This is an archive copy of our market report for February.

There is such a preponderance of negative economic news that the wary person will start looking for the upside. Many of the Kitsap Real Estate statistics don't look good, but let’s probe around for a bright spot before we conclude that there is no end to this darkness. Pending sales in February are still higher than a year ago - what’s driving that? The listing inventory fell January - this is far from normal. The inventory turnover (number of active listings divided by number of closed sales in that month) improved from 14.6 months in January to 13.1 months. While the turnover implies that your home may take 13 months to sell, you should know that most homes don’t sell at all, and those that do sell take an average of about 100 days or so. Shown below are graphs of inventory and inventory turnover for Kitsap County in 2007-09. Also shown is a graph of probability of sale, showing historically what percentage of the homes listed for sale will actually sell. The inventory turnover also varies significantly by price range, with higher priced homes selling much more slowly than lower priced homes. See the graph below for a better perspective. 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. With listing inventory up and closed sales down, our market is far different than it was in 2005. Below is a historical depiction of the changes in the ratio of listings to closed sales.

Kitsap Real Estate Months to sell existing inventory at current rate of sale

Chance of sale of Residential properties in Kitsap County

Kitsap Home Inventory Turnover Rate for various price ranges

Historical ratio of listings for sale vs closed sales

Listing Inventory
Kitsap’s listing inventory was 1790 listings at the end of February was 19% lower than a year ago and down about 1% from last month. This is very much against the seasonal trend. It appears for now that the lower inventory is because sellers have given up until the market improves - but stay tuned.

Kitsap Listing Inventory

Pending and Closed Sales

The number of February pending sales rose 12% compared to a year ago (same as last month) and were up 12% compared to January. The statistics for February pending sales (compared to February sales last year) varied for different parts of the County. Most areas have improved, though Port Orchard and Poulsbo have fallen. Here is a snapshot:

Bainbridge Island 21% (72% last month)
Poulsbo -44% (14% last month)
Bremerton 23% (4% last month)
Kingston 166% (0% last month)
Silverdale 23% (-70% last month)
Port Orchard -59% (-0% last month)
Olalla 57% (17% last month)

The number of YTD closed sales Countywide (see graph below) is minus 25% compared to a year ago, down from minus 23% last month

 

Kitsap County Closed Home Sales

Median Sales Price
The median price has been falling. February's median price ($225,450) is down about 4% percent from the median in January (see graph below), and is about 10% lower than a year ago. Last year we predicted that the median price would need to fall to about $235,000 to restore affordability (ratio of home prices to income) to the levels early in the decade prior to the latest housing boom, so this month’s median price is good news for buyers. Based on our latest count, the percentage of pending and closed sales from short sales and bank owned properties continues to increase. The recent fall in interest rates has made a great difference in affordability for conforming conventional, VA, and FHA buyers. 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. The jumbo loan and sub prime markets are still difficult for buyers to obtain financing. 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 and Sale Prices

After the January’s median list price dropped from $349,000, approximately where it had been for more than a year, to $329,000, about a 6% drop, the February median bounced back somewhat to $335,000.  This continues the trend started last month where we have seen that sellers are paying more attention to the drop in closed sale prices and lowered their list prices from the plateau of the past couple years.

 

Our March 2009 Waterfront Update is now online and can be downloaded from this link:

http//:www.bprowse.com/waterfront_update/marwfud09.pdf 

You can sign up to receive a monthly notification on our waterfront page, which also contains additional graphs of the latest listing and sales data.

Treasury Secretary Geithner presented a more detailed plan for the government to help banks get rid of toxic assets and improve the lending climate among financial institutions and businesses. The Dow Jones average rose 500 points. The New York Times reported that his plan “dazzled” Wall St. 

 All the details are can be seen at http://financialstability.gov/ . The plan leverages about $100 billion in TARP funds to purchase about $500 billion in assets (to be expanded to about $1 trillion over time) to create a legacy loans program and a legacy securities program. Below is a functional diagram (click on it to see a larger view).

