisis really hit a year ago in October with the failure, takeover, or bailout of the largest banks, investment banks, AIG, Fannie Mae and Freddie Mac, and other entities - so the comparative numbers with the previous year will start looking better as we go forward.  The 3 month moving average number of closed sales Countywide is up 56% compared to a year ago, up from plus 8% last month. Our market now is way better than it was a year ago.

 

Prices are steady...
The median price in Kitsap County has been pretty steady this year, and is up slightly from the beginning of the year. November's median price ($240,000) was down 5% from October (see graph of 3 month moving average below), and is 8% lower than a year ago. This low median price coupled with historically low interest rates has maintained good affordability. Conventional mortgage rates are now well below 5% for 30 year loans. Jumbo loans are becoming more accessible - they are offered at about .8 to .9% higher than the 30 yr fixed rate conventional.  Earlier this year passage of the President's Stimulus Program restored the conventional, VA, and FHA loan limits to $475,000 in Kitsap County, which has helped sales of higher priced homes. Now the homebuyer tax credit has been reworked to give some incentive to move up buyers as well as first time buyers. Our median price graphs shows a 3 month moving average of prices, which better show trends and reduce the month-to-month fluctuations.

 

Seller expectations…
The November median list price fell abruptly again from $325,000 to $310,000 - hasn’t been this low in a long time. For two months more properties have come on the market below median than above, and as a result the median list price has fallen more than $25,000. The County has a listing inventory turnover rate of about 6.1 months, improved from October's 6.4 months. The continual improvement in inventory turnover has been the result both of more closed sales and fewer listings on the market. The inventory turnover also varies significantly by price range, with higher priced homes selling more slowly than lower priced homes. We’ve made the point recently that the higher price ranges will be much more difficult to reduce in inventory because with today’s lending environment the pool of buyers have been greatly reduced. See the graph below for a better perspective. Even though it is still slow, turnover in the higher price ranges is definitely improving - most likely the result of more price reductions by sellers. 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.     

 

 

The number of pending sales in November fell off the table - down 43% from October. The number of pending sales this month is a reflection both of the rush to purchase prior to the end of the first time homebuyer tax credit and the seasonal decline at the end of the year. While this big drop in pending sales might mean a big drop in closed sales next month, we still expect the total closed sales this year to exceed the total of last year. Last December the market was reeling after big bank failures and the loss of market liquidity at the start of the banking crisis. The big question is whether pending sales will pick up again going into the new year.The statistics for pending sales (compared to November pending sales last year) varied for different parts of the County. Below is a busy graph showing the 3 month moving average of pending sales for different parts of the County.

This is the time of year where we all get a chance to take a breath and reflect on what we are thankful for. It is difficult for us to express just how grateful we feel to be involved with all of you. It's been a tough year for almost everyone in the real estate business and a tough one for many others in our community as well. Thanks for all or your referrals and for choosing to do business with us. We look forward to having the opportunity to help with your purchase or sale in the future.

Merry Christmas and Happy Holidays!

Brenda Prowse