Each month we publish a snapshot of several local markets to show variations in our larger Kitsap County real estate market. July's inventory of homes for sale (1944) rose 3.5% from June and is 6% larger than a year ago.  This rise in inventory did not occur last year and may indicate that some sellers who have been waiting to sell are now coming back into the market. The County has a listing inventory turnover rate of about 9.5 months, a big slowdown from June’s 7.1 months. Inventory turnover varies greatly by price. In July, there was only 1 sale among 152 Kitsap County properties priced greater than $800k, so turnover in the higher price ranges was very slow. July's median price ($264,250) rose about 11% compared to June and was also about 5% higher than a year ago.  This was primarily the result of a change in the price distribution of homes  sold, rather than an across the board increase in home prices. With expiration of the homebuyer tax credit, the number of sales of lower priced properties fell by a large percentage. Sales of mid priced homes was affected less, so the median (middle) price of the homes sold moved higher. The number of pending sales in July was down 20% compared to a year ago, but was up 15% compared to last month. You may recall that pending sales fell nearly 50% in May and have been rising again the past 2 months.  The links to regional market trends below will show both tables and graphs that further enhance the data reported. 

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

Bainbridge Island Real Estate
Bainbridge Island residential properties were selling for a July median price of $529,500, about 19% lower than in June. The more stable three month moving average of closed sale price fell about 1.5% from last month to $547,333 and is 19% lower than it was a year ago. The Kitsap County 3 month moving average median price is 1% higher than it was a year ago. The 3 month moving average for Bainbridge Island's number of closed sales is 54% higher than a year ago. The 3 month moving average of closed sales is down 3% Countywide from a year ago. The 3 month moving average number of Bainbridge pending sales in July rose 29% from a year ago. The number of active listings on Bainbridge (268) rose 3% from June and is up 6% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 12.2 months, slower then the 8.1 months in June and the 10.5 months of a year ago. Bainbridge Island is a buyer’s 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 $167,450 at the end of July, about 1% less than a year ago and about 1% less than last month. The more stable 3 month moving average median price ($168,949) was about 6% less than a year ago. The Kitsap County 3 month moving average median price is 1% higher than it was a year ago.  Bremerton's 3 month moving average for number of closed sales is 12% lower than a year ago and 15% lower than last month. The 3 month moving average of closed sales is down 3% Countywide from a year ago.  The 3 month moving average number of Bremerton pending sales is down 44% from last year. With expiration of the homebuyer tax credit, pending sales in Bremerton have fallen sharply. The number of Bremerton active listings (186) is 2% higher than a year ago. The inventory turnover (total Bremerton homes on the market divided by number sold last month) is 13.3 months (much slower than the 6.5 month turnover last month and 4.9 month turnover a year ago). The Bremerton market is slowing down and is a buyer’s market.

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 $208,725 at the end of July, 54% lower than a year ago. The more stable 3 month moving average ($253,480) of closed sale prices is down 28% compared to a year ago. The Kitsap County 3 month moving average median price is 1% higher than it was a year ago. The 3 month moving average of Kingston closed sales rose 39% from a year ago, while the number of pending sales is unchanged from a year ago. The 3 month moving average of closed sales is down 3% Countywide from a year ago. The number of active listings in Kingston (73) is up 7% from a year ago and down 16% from last month. The inventory turnover (total homes on the market divided by number sold last month) is 12.1 months (slower than the 9.7  month turnover reported last month and the 8.5 month turnover of a year ago). Kingston is still 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 July median sales price for Poulsbo was $317,750, up about 12% from a year ago and down about 11 % from last month. The more stable three month moving average closed sale price was $322,446, about 4% higher than a year ago. The Kitsap County 3 month moving average median price is 1% higher than it was a year ago.  The 3 month moving average number of closed sales in Poulsbo rose 2% from a year ago. The 3 month moving average of closed sales is down 3% Countywide from a year ago.  Poulsbo’s 3 month moving average of pending sales fell 41% from a year ago. The Poulsbo listing inventory (103) is 11% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 4.7 months, faster than the 6.4 months reported last month and better than most other areas in the County. Poulsbo is still a buyer’s market.

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

Silverdale Real Estate
Homes in Silverdale were selling for a July median price of about $383,500, 25% higher than a year ago. This rise is the result of a change in the price distribution of  homes sold - fewer low priced sales and more mid to high priced sales. Silverdale's more stable 3 month moving average median closed sale price was $301,150, about 18% higher than a year ago. The Kitsap County 3 month moving average median price is 1% higher than it was a year ago.   The 3 month moving average for Silverdale's number of closed sales was down 30% from a year ago. The 3 month moving average of closed sales is down 3% Countywide from a year ago.  The 3 month moving average of Silverdale pending sales in July fell 52% from a year ago. The number of active listings in Silverdale (109) is down 2% from last month and 35% higher than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 9.1 months,  slower than the 8.5 month turnover reported last month. Silverdale is still a buyer's market.