As described in the Treasury Overview the two key elements are:

• Legacy Loans Program: a program to combine an FDIC guarantee of debt financing with equity capital from the private sector and the Treasury to support the purchase of troubled loans from insured depository institutions.
• Legacy Securities Program: a program to combine financing from the Federal Reserve and Treasury through the Term Asset-Backed Securities Loan Facility (“TALF”) with equity capital from the private sector and the Treasury to address the problem of troubled securities.

In legacy loans, private investors bid at auction for the right to purchase pools of mortgages. If selected, they put up half the equity portion and form a Public-Private Equity Fund (PPIF) with the government, which provides TARP funds for the other half) and borrow up to a 6:1 debt to equity ratio (as determined beforehand by FDIC) to finance the remainder.

In legacy securities, the Federal Reserve makes loans to private investors from its Term Asset Backed Securities Loan Facility (TALF) with equity capital split evenly between the government TARP funds and investors in the purchase of non-agency (not issued by Fannie or Freddie) residential and commercial mortgage backed securities (RMBS and CMBS).

In addition, the legacy securities program provides that Treasury will partner with selected Fund Managers, who after raising private capital, can receive matching TARP funds from Treasury leveraged with loans from TALF to purchase non agency AAA rated RMBS and CMBS.

Though markets cheered loudly, there has been a spirited debate among economists, including this in the NY Times between four relatively liberal economists (Brad Delong, Paul Krugman, Mark Thoma, and Simon Johnson), who represented the approval spectrum from like to dislike. Each makes a statement and then responds to a position of one of the others - interesting. Criticism centers around whether investors will see an incentive to participate and how long the plan can be attempted before stronger measures, like some form of nationalization, must be attempted.

For a more conservative assessment, see this critique on a broader scale by George Will in the Washington Post.

Update (3/25): James Kwak at Baselinescenario.com posted an update earlier today that further expands on the discussion of the viability of this plan.

From the howl of the press you might well think that the real estate and economic story of the moment is about AIG, and how they wanted to pay huge bonuses to retain the very people who insured collateralized debt without the means to pay off, thus costing American tax payers many billions of dollars. That’s been a pretty good distraction.

But the real story this week is about the new efforts to extend credit. The Federal Reserve, in its March 18th press release, committed to purchase an additional $750 billion of Agency mortgage backed securities (high quality mortgage backed securities issued by Fannie Mae and Freddie Mac), purchase an additional $100 billion in agency debt, and, to improve conditions in private credit markets, to purchase up to $300 billion in longer term treasury securities over the next 6 months. This brings the total investment in Agency mortgage backed securities to $1.25 trillion and Agency debt to $200 billion. These are examples of quantitative easing (see primer here from the Financial Times), used when the Federal Funds Target Rate is near zero and has a limited effect on the economy. In a sense the Fed has decided to “print money” (increase its credit limits) and buy assets, thus raising the price and lowering the interest rate on those assets. In this case they have focused their purchases on the housing market. The Fed’s purchase of $300 billion in longer term Treasury debt drove the 10 year Treasury Note interest rate down about half a percent, while also causing the value of the dollar to fall and the price of precious metals to soar. 30 year fixed rate mortgages have fallen as low as 4.75%. Some think rates are near the bottom.

The coming week brings more details on the bank bail out. The program for “stress tests” of the 19 largest banks will continue through April and determine which banks will require additional capital later this year to survive. The irony is that having already used a silver bullet on the Stimulus package and now with a populist backlash against the banks, the government cannot really afford to take on the bank’s toxic debt with more government spending. It hopes to use public private partnerships to purchase the toxic bank debt. The government will provide the financing and share the risk of loss while the private investors will manage the government’s money along with their own to determine the best purchase price and hopefully earn a profit.

University of California Economist Brad DeLong provides a useful frequently asked questions article about today's bank bailout program announcement.

