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.

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!