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

This is a repost of our July newsletter at prowserealestate.com.

Bloomberg Businessweek supplied plenty of local news for Kitsap County last week, citing a study by Moody’s Economy.com and Fiserv that the Bremerton-Silverdale area would have the fastest price appreciation of any metropolitan statistical area in the United States over the next 4 years, a 44.7% increase in prices (or 9.7% per year). Some clients have contacted us about this prediction, wondering whether to bank on it by renting now and selling in a few years.

We wish a 44.7% price rise for every homeowner, but don’t know the assumptions of this nationwide study or what specific demographic trends drove its conclusion. The article cites our county’s lower unemployment rate and the lower percentage of distressed homes for sale. These assumptions are true - unemployment is about 7.2% here compared with a nationwide figure of 9.5%, and the percentage of distressed properties is about 14% (our calculation for residential single family homes in the Northwest MLS) versus 19% nationally. As with many other parts of the country, residential construction in Kitsap County has slowed down a lot. The main idea in the article seems to be that demand will return as our economy returns to normal, which will happen sooner here than other areas. The housing inventory won’t be able to keep up, leading to a rise in prices. In a sense, the analysis is a heads up to builders to start development sooner. There are a number of large residential projects in planning, Sterling Hills in Silverdale, White Horse and Arborwood developments in North Kitsap, and various Noll Rd development projects, as well as Poulsbo Place II, in Poulsbo, just to name a few.

The rise in prices in Kitsap County peaked with a 3 month moving average median residential closed sale price of $301,182 in September 2007. If we use the current 3 month moving average median of  $248,916 and raise closed sale prices by 9.7% per year, we can plot a graph of past and projected home prices and compare it with median incomes in Kitsap County (median price in 2014 would be $360,470). See the graph below.

Financial reform has taken away those creative (and unrealistic) lending programs that allowed people to purchase homes when prices were rising from 2004 - 2007 without a corresponding increase in incomes. The projected rise in home prices now can only occur if there is a corresponding rise in real median incomes to maintain current affordability. Assuming that the source of rising income and home prices is not inflation (which would make incomes and prices go up everywhere and not just here), it seems unlikely that home prices can rise as much as projected without choking off the supply of eligible buyers, given that a large percentage of jobs in our County come from the government, and that government everywhere is trying to cut back rather than increase their costs. A squeeze on affordability from rising home prices could result in higher monthly rates in our rental market.

Each month we report on affordability in Kitsap County. How much would median incomes need to rise to maintain current levels of affordability with the projected 44.7% rise in home prices? If we use the current affordability index of 1.2, which is still not back to the historical levels of the past 25 years for our County, the median household income would need to rise from the current $57,724 to $89,170, a rise of about 55%. John Burns Real Estate consulting currently lists the Bremerton metropolitan statistical area (Kitsap County) as the 5th most overpriced area in the country comparing current median home prices and median incomes to historical averages for our county over the past 26 years. It will be interesting to find out whether the predictions of the Bloomberg report come to pass.

The number of closed sales in Kitsap County in July fell about 23% from June. Pending sales rose 15%, now having risen two months in a row after falling by nearly 50% in May. In June, there were 266 closed sales and 239 pending sales. In July there were 204 closed sales and 276 pending sales. Shown below is a graph of month-by-month pending sales vs closed sales. This graph shows how pending sales lead closed sales in direction if not magnitude - by about 2 months - and also shows the rise in pending sales at each of the homebuyer tax credit expirations (November and April) and the fall each took the subsequent month. Also based on this trend, we can expect a modest increase in closed sales next month.

 

Residential Highlights

Kitsap County's residential inventory in July (1944 listings) is about 4% higher than June and about 6% higher than a year ago. Inventory has been steadily rising this year, and is now at the highest we’ve seen since 2008. Some of the shadow inventory has become active again as bank owned and distressed sales and as sellers coming back to test the market. Distressed properties make up about 14% of our market. Closed sales were down 28% compared with July 2009. The more stable 3 month moving average number of Kitsap County closed sales is down 2% compared to a year ago, a sharp reversal from recent months of rising closed sales. 