On March 3rd we published a blog article about why the government keeps bailing out AIG. We’ve updated it four times since as the news reveals each new shocking episode. I’ve realized that AIG is just a scapegoat for powers that some part of me wants, but knows the world would never tolerate. So unfair that I have to tolerate those acts by another. Economist Greg Mankiw makes a point about the relative unimportance of the focus on bonus payments, but his reasoning does little to stifle the anger.

While the AIG story might at present be viewed as a victory of the undeserving, we should also consider those who are deserving of our respect, if no other reward. This week’s winner is Ben Bernanke, who did the first TV interview by a Federal Reserve Chairman since 1987. Since the election Dr. Bernanke has played 2nd chair most of the time to Secretary of the Treasury Geithner, both in testimony before Congress and in speaking to the public. However, according to a Bloomberg article, Bernanke’s recent interview on CBS’s “60 Minutes” was an inspiration to both economists and financial professionals, not to mention to the man on the street. Someone is finally talking straight about the economy and committing that the problems will be fixed. When asked about why those responsible for the failures should not just be put out of business, Bernanke offered the following to interviewer Scott Pelley:

"Let me give you an analogy, if I might," Bernanke said. "If you have a neighbor, who smokes in bed. And he's a risk to everybody. If suppose he sets fire to his house, and you might say to yourself, you know, 'I'm not gonna call the fire department. Let his house burn down. It's fine with me.' But then, of course, but what if your house is made of wood? And it's right next door to his house? What if the whole town is made of wood? Well, I think we'd all agree that the right thing to do is put out that fire first, and then say, 'What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn't happen in the future? How can we fire proof our houses?' That's where we are now. We have a fire going on."

Bernanke told Pelley that "fire" is still burning. We wish him every success in putting out the blaze - his heart seems in the right place - and he’s a pretty smart guy.

 Each month we 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. 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 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 then 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. At the end of 2008,  interest rates dropped to historically low levels, and for the past 2 months the median sales price has dropped significantly. The affordability index has improved a bit to 1.38 in February from 1.30 in January. First time buyer affordability also improved to 1.21 from 1.14 last month. Affordability for both typical and first time buyers is back to the level it was at early in the decade. Below are graphs of the year to year changes in affordability and a second graph showing month-to-month affordability progress over the past year.

These affordability numbers are very good, but they won't last long after we start to see some consensus of a recovery. With the enormous amount of government lending and spending, fear of inflation will drive up interest rates (and reduce affordability) very quickly after that. Now is truely a good time to buy. One caution to all this good news about affordability, the thin sales in our market and effect of distressed property sales are distorting real property values to some extent. See more in our recent blog article on this subject.

Year	2003	2004	2005	2006	2007	2008	2009
Annual Average interest rate	5.83	5.84	5.87	6.41	6.34	5.80	5.11
Median Income	$53,160	$53,923	$54,582	$58,304	$60,719	$65,000	$65,000
Median Price	$184000	$206900	$250000	$275000	$290343	$265000	$225,450
Monthly payment	$867	$975	$1182.43	$1378	$1443	$1244	$980
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	1.38
1st time buyer payment	$693	$780	$946	$1102	$1155	$995	$784
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	1.21

Here are the current statistics for Pending - Inspection and Active Listings (comparing the number in mid March to the number in mid March). You'll recall that Pending Inspection status represents a newly signed around contract prior to the buyer and seller agreeing on the home inspection. Below we show the number of Pending Inspection contracts signed around in the first 2 weeks of the month. The number of Pending Inspection contracts is the best gauge for telling us in near real time how many sales are occurring. Some of these sales will fall apart as a result of the home inspection results.

