See this May economic summary in graphs from the blog Calculated Risk.

The Prowse and Company May 2009 Newletter is now on line. Brenda talks a little about Bloomsday, Noelle Osborn receives her Buyer Agent Accreditation, see market statistics and current listings.

You can download a copy here.

As May draws to an end, we want to keep a watchful eye on distressed homeowners, short sales, and foreclosures. In a short sale the seller negotiates a price with the buyer and the transaction is submitted to the bank for approval since the seller won’t realize sufficient funds to pay off his loan. In a foreclosure the seller is evicted and the bank’s representative auctions the house to the highest bidder. If the bank bids highest in the foreclosure auction, then the property becomes bank owned and is sold in the real estate market, usually after some months off market following the foreclosure auction. Homeowners owe more than the house is worth in roughly a third of our current transactions - not a scientific estimate - so this process of sellers dealing with a shortfall in paying off their loans is very much part of our current Kitsap County Market, not just some hypothetical situation.

On May 15th National Public Radio’s This American Life featured a report by Chris Arnold about loan modifications entitled, “The Mod Squad,” which highlights some current issues with distressed property sales. This report stated that 15- 20% of American households are now under water (owe more than the house can be sold for). Nationwide, more than 342,038 homes received a foreclosure filing last month, a 32% increase from April 2008. Arnold’s report estimates that about half of the 6 million foreclosures over the next 3 years don’t need to occur, that currently only 5-10% of the people who need help are enabled to stay in the home, that 46% of the people whose loans are modified fall back into default, that only 16% of loan modifications actually reduce the principal owed. The report states that large banks lack the technology to model the costs of short sale vs foreclosure. It said that the rules for banks to account for foreclosure allow them to delay posting the loss, whereas in a short sale, the bank must post the loss when it occurs. Thus it may appear best for the bank to delay sale, even though it continues to lose money every day that the property is not sold. The report said that the existence of 2nd liens often prevents modification of the primary loan to keep the homeowner in the house.

Hundreds of billions of dollars in legislation and Treasury initiatives have had little effect to speed loan modifications or speed the sale of troubled assets so that bank balance sheets can be repaired. From our perspective, property market values in short sales should not be any different than values in foreclosure, though desperate sellers may agree to short sale prices that banks are currently unwilling to accept. While banks ponder how to improve their loss mitigation software to predict the costs of sale, we wonder why they don’t just hire a Realtor. Perhaps legal procedures could be modified to level the accounting rules and allow sellers to authorize the bank to act directly for the seller in short sales in lieu of foreclosure, with provisions for certain guarantees such as allowing the seller sufficient time to vacate the premises following sale, etc. Realtors already can estimate sale price and costs of sale, do the legwork to effect necessary repairs, and otherwise fill in the decision making gaps currently lacking in the banking industry. The bank’s decision process would be simplified to whether the bank would lose less by restructuring the loan or by selling the house. We don’t know all the legalities that drive the current system - only that the end result is a system that isn’t working. With unemployment continuing to rise and with pressure on interest rates to rise, we expect that the number of home owners underwater will continue to increase and that prices will continue to fall until the excess inventory of homes is worked off.

Noelle Osborn of Prowse and Company has been awarded the Accredited Buyer Representation designation by the Real Estate Buyer’s Agent Council (REBAC) of the National Association of Realtors (NAR).

Noelle joins more than 32,000 real estate professionals in North America who have earned the ABR designation. All were required to complete a comprehensive course in buyer representation and an elective course focusing on a buyer representation specialty, both in addition to documentation verifying professional experience.

REBAC, founded in 1988, is the world’s largest association of real estate professionals focusing specifically on representing the real estate buyer. There are more than 43,000 active members of the organization world-wide. The National Association of Realtors, “The Voice for Real Estate”, is the world’s largest professional organization, representing over 1,000,000 members involved in all aspects of the real estate industry.

Way to go Noelle!

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A serious financial blog pointed out this article from the Onion as representative of the Nation’s lack of enthusiasm about economic news these days. While people seem to have caught on to the first time homebuyer credit, other programs, such as the economic stimulus package, have yet to bear much fruit.  The cost of interbank borrowing has returned to near normal levels. There is a short primer on Calculated Risk about how you can be fooled by statistics about median prices.