Prices are steady...
The County’s monthly median closed sale price rose this month because the distribution of sales prices changed. Relatively fewer low priced homes were sold now that the tax credit is not there to lure 1st time buyers. At the same time almost no high priced sales occurred. July's median price ($264,250)  rose about 11% compared to June, and is 5% higher than a year ago. The more stable 3 month moving average (see graph below) of the median closed sale price ($248,916) rose about 5% from last month and is about 1.4% higher than a year ago. The current low median price coupled with record low interest rates offers good affordability, and it appears that some move up buyers are taking advantage in the $400-700k price range. Conventional mortgage rates are now about 4.57% for 30 year loans. Speculation that rates will rise later this year has been dampened by the debt crisis in Europe. Jumbo loans keep improving, and are now offered about 5.5%  The conventional and FHA loan limits remain at $475,000 in Kitsap County, which has helped sales of higher priced homes. The VA loan lender imposed limit is back to $417,000. Our median price graphs show a 3 month moving average of prices, which better shows trends and reduces the month-to-month fluctuations.

 

Seller expectations…
The July median list price (median of all properties listed for sale) fell to $304,450 from $319,000 last month (5% decrease). Median list prices have fallen significantly since a year ago as sellers became more aggressive in getting their properties sold.   The County has a listing inventory turnover rate of about 9.5 months, a slow down from the 7.1 month turnover in June.  Inventory turnover rate is calculated by dividing the number of homes for sale by the number of closed sales last month. This is a buyer’s market. The housing inventory increased for the 8th straight month, while the number of closed sales fell sharply in July. Shown below are graphs of inventory and inventory turnover for Kitsap County in 2007-10.

The inventory turnover also varies 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 more difficult to reduce in inventory because today's lending environment has greatly reduced the pool of qualified buyers. This was a particularly daunting month in the higher price ranges, with only 1 closed sale in the County among 152 properties priced higher than $800k. 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. Below is a historical depiction of the changes in the ratio of listings to closed sales.

 

 

The number of pending sales in July was down 20% compared to a year ago and up 15% compared to June. The statistics for July pending sales varied for different parts of the County. Below is a graph showing the 3 month moving average of pending sales for different parts of the County.  Even though we said that pending sales increased last month, the 3 month moving average in all areas is still falling because of the overriding effect of May's big drop in pending sales. You can see that pending sales have fallen sharply in the lower priced (Bremerton) and higher priced areas (Bainbridge), while mid priced communities such as Poulsbo have seen lower magnitude fluctuations.

 

Much recent news has focused on the economic slowdown. 2nd quarter GDP fell to an annual growth rate of 2.4%. With concerns about high unemployment and high government debt, government economists are weighing their options. The media have reported that economists predict a gloomier national housing market. July closed sales in Kitsap County appear to have fallen significantly (perhaps because of the rush to complete sales by the end of June), while July pending sales appear to have held fairly steady.

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’ve recently updated the income and 1st time buyer assumptions for this comparison to conform with current methods at WCRER. These updated data and calculations show not only that affordability has suffered because median household incomes have fallen the past few years, but also that affordability has not yet returned to where it was at turn of the century. Note that these calculations only compare the affordability of standard conventional loans. During the era of zero down subprime lending, other products with adjustable interest rates, interest only, or option ARM loans were used to qualify buyers for higher loans. History has shown that many of these were ultimately unaffordable. 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 10% down on a house priced at 85% of the median and obtains a 30 year fixed rate mortgage with mortgage insurance. 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 2001, 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 2010 are estimates using the latest monthly data for median prices, interest rates, and median income.

The interest rate for a typical 30 year fixed rate conforming loan has fallen to about 4.59%, a record low reflecting investment in US Treasuries as a safe haven. The June median closed sale price fell about 2% from May to $239,000, further enhancing affordability. Rates have been expected to rise at some point in the coming year, with some experts predicting they'll reach 6% by the end of 2010. However, fear of a European sovereign default and other signs of continued economic weakness may result in a longer period of low US Treasury and mortgage rates. Keep in mind that median prices can be deceptive and 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 1.23 in July from 1.19 in June. First time buyer affordability also improved to .82 from .76 in June.  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	2004	2005	2006	2007	2008	2009	2010
Annual Average interest rate	5.84	5.87	6.41	6.34	5.80	5.03	4.59
Median Income	$54467	$58464	$61786	$60,668	$59135	$57724	$57724
Median Price	$206900	$250000	$275000	$290343	$265000	$244499	$239000
Monthly payment	$975	$1182	$1378	$1443	$1244	$1054	$979
Affordable payment	$1135	$1218	$1287	$1264	$1232	$1203	$1203
Affordability Index	1.16	1.03	0.93	0.88	0.99	1.14	1.23
1st time buyer payment	$1002	$1214	$1408	$1478	$1277	$1089	$1031
1st time buyer affordable payment	$794	$853	$901	$885	$862	$842	$842
1st time buyer affordability index	0.79	0.70	0.64	0.60	0.68	0.77	0.82