Area	Pending Inspection 03/15	Pending Inspection 02/15	Active Listings 03/15	Active Listings 02/15
S. Kitsap W. of HWY 3	3	10	179	169
S. Kitsap E. of HWY 3	5	4	132	144
Port Orchard	6	3	108	117
Retsil/Manchester	5	1	114	127
Seabeck/Holly	2	5	94	95
Chico	0	2	21	16
Silverdale	4	6	88	81
W. Bremerton	5	9	164	171
E. Bremerton	10	7	129	125
E. Central Kitsap	11	5	143	154
Hansville	0	0	44	49
Kingston	1	3	68	65
Port Gamble	2	2	18	18
Lofall	0	2	29	33
Finn Hill	2	3	52	53
Poulsbo	4	4	145	146
Suquamish	1	1	34	38
Indianola	1	1	29	26
Bainbridge	4	2	215	199
Totals	66	70	1806	1828

After rising the past 2 months, the number of Pending Inspection deals the first two weeks of March fell by 6% from the same period in February. The activity is 10% lower than it was in March 2008. The number of active listings (1806) in our residential inventory fell about 1.2% from January. It’s not clear yet how much the listing inventory will increase this year. In a typical year it would have risen sharply by now. The ratio of sales to number of active listings fell from 3.8% to 3.7%. About 88% of the sales were under $400,000 (up from 79% as last month) and 70% were under $300,000 (same as last month).

Here is a graph of the mid month Pending Inspection data (note the graph uses the 3 month moving average to better show the trends).

March's APR is 5.086% on a 30-Year and 4.989% on a 15-Year, both Conforming. February's rates were 5.213% on a 30-Year and 4.989% on a 15-Year, both Conforming. If you qualify for FHA or VA loans (or the newly popular USDA loans), these programs have become much more attractive for low downpayment buyers. Limits for FHA and conventional conforming loans just went up with the stimulus bill signed yesterday. FHA maximum is $475,000, and the conventional conforming limit has returned to $475,000. Lending programs for jumbo loans are problematic and contribute to the high percentage of current sales in the lower price ranges. Local lenders such as saving and loans and credit unions offer much better rates for jumbo loans (above $475,000) than do the big banks. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/ .

Prices have been falling in our county as they have in most parts of the country. Home sellers need to price their properties coming on the market in line with comparable sales in their communities or they won’t sell. Sales from the lower price ranges have recently dominated total sales more than in past years, and sales prices have been driven down significantly by short sales and bank owned and foreclosure sales. Banks and distressed sellers have different motivations when negotiating price than a normal seller in a typical arm’s length transaction. The impact of the distressed seller factor on the price indexes published in the news doesn’t necessarily indicate that your home has lost the same amount of value in the eyes of assessors and appraisers. See how and why these factors effect appraisals and property assessments, including some graphs of sales in Kitsap County.

Each month we publish a snapshot of several local markets to show variations in our larger Kitsap County real estate market. February's inventory of homes for sale fell by 19% from a year ago and was slightly less than in January.  Based on the slow inventory turnover rates, listing inventory is still well above normal. It’s not clear whether inventory this spring will build up as in past years, or if some sellers have given up until we have a better market. February’s closed sale median price ($225,450) was down about 4% from January and down 10% percent compared to a year ago.  The number of pending sales in February was up 12% from a year ago and up 12% compared to January.  Below are graphs of the month-to-month market fluctuations of total listings, number of closed sales, and 3 month moving average of median sales price for each area. You can see each region’s data for the past several years at http://www.bprowse.com/kitsap_market_trends.

 

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 month end median price of about $455,000 at the end of February, a drop of 36% from a year ago. The three month moving average of closed sale prices ($477,167) has dropped 24% from a year ago. This substantial drop in median price is due not only to sellers lowering their price, but also because the distribution of likely buyers has changed. A primary contributor may be the higher interest rates and continued inability to sell jumbo loans (now exceeding $475,000 but previously exceeding $417,000 until last month). While the big banks are advertising a large interest rate premium for jumbo loans, local banks and credit unions are willing to make these loans for far less. Kitsap County 3 month moving average median price has fallen 16% over the past year. The 3 month moving average number of Bainbridge closed sales is down 8% from a year ago, and the February number of pending sales is up 21%! The 3 month moving average of closed sales is down 28% Countywide from a year ago. The number of active listings on Bainbridge (202) is down 14% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 22.4 months, up from the 17.6 month turnover rate of last month. 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 similar trends. Homes in Bremerton were selling for a month end median price of about $184,800 at the end of February, about 3% lower than a year ago. The 3 month moving average of median price for closed sales was 5% higher than a year ago - Bremerton prices have actually been rising. Kitsap County’s 3 month moving average median price has fallen 16% over the past year. The Bremerton 3 month moving average number of closed sales is down 18% from a year ago (compared to a Countywide drop of 28%). The number of February Bremerton pending sales is up 23% from last year. The number of active listings (154) has fallen 9% from last month and 36% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 9 months, which reflects the greater percentage of lower priced homes that are selling. The Bremerton market is still a buyers market.