Meanwhile in Kitsap County, the Commissioners have bailed out the Consolidated Housing Authority. Only 34 of the 78 Bremerton Harborside Condos have sold. The remainder constitute the principal debt burden to the Housing Authority. According to the Bremerton Sun article, the County’s restructuring of the debt may allow sales at prices lower than the bank would previously accept, since the County now has final say. Many short sales, where the seller asks the bank to take less than the amount needed to pay off the loan, take months for bank approval. It may seem that a short sale would be a more favorable alternative to the bank than foreclosure, but the delays and uncertainties in most are frustrating to buyers, sellers, and Realtors alike, and the County isn’t there to help out as it has done for the Housing Authority. The Obama administration recently revealed some additions to the housing bailout designed to make short sales more palatable. Let’s hope some of this legislation can actually make its way into practice

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 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 continuing to stay low (now about 4.97% for a typical 30 year fixed rate conforming loan) and the median price dropping again in April to $240,000, affordability is still as good or better than it was early in the decade. Keeping in mind how median prices can deceive, 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 has stayed fairly constant at 1.32 in April from 1.31 in March. First time buyer affordability also remained nearly constant at 1.15 from 1.14 last month. 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.

Year	2003	2004	2005	2006	2007	2008	2009
Annual Average interest rate	5.83	5.84	5.87	6.41	6.34	5.80	4.97
Median Income	$53,160	$53,923	$54,582	$58,304	$60,719	$65,000	$65,000
Median Price	$184000	$206900	$250000	$275000	$290343	$265000	$240,000
Monthly payment	$867	$975	$1182.43	$1378	$1443	$1244	$1027
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	1.32
1st time buyer payment	$693	$780	$946	$1102	$1155	$995	$828
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	1.15

Here are the current statistics for Pending - Inspection and Active Listings (comparing the number in mid May to the number in mid April). 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. This category also excludes short sales awaiting bank approval, a category that has pumped up the pending sales numbers with contracts that may take months to be rejected or approved. Some of the pending inspection sales will fall apart because buyer and seller will not be able to agree on the home inspection repairs.

Area	Pending Inspection 05/15	Pending Inspection 04/15	Active Listings 05/15	Active Listings 04/15
S. Kitsap W. of HWY 3	8	5	153	168
S. Kitsap E. of HWY 3	7	5	144	141
Port Orchard	13	6	96	110
Retsil/Manchester	11	6	110	110
Seabeck/Holly	2	7	96	82
Chico	0	0	17	17
Silverdale	10	6	85	87
W. Bremerton	13	7	173	158
E. Bremerton	10	7	116	120
E. Central Kitsap	6	10	143	139
Hansville	1	3	44	44
Kingston	4	3	63	69
Port Gamble	2	2	13	14
Lofall	5	4	27	31
Finn Hill	4	3	57	52
Poulsbo	2	7	145	136
Suquamish	1	3	25	23
Indianola	1	3	29	27
Bainbridge	3	1	241	219
Totals	103	88	1777	1747

Our market, and least in this instant, is looking better. The number of Pending Inspection deals the first two weeks of May rose by 17% from the same period in April. The activity is 17% higher than it was in May 2008, and was the highest month on record since mid 2007. That’s a pretty good indicator. The number of active listings (1777) in our residential inventory rose about 1.7% from April. In a typical year it would have risen sharply by now, and we don’t have a good explanation for the current trend. The ratio of sales to number of active listings rose from 5% to 5.8%. About 85% of the sales were under $400,000 (75% as last month - so fewer higher priced homes are now selling) and 69% were under $300,000 (69% last month). There were no pending inspection sales above $900,000.

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).

May's APR is 4.96% on a 30-Year and 4.862% on a 15-Year, both Conforming. April's rates were 4.96% 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 reportedly getting better, 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 6.273% on one major bank web site). Local savings and loans and credit unions may well be able to beat this rate for jumbo loans. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/.

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The Prowse and Company Waterfront Update for May 2009 is now on line. Download the latest news or use the link to our waterfront page to see graphs and other information.

By some appearances, the recently announced results of stress tests of the 19 largest US banks have been carefully orchestrated to buoy confidence in the system and demonstrate cautious oversight by the government. The stock market neither crashed nor spiked, and the commentary has faded from the news headlines. Still there are a number of skeptics with arguments worth noting. The blog Baseline Scenario published a short article, “Stess Tests for Beginners”. The New York Times graded the stress tests in an editorial featuring a diverse group of financial and economic commentators, none of whom declared that the stress tests indicated a sound banking system. The Wall Street Journal reports that some banks negotiated huge concessions from the government, shrinking the final amounts of capital the test determined they needed to raise. For what seems the most important aspect of our economic recovery, these tests of our banking system did not stir up much dust. Perhaps most people are numb to news about the recession.

Fannie Mae’s reported $23 billion first quarter loss didn’t roil the markets much either. The biggest part appears to be write downs for future expected loan losses.

The failure of Westsound Bank is on the FDIC home page.

Market trends and graphs for Kitsap County real estate, and for Poulsbo, Bainbridge Island, Bremerton, North Kitsap (Kingston), and Silverdale have been updated for April and are now on line here.

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