July's APR is 4.686% on a 30-Year and 4.195% on a 15-Year, both conforming. June's rates were 4.812% on a 30-Year and 4.195% on a 15-Year, both conforming. If you qualify for FHA, VA, or USDA loans , these programs have are attractive for low downpayment buyers. The conventional and FHA loan limits remain at $475,000 in Kitsap County, which has helped sales of higher priced homes. The VA loan lender imposed limit is back to $417,000. The homebuyer tax credit was reworked last year to give some incentive to move up buyers as well as first time buyers.  A typical 30 year fixed jumbo APR (with total costs of the loan, not just the rate factored in) is 5.264% on one major bank web site - down from 5.643% last month. You should also check with local credit unions and savings and loans for jumbo loan rates. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/.

Congress is on the verge of passing a financial system overhaul that, among other things, gives regulators authority to break up troubled financial firms, forms a financial stability oversight council to address risks to financial stability, mandates a one time audit of the Federal Reserve’s lending programs, eliminates the Office of Thrift Supervision, limits the largest financial firms from investing their own capital in hedge funds and private equity funds, extends regulation to the derivatives market for the first time, limits derivatives trading by banks, sets tougher capital requirements on banks, mandates a fee on the largest banks to raise $19 billion to offset for the cost of the bill, establishes a consumer protection agency within the Federal Reserve to examine and enforce regulations for mortgage related businesses at banks and credit unions with more than $10 billion in assets (as well as other non-bank financial firms except auto dealers), applies stricter state statutes to national banks, increases the federal deposit insurance limit to $250k retroactive to January 1, 2008, establishes national minimum underwriting standards for home mortgages, and a raft of changes to protect investors from deals gone bad (thanks to the Wall Street Journal for the great summary). It’s a pretty sweeping bill, and some say it will be years before we will know the impact.

This massive bill, along with the health care overhaul and economic stimulus bills, have been part of an initiative to impose greater government control on our system of capitalism and free enterprise. Politicians have condemned and vilified many of our largest corporations and their executives as a way of justifying the need for these changes, and there has also been a vocal opposition to these measures. Recently, the number one best seller on Amazon.com became, at the suggestion of the flamboyant Glenn Beck, F.A. Hayek’s “The Road to Serfdom”, written in the ‘40s as, among other things, a warning about the ill effects of socialism and the benefits of free markets. Readers may be surprised that Hayek does not advocate a system of laissez-faire economics, but instead has a significant role for government in areas where markets do not provide the best outcomes, such as operation of the monetary system, enforcement of labor regulations, and dissemination of economic information (and probably oil spill cleanups as well). Here's another take on Hayek from the Russell Roberts at George Mason University.

A more readable and relevant book about the current financial crisis is University of Chicago Economist Raghuram Rajan’s new book, “Fault Lines: How Hidden Fractures Still Threaten the World Economy”. He relates the causes of the crisis on a much more global scale than most other accounts. While the same basic causes are there, the context and underlying forces are much broader, relating, for example, how US income inequality (look at how Kitsap County median incomes have changed in the table below), performance of our educational systems, and the choices of some governments (Germany, China, etc.) to focus on exports relate to the crisis. The article in the Financial Times (link above) notes:

“The circle of blame goes wider than greedy bankers and negligent regulators, Rajan emphasises. It includes you and me, and the politicians we elected. Almost all the culprits acted in good faith and even rationally, given the circumstances, he argues. If this were not the case, avoiding the next crisis would be much easier. We could thump the villains and move on. If only it were so simple.”

Rajan’s book sheds some light on the major issues confronting the G20 meetings in Toronto this week. It also questions whether the complex financial regulatory overhaul is addressing the underlying problems.

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’ve updated the income and 1st time buyer assumptions for this comparison to conform with current methods at WCRER. These updated data and calculations show not only that affordability has suffered because median household incomes have fallen the past few years, but also that affordability has not yet returned to where it was at turn of the century. Note that these calculations only compare the affordability of standard conventional loans. During the era of zero down subprime lending, other products with adjustable interest rates, interest only, or option ARM loans were used to qualify buyers for higher loans. History has shown that many of these were ultimately unaffordable. 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 10% down on a house priced at 85% of the median and obtains a 30 year fixed rate mortgage with mortgage insurance. 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 2001, 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 2010 are estimates using the latest monthly data for median prices, interest rates, and median income.