North Kitsap Real Estate
Using the example of Kingston - the largest housing market in North Kitsap - homes were selling for a February median price of about $383,000, up about 8% from a year ago, while the 3 month moving average of median closed sale price has fallen 44% compared to a year ago. Kingston prices fluctuate more than some of the other markets because of the lower listing and sales volume. Kitsap County’s 3 month moving average median price has fallen 16% over the past year. The 3 month moving average number of closed sales in Kingston is the same as a year ago, and the number of February pending sales is also unchanged. The number of closed sales is down 28% Countywide from a year ago. The number of active listings in Kingston (65) is down 23% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 13 months. Kingston is a buyer's market.

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 three month moving average median sale price of about $292,000 at the end of February, down about 19% from a year ago. Poulsbo's February median sale price was $209,000, about 38% lower than in February 2007. Kitsap County’s 3 month moving average median price has fallen 16% over the past year. The 3 month moving average number of Poulsbo closed sales is down about 63% from a year ago. February pending sales in Poulsbo were down by 44%. The number of February closed sales for Kitsap County dropped 28% compared to last year. The Poulsbo listing inventory (149) is about the same as a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 30 months, up from 13 months last month.

Silverdale Real Estate
Homes in Silverdale were selling for a February median price of about $256,500 at the end of February, down 25 percent from a year ago. The 3 month moving average for Silverdale median closed sale price of $260,567 was about 26% less than a year ago. Kitsap County’s 3 month average median price has fallen 16% over the past year. The 3 month moving average number of Silverdale closed sales was down 33% from a year ago, compared to a drop in closed sales of 28% for the County as a whole. The number of Silverdale pending sales in February is up 19% from a year ago. The number of active listings in Silverdale (65) is 25% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 6.5 months, down sharply from last month's rate of 15.2 months.

Each month the media faithfully report that home prices are dropping (and so do we). The standard home price indicators are the OFHEO and the Case-Schiller price indices. OFHEO (Office of Federal Housing Enterprise Oversight) was the name of the regulator of Fannie Mae and Freddie Mac until it became the Federal Housing Finance Agency with passage of the Housing and Economic Recovery Act of 2008. They also publish housing price data for conforming mortgage house sales all over the United States. You can even use their calculator to enter your purchase date and price and find their estimate of your current home price (I was surprised by the result). Case Shiller uses repeat sales in 20 metropolitan areas to calculate an index for each area and a composite index. Their sophisticated methodology provides convincing evidence each month that home prices are falling ever faster. The question is whether we can infer the loss in value of all real estate in a city, county, state, or country by using the data from indices of recent home sales. A recent article on Bill Conerly’s Businomic’s Blog quotes Oregon economist Randy Pozdena about the inaccuracies in the current home price measurement systems:

The Case-Schiller index is not the one I would use to measure wealth effects.  Although the indices attempt to crudely approximate a "same-home sales" protocol, in practice, they do not control for either within-region property location or distressed/thin market sale nature of current transactions.  I had the opportunity recently to work with a mass appraisal consultant (the folks who help assessors value properties for tax purposes) who showed me some GIS plots of recent vs. historical sales patterns.  It is clear that:

• The spatial pattern of sales is very different.  There are virtually no sales in the traditionally-high value subareas of large regions (e.g., Santa Monica within LA metro, or SF or Marin counties within the SF Bay Area). The transactions in these regions are dominated by foreclosure sales in places like Solano County, etc.
• The "market prices" being captured are not adjusted for illiquidity/thin market discounts. 

