The Prowse and Company June Newsletter is now available for download as a PDF. This month's news includes highlights from our mid month report, a note about Brenda's award from the Poulsbo Noon Lions, and some discussion about our new web site at http://www.prowserealestate.com. Please take a look!

At a recent presentation in Poulsbo by Patrick Redmond, CEO of Viking Bank, he remarked that Washington State banks have the highest percentage of construction loans in the country (I'm taking that to mean the highest percentage of bank's total loan portfolio), and that the housing crisis is hitting our community banks as hard as in any other state. He said that 90% of the banks are under some level of stress. That might sound odd since the Washington residential real estate market has not suffered in any respect like the markets have in California, Michigan, Arizona, Arizona, Florida, or Nevada, just to name a few. Land use planning and geography in Washington have to some extent limited the large tracts commonly put up by the big national builders. The big national builders get their financing from other sources, but in Washington, community banks have funded smaller builders for most of the construction and thus are suffering more of the consequences. A recent Seattle Times article analyzed by several methods some Washington Banks having the most difficulty, including Westsound Bank (which failed), as well as Frontier Bank, American Marine Bank, and Golf Savings Bank, all of which have branches operating in Kitsap County. Redmond’s presentation pointed out that not only are community banks being affected by the credit crunch , low interest rates, and non performing loans, but they are also reeling from the sharp increase in FDIC deposit insurance fees at a time when most banks are trying to cut their overhead in every area possible. Redmond’s closing comment was that, much as he wished otherwise, there will probably be more bank failures.

While community banks and their borrowers and creditors are having to face the music from the financial crisis, there are some complaints that large banks are being propped up by the government because they are too big to fail. William Buiter at the Financial Times takes a pretty blunt tack, as does Simon Johnson at the Baseline Scenario. Both say that the government’s proposed regulatory changes are too soft on the big banks. Ever since the days of Alexander Hamilton, who was for a strong federal government and the first national bank, and Thomas Jefferson, who was for states rights and opposed creation of a national bank, there has been a tug of war between support for large national banks and populist opposition to their power and profits. 

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 rate statistics in Kitsap. 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 4.97% last month to  5.41% in June for a typical 30 year fixed rate conforming loan and the median price remaining steady in May at $240,000, affordability is still very good but has slipped somewhat. 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 fell to 1.25 in May from 1.32 in April. First time buyer affordability also fell to 1.10 from 1.15 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	5.41
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	$1079
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	1.25
1st time buyer payment	$693	$780	$946	$1102	$1155	$995	$863
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	1.10

Here are the current statistics for Pending - Inspection and Active Listings (comparing the number in mid June to the number in mid May). 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 could 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 06/15	Pending Inspection 05/15	Active Listings 06/15	Active Listings 05/15
S. Kitsap W. of HWY 3	5	8	160	153
S. Kitsap E. of HWY 3	4	7	166	144
Port Orchard	10	13	109	96
Retsil/Manchester	7	11	107	110
Seabeck/Holly	7	2	92	96
Chico	0	0	22	17
Silverdale	10	10	81	85
W. Bremerton	11	13	167	173
E. Bremerton	10	10	118	116
E. Central Kitsap	6	6	135	143
Hansville	3	1	52	44
Kingston	3	4	64	63
Port Gamble	1	2	11	13
Lofall	1	5	27	27
Finn Hill	3	4	56	57
Poulsbo	5	2	128	145
Suquamish	2	1	25	25
Indianola	1	1	28	29
Bainbridge	5	3	264	241
Totals	94	103	1812	1777

The number of Pending Inspection deals the first two weeks of June fell 9% from the same period in May, but June’s activity is 68% higher than it was in June 2008, so the level of sales is still pretty good. The number of active listings (1812) in our residential inventory rose about 2% from May. In a typical year it would have risen sharply by now. The ratio of sales to number of active listings fell from 5.8% to 5.2%. About 87% of the sales were under $400,000 (85% as last month - so fewer higher priced homes are now selling) and 73% were under $300,000 (69% last month). There was one pending sale above $1 million.

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 - and that it is still rising).