 The interest rate for a typical 30 year fixed rate conforming loan has fallen to about 4.72%, a record low reflecting investment in US Treasuries as a safe haven. Even with the May median price rising about 7% from April to $243,498, affordability probably won’t get much better. Rates have been expected to rise at some point in the coming year, with some experts predicting they'll reach 6% by the end of 2010. However, fear of default by Greece or another of the suspect countries in the European Union may result in a longer period of low US Treasury and mortgage rates. Keep in mind that median prices can be deceptive and that the bulk of sales are concentrated below $400,000, with considerably fewer than normal in the higher price ranges (see graph showing distribution of June sales by price range).

The affordability index degraded to 1.19 in June from 1.24 in May. First time buyer affordability also degraded to .76 from .84 in May. The first time buyer index was effected more than the regular index because of the increase in the cost of mortgage insurance. 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	2004	2005	2006	2007	2008	2009	2010
Annual Average interest rate	5.84	5.87	6.41	6.34	5.80	5.03	4.87
Median Income	$54467	$58464	$61786	$60,668	$59135	$57724	$57724
Median Price	$206900	$250000	$275000	$290343	$265000	$244499	$243498
Monthly payment	$975	$1182	$1378	$1443	$1244	$1054	$1013
Affordable payment	$1135	$1218	$1287	$1264	$1232	$1203	$1203
Affordability Index	1.16	1.03	0.93	0.88	0.99	1.14	1.19
1st time buyer payment	$1002	$1214	$1408	$1478	$1277	$1089	$1114
1st time buyer affordable payment	$794	$853	$901	$885	$862	$842	$842
1st time buyer affordability index	0.79	0.70	0.64	0.60	0.68	0.77	0.76

June's APR is 4.812% on a 30-Year and 4.195% on a 15-Year, both conforming. May's rates were 5.065% on a 30-Year and 4.573% on a 15-Year, both conforming. The 15 year rate improved significantly over the past month. If you qualify for FHA, VA, or USDA loans , these programs have are attractive for low downpayment buyers. The conventional and FHA loan limits remain at $475,000 in Kitsap County, which has helped sales of higher priced homes. The VA loan lender imposed limit is back to $417,000. The homebuyer tax credit was reworked last year to give some incentive to move up buyers as well as first time buyers.  A typical 30 year fixed jumbo APR (with total costs of the loan, not just the rate factored in) is 5.643% on one major bank web site - same as last month. You should also check with local credit unions and savings and loans for jumbo loan rates. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/.

The economy in the last month of spring has been pretty volatile, with several factors working against each other and no one able to pick the winners and losers. The latest Pacific Northwest report from economist William Conerly at Conerly Consulting shows low to moderate gains in GDP, weak improvements in employment, a steady rise in discretionary spending, strong gains in industrial sales, and improved corporate profits.  Federal Reserve Chairman Ben Bernanke, speaking before the House Budget Committee last week, said technically we’ll be in recovery, but with near double digit unemployment there will still be a lot of financial stress. He also reminded the committee that the US Budget is on a path of unsustainable debt, while at the same time not giving Representatives cover by suggesting spending cuts or tax increases that might make things better.

The Joint Center for Housing Studies at Harvard released its 2010 State of the Nation’s Housing Report. The report analyzes the impact of high unemployment, reduction in median income since 2000, slowing growth in the number of households, rising numbers of minorities in younger generations, falling home prices, etc., on the national real estate market. It spans a number of topics. With falling prices, total home equity has returned to the 1985 level, back when there were far fewer homes. Total mortgage debt stands at 163% of total home equity - a record. Home prices have fallen a greater percentage at the low end then at the high end. The percentage of minority homeowners in distress far exceeds the number of white homeowners in distress, regardless of income level. Despite the large number of distressed properties, likelihood of stagnant sales prices for several years, more stringent lending standards, and high government debt, and even with much reduced immigration, there will be ample household generation to provide a robust housing market in future years. It’s just getting through the next few years that will most likely be painful.

May’s nationwide new construction single family starts fell 17.2% from April. Similarly, permits issued in May fell 9.9%. As predicted, residential construction doesn’t appear to be adding many jobs to the recovery. Builders are returning to smaller, less expensive, more energy efficient home designs. Changes in homebuilding practices might well effect builder’s return to profitability and reignite construction hiring. There must be some upside surprises developing amid all this gloomy news.