Conerly’s article makes several other points:

• Case Shiller Index only represents large metropolitan areas and doesn’t necessarily reflect the markets in more rural communities such as Kitsap County. We’ve commented in the past that the shape of the Case Shiller for Seattle does closely resemble the plot of 3 month moving average prices for both King and Kitsap Counties.
• Pozdena cites the Mortgage Forgiveness Debt Relief Act of 2007 (extended for 3 more years by the Emergency Economic Stabilization Act of 2008) as giving underwater homeowners greater incentive to walk away from their mortgages by exempting them from the tax they would owe on the forgiven mortgage debt. This helps to accelerate the foreclosure rate, and the bank's urgency to part with foreclosed homes accelerates the drop in prices.
• Pozdena also cites so called “mark to market” accounting rules as a factor in giving the banks an incentive to clear the asset from their balance sheets rather than hold out for market prices with the same motivation as a normal seller.

Below are data for the price distribution of listings from 2007 - 2009 and a second graph of the price distribution of sales. We can see that in our current market while the distribution of homes listed for sale by price range hasn’t changed that much, the distribution of homes sold by price range has definitely shifted toward the lower price ranges. Mr. Pozdena’s point is that it’s difficult say to every homeowner in the market that your home’s value has declined by “x” percent based on the observed price drop for a relatively few homes, many sold in some form of distress, at the lower price ranges of the market.

In related news, today’s Wall St Journal points out the plight of some home builders in selling homes in same neighborhoods where nearly identical houses are being sold in foreclosure sales. Builders can't afford to compete with the banks. In closing, none of the reasons for discounting the importance of home price indices in estimating the total loss of wealth implies that you should expect not to have to discount your price to get a sale in our current market.

We've published our monthly market report for Kitsap County at this web site:

http://www.prowseandco.com/newsletter.asp

One topic we cover is the recently announced Home Affordable Modification Program. In general, the plan allows residential owners occupying their homes as primary residences and who received a mortgage prior to 12/31/2008 to make application through their lender to reduce their payments. The government provides cash incentives for homeowners and loan servicers who successfully participate, as well as bonuses for homeowners who stay current on payments. Owners must provide proof of income and their latest tax return, have their debt and monthly payments analyzed. The home’s value may be determined by an automated valuation model or a broker price opinion. The process capitalizes debt in arrears and reduces the interest rate to try to meet the front end debt to income target of 31% for principal plus interest, taxes, and insurance. Government payment reduction cost sharing is provided to help lenders reduce payments from 38% to 31% for up to 5 years. Subordinate liens are not included in this part of the calculation, but are considered in a later total debt to income calculation. If interest rate adjustments alone cannot meet the target, then the loan term may be extended and principal forbearance may be used to reach the target. If the debt ratio cannot be reached, the applicant can be referred to the Hope Now for Homeowners Program (where major banks can restructure the loan) or to counseling to assist with a short sale.

While this program is expected to help 1 in 9 homeowners, it won’t help you if your loan is not guaranteed by Fannie Mae or Freddie Mac (for example, program does not cover most sub prime or jumbo loans). It won’t help reduce the amount owing for an owner who owes more than his home is worth. It won’t help a family that needs to move but cannot sell for as much as they owe. A New York Times Op-ed by John D. Geanakoplos and Susan P. Koniak argues that the better tactic would be for the government to focus on writing down the principal of the loans by hiring community banks to modify mortgages instead of leaving it in the hands of the loan servicers.

Quality Built Home!

$299,950
3 BDR, 2.5 BTH, 2 story with approx. 2035 sq. ft. on .36 acres!

Lovely condo with a breathtaking view!

$325,000
2 BDR. 1.75 BTH one story condo with approx. 1298 sq. ft.

Beautiful home with large shop on acreage!