June's APR is 5.697% on a 30-Year and 5.204% on a 15-Year, both Conforming. May's rates were 4.96% on a 30-Year and 4.862% 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 6.399% 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/.

This month we’ve had everything, a surprise rise in interest rates based on inflation fears, record deflation, a 17% rise in housing starts, proposed historic financial regulatory overhaul. We only scratch the surface. How about that text messaging championship? Prowse and Company has completely renamed and redesigned our website http://www.prowserealestate.com, adding new displays and a new and better integrated home search.

Our local real estate market appears to be healing - not that this means home prices will start rising soon.

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

This posting at Calculated Risk applies to our market. Southern California sales (number of closed sales) have risen for the 11th consecutive month. This month was the first since 2007 where year-over-year median sales price increased. The article explains that this doesn't show the home prices to be rising, but rather the mix of sales has shifted to fewer low end sales and more mid to high priced sales, making it look as if the median (middle) price among sold homes is rising. More mid and high end sales are probably occurring because owners of these homes are more aggressively dropping their prices. Low interest rates and better availability of jumbo mortgages are also a factor.

You can see this same effect in the median price graphs for Bainbridge Island and Poulsbo.

Statistics and graphs have been updated on our waterfront page, or you can download the June 2009 Waterfront Update in pdf here.

The Kitsap Penninsula Business Journal posted this nice snapshot of our local economy, comparing current conditions (end of March) with a year ago. Unemployment has risen from 4.8% to 8.7%. Private sector employment fell by 4700 jobs while government jobs fell by 100. Retail sales fell by 12.5%.

Each month we publish a snapshot of several local markets to show variations in our larger Kitsap County real estate market. May's inventory of homes for sale fell by 30% from a year ago and was about the same as in April. This is unusual and implies that some sellers may have decided to wait until we see a better market. The County has a listing inventory turnover rate of about 8.5 months, down from April's 9.1 months, and the best turnover we've seen since 2007. Inventory turnover varies greatly by price, with an inventory turnover closer to 6 months for homes under $400,000 and 2 to 6 times longer turnover for homes priced above $400,000. May's closed sale median price ($240,000) was the same as April and was down 10% percent compared to a year ago.  The number of pending sales in May was up 38% from a year ago and fell 8% compared to April.

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

Bainbridge Island Real Estate
Bainbridge Island residential properties were selling for a month end median price of $530,000 at the end of May, a drop of 3% from April. However, the distribution of buyers has changed as more properties in the higher price ranges are now selling. There are several factors - low interest rates, anxious sellers, and a slowly reviving market for jumbo loans all must be contributing to some extent. The more stable three month moving average of closed sale prices ($633,333) rose 4% from last month but and is 2% higher than it was a year ago. The Kitsap County 3 month moving average median price has fallen 11% over the past year. The 3 month moving average for Bainbridge Island's number of  closed sales is the same as a year ago. The number of pending sales in May fell 14% from a year ago. The 3 month moving average of closed sales is down 11% Countywide from a year ago. The number of active listings on Bainbridge (243) is down 22% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 12.8 months, down from the 15 month turnover rate of last month - improving but still very slow. Bainbridge Island is a strong buyers market.

See 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 $175,450 at the end of May, about 13% lower than a year ago but up 27% from last month. The more stable 3 month moving average was 16% lower than a year ago.  The Kitsap County 3 month moving average median price has fallen 11% over the past year.  Bremerton's 3 month moving average for number of closed sales is down 10% from a year ago (compared to a Countywide drop of 11%). The number of month end Bremerton pending sales is up 31% from last year, but recall this number includes pending short sales that may not close. The number of Bremerton active listings (173) rose 3% from last month but is 31% lower than a year ago. The inventory turnover (total Bremerton homes on the market divided by number sold last month) is 10.8 months (up from 9.8 last month). The Bremerton market is still a buyers market, the lower price ranges are definitely selling better now.

See 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 $325,000 at the end of May, 14% 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 up 5% compared to a year ago.  The Kitsap County 3 month moving average median price has fallen 11% over the past year.  The 3 month moving average number of closed sales is 60% lower than a year ago, while the number of pending sales is 83% higher than a year ago. Recall this number includes pending short sales that may not close. The number of closed sales is down 11% Countywide from a year ago. The number of active listings in Kingston (62) is down 40% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 21 months (down from 33 months last month). Sales in North Kitsap seem to be slower than farther south in the County. Kingston is a buyer's market.