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 (1846) rose 5% from April and is 4% greater than a year ago.  This rise in inventory did not occur last year and may indicate that some sellers who have been waiting to sell are now coming back into the market. The County has a listing inventory turnover rate of about 7.3 months, the same as in April. Since May pending sales have fallen 45%, it looks like turnover will slow in coming months. Inventory turnover varies greatly by price, with some higher price ranges having a turnover greater than 40 months. April's median price ($243,498) rose about 6% compared to April and was about 1% higher than a year ago.  The number of pending sales in May was down 32% compared to a year ago, and regional pending sales fell in several areas.  The links to regional market trends below will show both tables and graphs that further enhance the data reported below.  See Kitsap County graphs at http://www.bprowse.com/kitsap_market_trends.

Bainbridge Island Real Estate
Bainbridge Island residential properties were selling for a May median price of $457,500, about 18% lower than in April. The more stable three month moving average of closed sale price fell 12% from last month to $511,333 and is 19% lower than it was a year ago. The Kitsap County 3 month moving average median price is 3% higher than it was a year ago. The 3 month moving average for Bainbridge Island's number of closed sales is 63% higher than a year ago. The 3 month moving average of closed sales is up 25% Countywide from a year ago. The 3 month moving average number of Bainbridge pending sales in May rose 105% from a year ago. The number of active listings on Bainbridge (210) is down 9% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 6.9 months, better than last month and much better than a year ago. Bainbridge Island is a buyer’s market.

See tables and graphs and tables 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 $169,898 at the end of May, about 3% less than a year ago and about the same as last month. The more stable 3 month moving average median price was 7% higher than a year ago. The Kitsap County 3 month moving average median price is 3% higher than it was a year ago.  Bremerton's 3 month moving average for number of closed sales is 56% higher than a year ago. The 3 month moving average of closed sales is up 25% Countywide from a year ago.  The 3 month moving average number of Bremerton pending sales is up 13% from last year. Recall this number includes pending short sales that may not close. The number of Bremerton active listings (168) is 3% lower than a year ago. The inventory turnover (total Bremerton homes on the market divided by number sold last month) is 5.6 months (a small improvement from the 6.1 month turnover last month and better than the 10.8 month turnover a year ago). The Bremerton market is probably still a buyer’s market.

See tables and graphs and tables 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 $312,715 at the end of May, 4% lower than a year ago. The more stable 3 month moving average of closed sale prices is down 32% compared to a year ago - this has been affected by the very low median price of last month.  The Kitsap County 3 month moving average median price is 3% higher than it was a year ago. The 3 month moving average number of Kingston closed sales rose 350% from a year ago, while the number of pending sales is up 75% from a year ago. Recall again that our current pending sales include pending short sales that may not close. The 3 month moving average of closed sales is up 25% Countywide from a year ago. The number of active listings in Kingston (77) is up 24% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 7.7 months (worse than the 6.4  month turnover reported last month, but much better than a year ago). Kingston is still a buyer's market.

See tables and graphs and tables 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 $290,087, down about 18% from a year ago. The more stable three month moving average closed sale price was $307,362, about 6% lower than a year ago. The Kitsap County 3 month moving average median price is 3% higher than it was a year ago. The 3 month moving average number of closed sales in Poulsbo rose 56% from a year ago. The 3 month moving average of closed sales is up 25% Countywide from a year ago.  Poulsbo’s 3 month moving average of pending sales fell 18% from a year ago. Recall this number includes pending short sales and new construction that may not close soon. The Poulsbo listing inventory (103) is 15% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 5.7 months, improved from the 8.2 months reported last month. Poulsbo is still a buyer’s market.

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

Silverdale Real Estate
Homes in Silverdale were selling for a May median price of about $245,000, 12% lower than a year ago. Silverdale's more stable 3 month moving average median closed sale price was $266,333, about 1% lower than a year ago. The Kitsap County 3 month moving average median price is 3% higher than it was a year ago.  The 3 month moving average for Silverdale's number of closed sales was up 17% from a year ago. The 3 month moving average of closed sales is up 25% Countywide from a year ago.  The number of Silverdale pending sales in May is up 5% from a year ago, but recall this number includes pending short sales that may not close. The number of active listings in Silverdale (98) is 14% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 7 months,  worse than the 5.9 month turnover reported last month. Silverdale is still a buyer's market.

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

As we approach the end of January, some of the economic optimism of late 2009 has faded, and Americans are reassessing their outlook for this year.  The stock market has fallen more than 500 points, but the market that in many ways continues to be the most central concern is real estate. Calculated Risk blog published an article about the Special Inspector General's quarterly report on the Troubled Asset Relief Program (TARP), which asserts:

"...the Federal Government's concerted efforts to support home prices risk re-inflating that bubble in light of the Government's effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market."

