We now have the lowest mortgage rates since the '50s, so rate affordability won't get much better than now; however, the price distribution of homes sold has changed, and as a result the median price has gone up and overall affordability has gone down. This is a structural change that makes the numbers in this report inconsistent, but probably doesn't represent an actual rise in prices across our market. Market inventory is rising, so prices should be going 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. 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 4.50%, a record low reflecting investment in US Treasuries as a safe haven. The July median closed sale price rose about 10% from June to $264,250. This big jump in median price represents a shift in the distribution of buyers rather than a rise in overall prices. There were fewer buyers of low priced properties because many had purchased earlier this year to take advantage of the homebuyer tax credit. For our calculations here, the rise in median price makes affordability worse even though we don't think real prices have risen. 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 appear to be resulting in a longer period of low US Treasury and mortgage rates. The inconsistency in the median price as the price distribution changes makes the information in this report less meaningful. It's important to understand that this same phenomena also affects the regional and national statistics being reported in by the news media.

The affordability index worsened to 1.12 in August from 1.23 in July. First time buyer affordability also worsened to .71 from .82 in July.  First time buyer affordability went down not only because of the median price rose, but also because the cost of mortgage insurance appears to have risen significantly. We use an automatic PMI calculator at a public web site. The first time buyer PMI for this month was about double what it has been in recent months. 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	4.50
Median Income	$54467	$58464	$61786	$60,668	$59135	$57724	$57724
Median Price	$206900	$250000	$275000	$290343	$265000	$244499	$264250
Monthly payment	$975	$1182	$1378	$1443	$1244	$1054	$1071
Affordable payment	$1135	$1218	$1287	$1264	$1232	$1203	$1203
Affordability Index	1.16	1.03	0.93	0.88	0.99	1.14	1.12
1st time buyer payment	$1002	$1214	$1408	$1478	$1277	$1089	$1182
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	0.71

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 news cycle continues to focus on the not yet stopped BP oil leak in the Gulf of Mexico (see this recent tech update on what they have been doing) and the warlike hostilities on the Korean peninsula. The stock market fell sharply in May because of investor fears that Greece or other members of the European Union might default on sovereign debt. These coupled with the flurry of real estate activity at the expiration of the homebuyer tax credit leave us with a lot of unanswered questions as we start into the summer. Kitsap County has the most housing inventory since 2008, and pending sales last month were the highest since mid 2007. Despite these upbeat indicators and interest rates near a record low, US home prices as measured by the Case Shiller Index have fallen for 6 straight months, and some are guessing that prices will continue to fall. The good news for buyers is that affordability continues to get better.

March is rapidly coming to an end, and we still want to report on the affordability numbers. Going into the new month there’s still lots of controversy about our economy and the near term for our real estate market. Let us try to focus only on two (of a nearly infinite number of) aspects:

The new issue of The Economist proclaims “Hope at Last” and tells a story of a reviving and changing (for the better) United States.

America has relied for decades on its consumers’ willingness to spend, borne up by borrowing and the false comfort of bubbles in asset prices. Now Americans are saving more and borrowing less because the collapse in home prices has eviscerated their wealth. Bankers and regulators who once celebrated the democratisation of credit now ration it. Businesses from General Electric to Citigroup that prospered from the consumption culture are rethinking—and often shrinking—their loan books. Property developers are building smaller, simpler houses. The country’s geography is changing. Recession has slowed the rush to sun and sprawl. People are moving out of Florida and into North Dakota. Foreclosures and costlier commutes have laid low the distant suburbs, or exurbs.

On the other hand, Northwest Economist Bill Conerly tells why the latest of many attempts to help homeowners stay in their homes won’t work, titled “Mortgage Modifications Will Not Solve the Housing Problem.”

Both rental and owned vacancy rates are too high, well above historic norms.  If we keep some families in their owned property, they don't have to move to rentals.  If we offer a first-time home-buyers tax credit, we can move some families out of rentals into owned housing.  But we cannot do any more than push the peas around on the plate.

He also mentions what will solve the housing problem.

What will help?  The standard old answer is population growth.  More people means more demand for housing.  We simply built ahead of our needs and now are waiting for our needs to catch up.

Second, an improving job market will help some young adults move out of their parents' homes, and others will be able to afford to live without roommates.  That will stimulate the demand for housing units in total, and some of that demand will spread over into the owned housing market.

The February median price for Kitsap real estate ($252,435) is up about 5% from January’s low. The Federal Reserve is winding down purchases of mortgage backed securities and debt from Fannie Mae and Freddie Mac, operations which have helped to hold down mortgage interest rates and promote a fragile real estate market.  Mortgage interest rates have so far not moved much in response. As we predicted last month, the median price has moved back up to about where it was for most of last year after dipping at year end when sales were very weak. Thus the affordability numbers this month, though worse than last month, are still at about the low range of where they were over the past year.

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 2010 are estimates using the latest monthly data for median prices and interest rates (2009 has been updated with average annual values), and an estimated median family income for 2008-2010.

With interest rates remaining nearly level at 5.12% in March (same as last month) for a typical 30 year fixed rate conforming loan and the median price rising about 5% in February to $252,435, affordability has dropped from near all time high last month back into the range we saw for most of last year. 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 fell to 1.23 in February from 1.39 in December, almost entirely due to the higher median price. First time buyer affordability fell to 1.08 from 1.21 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.

March's APR is 5.318% on a 30-Year and 4.573% on a 15-Year, both conforming. February's rates were 5.065% on a 30-Year and 4.573% 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 5.643% on one major bank web site - lower than 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/.

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?