$470,000
3 BDR, 1.75 BTH one story home with approx. 1868 sq. ft. on 1.94 acres

Recent news about another government bailout of AIG, an insurer, not a bank, continues to enshroud the plight of our banking system. AIG just posted the largest corporate quarterly loss ever, $61.7 billion, and the government has announced it’s fourth adjustment to the bailout. This post on “AIG in Review” at Baselinescenario.com shows how little even the experts can explain about the motives behind the government’s actions to protect AIG. Loans of about $180 billion have been given, and based on AIG’s stock price of about $.50 per share, there is little confidence that AIG has revealed all its problems.

Even though commercial bank lending was up a couple percent in the 4th quarter, banks and other depository institutions only supply about 22% of the credit to the US Economy. The shadow banking system, insurance companies, foreign banks, and other financial intermediaries supply the rest. AIG's main contribution was in guaranteeing by selling credit default swaps to banks and other entities seeking to protect themselves in the case of default on mortgage backed securities they had purchased. This picture has somehow been altered by the absorption of the investment banks in to the commercial banking system (if that correctly describes what has happened). Will removing (by nationalizing or by any other means) the toxic assets held by the largest banks get credit flowing again? Are there not other issues with disposal of toxic assets held by hedge funds, private equity firms, insurance companies, etc? How has the conversion of investment banks to regulated banks affected the capacity of credit markets to lend? Will the present models of bundling and securitizing and reselling loans in the secondary markets work again as before, or is some fundamental change (for instance in assessing risk or reporting transactions in the secondary markets) necessary?

If we knew any of these answers we could move to Washington, D.C., and get involved in the action.

Late Note: Fed Chairman Ben Bernanke told the Senate Budget Committee that he was very angry about how AIG had "exploited a huge gap in the regulatory system", made irresponsible bets, and took huge losses. See this post about why the bailout was necessary.

2nd Update: AIG reportedly presented regulators with a scenario of total financial market meltdown if the bailout wasn't approved. See this post.

3rd Update: AIG pays $165 milliion in bonuses after receiving $170 billion bailout!

4th Update: From the Wall St Journal (3/16):

Since September 16, AIG has sent $120 billion in cash, collateral and other payouts to banks, municipal governments and other derivative counterparties around the world. This includes at least $20 billion to European banks. The list also includes American charity cases like Goldman Sachs, which received at least $13 billion.

5th Update: From the New York Times (3/24):

Executive Vice President Jake DeSantis resigns - letter is published as an editorial. Read how things look from the inside.

To some extent we are all captives of the news we read, see, and hear. No one from AIG has told me anything. Still I think they have become the poster child for the whole financial mess. The stories tell of a company that will insure any CDO without retaining the reserves to pay off, will hang any debt around the neck of the taxpayer, will obfuscate and avoid disclosing that bailout funds were used to bail out foreign banks and other US banks that were simultaneously receiving TARP funds, will continue to pay bonuses to people in the responsible division so they can "attract and retain the best and brightest talent...". It's an outrage. It's a comedy. It's my shadow.

The February Prowse and Company Newsletter is now available here for download. This month's issue shows how you can keep up with us on Facebook, discusses the 2009 Homebuyer Tax Credit, shows a photo of Sheri's new dog, and much more. 

Also there are some recent articles on our Kitsap Market Blog that my be of interest to you:

Kitsap County Local Market Report - find out what's happening in your part of the County.

Assessed Property Values - now that home values have fallen, can you lower your taxes by lowering your assessed value? Find out here.

A short simple explanation of the credit crisis. This short multimedia presentation provides a clear explanation.

Military Families Caught in the Housing Crunch - our take on what should be done in response to a recent Kitsap Sun article.

The President's new budget represents a new way forward, but will only have real effect to the extent that Congress acts upon his proposals. The new budget proposes as one of its tax revenue schemes to limit the deductions of those tax payers in the 33% and 35% tax brackets to the amounts that could be deducted if they were in the 28% tax bracket. This will impact the very popular home mortgage interest deduction, causing those in the higher brackets to give up 20% of the interest they could previously deduct.