See 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 May median sales price for Poulsbo was $355,000, up about 9% from a year ago. The more stable three month moving average closed sale price was $328,333, about 2% lower than in May 2008. The Kitsap County 3 month moving average median price has fallen 11% over the past year. The 3 month moving average number of closed sales in Poulsbo has fallen 22% from a year ago. The number of closed sales is down 11% Countywide from a year ago.  Unlike most other areas, May pending sales were up 121% in Poulsbo, but recall this number includes pending short sales that may not close. The Poulsbo listing inventory (121) is 31% lower than a year ago and dropped 14% from last month. The inventory turnover (total homes on the market divided by number sold last month) is 8 months, worse than the 12.8 months last month. Poulsbo is still a buyers market, but looks like it has improved recently.

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

Silverdale Real Estate
Homes in Silverdale were selling for a May median price of about $277,500, down 12% percent from a year ago. Silverdale's more stable 3 month moving average median closed sale prince in May of $268,500 was down about 6% from a year ago. The Kitsap County 3 month moving average median price is down 11% compared to a year ago.  The 3 month moving average for Silverdale's number of closed sales was 8% lower than a year ago, compared to a drop in closed sales of 11% for the County as a whole. The number of Silverdale pending sales in May is up 39% from a year ago, but recall this number includes pending short sales that may not close. The number of active listings in Silverdale (86) is 39% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 6 months, improved from last month's rate of 7.5 months. Silverdale is looking now like a neutral market, but there appears to be a large shadow inventory of unsold homes not currently on the market.

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

It's good sometimes to get a feel for how the real estate market is doing in other parts of the country. Here's an article about real estate in Detroit.

The Washington State Housing Finance Commission has posted on their website that the IRS has turned down their effort to allow 1st time homebuyers to assign their $8000 tax credit to their lender to serve towards the buyers downpayment (referred to as the tax credit bridge loan program). The article refers readers to other state sponsored downpayment assistance programs.

The National Association of Realtors reports that Congress is considering an expansion of the current $8000 credit for first time buyers to raise the limit to $15,000 and extend those eligible to - everyone!

Although news of the recession continues to show in many cases that it is worse than expected, bond investors and the Federal Reserve have been caught off guard the past couple weeks as the spread in interest rates between the 2 year and 10 year Treasury bonds jumped to a record 2.75 percent. 30 year conventional mortgage rates have risen from under 5% to about 5.5% in the same period. These fluctuations in bond prices are reducing affordability in our weak housing market. A finance textbook describes this steepening of the yield curve as a sign that short term rates are expected to rise. Short term rates could rise because the Fed needs to tighten monetary policy to fight inflation as a result of the enormous recent increase in the money supply or because the economy could be turning around. Another reason could be eroding confidence in the country’s credit rating.

Standard and Poor’s recently degraded the long term outlook for Great Britain’s AAA rating, and Japan had its rating lowered in the ‘90s after generating an enormous amount of public debt. The US debt is rising from a relatively stable 41% of GDP in 2008 to a projected 82% in the next 10 years. The NY Times David Leonhardt provides an analysis of the sea of red ink, which wasn’t born yesterday. Check out this debt calculator for some up to date numbers. With our low savings rate, foreign countries buying our debt may well demand a higher risk premium for longer term issues, considering this projected weakening of our financial balance sheet. Ben Bernanke, Chairman of the Federal Reserve, urged the House of Representatives to “begin planning now for the restoration of financial balance.” PIMCO’s Bill Gross echoes this message. Kansas City Fed President Thomas Hoenig has called for raising short term interest rates now.

None of this has prevented US News and World report from predicting that the Bremerton-Silverdale area will have the best home price appreciation in the country from 2008 to 2018. Did I mention that now is a good time to buy real estate?

We're still in the process of updating the local area market write ups, but all the graphs are up to date for May - see Kitsap Market Trends.