The Calculated Risk article also published this graphic from the report, showing the different ways that the government is currently supporting residential real estate and lending in our markets. The report also outlines why "too big to fail" institutions benefitted from the TARP while contributing to the problem, and that these institutions have grown larger and more problematic as a result.

As portions of government support for home prices wind down and withdraw price support as our economy recovers, the article speculates that home prices will continue to fall. Interest rates will rise and demand for housing will fall.  Our own opinion is that we'll see a greater adjustment in higher priced homes than at the low end of the market since loans are more difficult to obtain and an increasing number of owners of higher priced homes will be subject to defaults and foreclosures.

While the wave of subprime adjustable rate mortgage payment resets has passed, a new wave of resets, most prominently option-ARM mortgage payment resets, is about to begin. Many of the Option ARM loans went to purchase more expensive homes, so we expect more defaults in higher priced homes this year. See this graphic published by the IMF posted in an older article on the Calculated Risk Blog.

Also, unemployment continues to force defaults even among conventional borrowers, who now make up the largest group of defaults and foreclosures by loan type. See this graph, again from Calculated Risk, "Statistical Recovery and Human Recession," showing how unemployment in this recession compares with other recessions since World War II.

While this discussion at the national level will have an impact on our local market, it is important to distinguish that not all markets will be effected in the same way. For instance, Kitsap County has only 7.5% unemployment, while the national rate is 10%. Fewer defaults occur in Kitsap County as a result of unemployment.

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 5.34% in December to 5.13% in January for a typical 30 year fixed rate conforming loan and the median price falling in January to $239,950, affordability is improved slightly and remains very good. The outlook for rates is that they will continue to rise in the coming year, with some experts predicting they'll 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 1.29 in December from 1.27 in November. First time buyer affordability improved to 1.13 from 1.11 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	5.13
Median Income	$53,160	$53,923	$54,582	$58,304	$60,719	$65,000	$65,000
Median Price	$184000	$206900	$250000	$275000	$290343	$265000	$239950
Monthly payment	$867	$975	$1182.43	$1378	$1443	$1244	$1046
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	1.29
1st time buyer payment	$693	$780	$946	$1102	$1155	$995	$837
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	1.13

January's APR is 5.191% on a 30-Year and 4.573% on a 15-Year, both conforming. December's rates were 5.444% on a 30-Year and 4.952% on a 15-Year, both conforming. After rates rose somewhat in December, they are again back at very attractive levels. If you qualify for FHA, VA, or USDA loans , these programs have are attractive for low downpayment buyers. Limits for FHA and conventional conforming loans went up with the stimulus bill. The 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/.

Recent news from the National Association of Realtors is that December home sales were down 16% nationally compared to November, yet 15% higher than December 2008. You'll recall that November ended the initial first time homebuyer tax credit, so sales then were inflated by buyers rushing to meet the deadline. Even though the tax credit has been renewed and expanded, there isn't the same urgency on the part of buyers. With so many Americans having lost equity in their homes (we calculated 8949 homeowners underwater in Kitsap County - but many more have lost a sizable amount of equity), few are in a position to benefit from the new tax credit for move up buyers.

There is still a great deal of uncertainty in our economy, and there will be more trials over the next year. Congress (through the Stimulus bill), Treasury and the Federal Reserve (though a near zero Federal Funds target rate and the purchase of debt and mortgage backed securities from Fannie Mae and Freddie Mac) have pumped a huge amount of money (more than $200 billion by Treasury and about $1.25 trillion by the Fed) into our economy. As demand for goods and services increases, there will be a threat of inflation (too many dollars chasing too few goods). One uncertainty is whether the Federal Reserve will have the resolve to raise their target rate in spite of political pressure to keep rates low. Related to this, the Treasury has stopped purchasing mortgage backed securities from Fannie Mae and Freddie Mac, and the Federal Reserve has announced it will stop purchasing these securities at the end of March. Another uncertainty is how much interest rates will rise to attract private investors back into this market. While some experts expect mortgage rates to rise only a few tenths of a percent, others have predicted that rates will be 6% by year end. These uncertainties are playing a role in the doubts currently circulating about whether or not to confirm the nomination of Ben Bernanke to continue as Chairman of the Federal Reserve Board of Governors.

There is also uncertainty about what will be done to alleviate the perception that some of our financial institutions are too big to fail. Despite being saved by the the taxpayers late last year, many of these institutions have profited and grown this year, now making the influence of the largest bank (actually bank holding companies) considerably greater than it was when markets failed in fall 2008. The administration has recently proposed curbs on the lending and investing activities of these big banks, and while it might appear that this was a reaction to the Democrats recent loss of a Senate seat in Massachusetts, the program, at least according to one source, has been in preparation and review for many months. Just a case of bad timing.

Each month we publish a snapshot of several local markets to show variations in our larger Kitsap County real estate market. December's inventory of homes for sale fell by 25% from a year ago and was 10% lower than in November. 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 6.0 months, somewhat better than November's 6.1 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 25 months turnover for homes priced above $800,000. December's closed sale median price ($239,950) was about the same as in November and was 8% higher than a year ago (median price dipped very low in December 2008 before rebounding somewhat to near its current level).  The number of pending sales in December was up 38% from a year ago (recall that December 2008 was a very bad month for our economy) even though pending sales have fallen steeply the past 2 months (as the first time homebuyer tax credit deadline passed). Regional pending sales have tailed off after peaking in October.  The links to regional market trends below will show both tables and graphs that further enhance the data reported below.

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

Bainbridge Island Real Estate
Bainbridge Island residential properties were selling for an December median price of $505,000, about 3% higher than in November. The more stable three month moving average of closed sale price fell 1% from last month to $495,000 and is 5% 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 is just about the same as it was a year ago. Note that prices tailed off at the end of last year so this parity is not unexpected. The 3 month moving average for Bainbridge Island's number of  closed sales is 50% higher than a year ago. Recall that sales were very weak at the end of 2008 and the number of closed sales at the end of last year was improved. The 3 month moving average number of pending sales in December rose 53% from a year ago. The 3 month moving average of closed sales is up 39% Countywide from a year ago. The number of active listings on Bainbridge (162) is down 16% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 7 months, improved from the 11.7 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 $153,150 at the end of December, about 2% higher than a year ago and down 4% from 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 is just about the same as it was a year ago. Bremerton's 3 month moving average for number of closed sales is up 13% from a year ago. The 3 month moving average of closed sales is up 39% Countywide from a year ago.  The 3 month moving average number of Bremerton pending sales is up 13% from last year. Recall this number includes pending short sales that may not close. The number of Bremerton active listings (138) is 25% lower than a year ago. The inventory turnover (total Bremerton homes on the market divided by number sold last month) is 5.1 months (better than the 6.1 last month and from 8.7 months a year ago). 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 $299,000 at the end of December, 94% higher than a year ago - December 2008 was a terrible month for Kingston home sales. 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 13% compared to a year ago.  The Kitsap County 3 month moving average median price is just about the same as it was a year ago.  The 3 month moving average number of Kingston closed sales rose 175% from a year ago, while the number of pending sales is 100% higher than a year ago. Recall again that December 2008 had very low sales and that our current pending sales include pending short sales that may not close. The 3 month moving average of closed sales is up 39% Countywide from a year ago. The number of active listings in Kingston (62) is down 21% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 4.8 months (better than the 8.7 months last month, not to mention the 78 month turnover of last year). Our guess is that Kingston is still a buyer's market because of the shadow inventory.

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 December median sales price for Poulsbo was $254,250, down about 30% from a year ago. The more stable three month moving average closed sale price was $282,709, about 18% lower than in December 2008. The Kitsap County 3 month moving average median price is just about the same as it was a year ago. The 3 month moving average number of closed sales in Poulsbo rose 50% from a year ago. The 3 month moving average of closed sales is up 39% Countywide from a year ago.  December pending sales were up 50% in Poulsbo. Recall this number includes pending short sales and new construction that may not close soon. The Poulsbo listing inventory (98) is 36% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 5.9 months, somewhat worse than the 4.2 months reported last month - but still very good. Poulsbo is probably still a buyers market because of the shadow inventory of homes pulled off the market in the past year without selling, but looks like it has improved recently.

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

Silverdale Real Estate
Homes in Silverdale were selling for a December median price of about $274,000. This median is down 4% percent from a year ago. Silverdale's more stable 3 month moving average median closed sale prince in December of $275,417 was up about 5% from a year ago. The Kitsap County 3 month moving average median price is just about the same as it was a year ago.  The 3 month moving average for Silverdale's number of closed sales was 8% higher than a year ago. The 3 month moving average of closed sales is up 39% Countywide from a year ago.  The number of Silverdale pending sales in December is up 44% from a year ago, but recall this number includes pending short sales that may not close. The number of active listings in Silverdale (62) is 25% lower than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 5.2 months, better than the 5.7 months last month. Silverdale is looking now like a seller's market, 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  

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 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%.