Kitsap Real Estate Market Blog

Monday, 31 May 2010

May 2010 Kitsap Real Estate Affordability Outlook

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.

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 4.87%, mostly the result of investors fleeing the Euro and buying US Treasuries after the Greek debt crisis. With the median price falling to $228,750, it’s ironic that first time home buyers can probably save more now than before the end of the homebuyer tax credit. 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 May sales by price range).

Kitsap Closed Sales by Price Range - May 2010

The affordability index improved to 1.24 in May from 1.14 in April. First time buyer affordability improved to 0.84 in May from 0.77 in April. Below is a graph of the year-to-year changes in affordability and a second graph showing month-to-month affordability progress so far this year. Affordability has still not recovered to the levels of 2001 and 2002.

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 $228750

Monthly payment $975 $1182 $1378 $1443 $1244 $1054 $968

Affordable payment $1135 $1218 $1287 $1264 $1232 $1203 $1203

Affordability Index 1.16 1.03 0.93 0.88 0.99 1.14 1.24

1st time buyer payment $1002 $1214 $1408 $1478 $1277 $1089 $1002

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 0.84

Graph of Kitsap County Housing affordability for first time and regular home buyers

May's APR is 5.065% on a 30-Year and 4.573% on a 15-Year, both conforming. April's rates were 5.191% 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 - 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.

POSTED BY: Hugh Nelson AT 10:21 am | Permalink | E-mail this

Sunday, 23 May 2010

Short Sales and Second Liens

The Daily Show recently offered this commentary on the current profitability of large banks:

The Daily Show With Jon Stewart Mon - Thurs 11p / 10c

Hoarders

www.thedailyshow.com

Daily Show Full Episodes Political Humor Tea Party

The gist of the Daily Show’s segment is that 4 banks profited every trading day during the last quarter basically by borrowing short term from the Federal Reserve at almost zero interest and lending the same money back to the government at 3.5% by purchasing 10 year Treasury bonds. They are the profit taking middlemen in a washing machine to fund large deficits to stimulate the economy. Note that the Federal Reserve and Treasury are aiding the banks in this arrangement. The public animosity towards the bank profiteers no doubt played a part in passing more vigorous reforms to financial regulations.

While on the one hand bank earnings in 2010 have been more than 4 times the earnings of the S&P 500, banks also have about $1 trillion in second liens on their books, with more than $400 billion on the books of the 4 largest banks. On the financial blog Rortybomb, Mike Konczal reports that the Bank Stress Test adverse scenario documents expected losses of 13-14% on these second liens (so banks value the second lien assets at 86% of their face value). He asserts that the current housing market might see real losses of 40-60%, considering that most of the second liens are worthless after the fall in home prices. There are 11 million plus underwater homeowners, almost 25% of all homeowners with bank loans. Konczal thinks the difference in the real losses to the big banks might be as much as $150 billion, which would require them to raise large amounts of additional capital. One analyst has predicted that the big banks will need to set aside an extra $33.2 billion starting this year because of home equity loan losses, enough to wipe out most of their estimated profits for the year. Home equity loans are a particular problem because long after the homeowner stops making payments, the banks continue to count the loan as current by adding the interest not paid to the loan balance. Second lien holders are balancing delaying the loan modification or short sale process and urging the homeowner to continue paying with action to avoid foreclosure, where the second lien holder will probably receive nothing.

Our anecdotal experience has been that most distressed homeowners have second liens. In most cases second lien holder banks have been unresponsive in releasing liens to allow short sales. As an example, we can document a short sale that took us 13 months to complete, and we have others where the seller (and of course the buyer) has been waiting more than 5 months for a response from the second lien holder. Literally hundreds of other agents in the Certified Distressed Property Agent network are reporting the same thing. Millions of distressed homeowners are being punished by the unnecessary delay in resolving second liens. With financial reform at our doorstep, it would seem that the government could trade some of the good will that is helping the banks to profit for their cooperation in helping homeowners more quickly sell their homes.

POSTED BY: Hugh Nelson AT 03:34 pm | Permalink | 0 Comments | E-mail this

Sunday, 01 March 2009

Obama Budget Proposes Placing New Limits on Home Mortgage Interest Deduction

The President's new budget represents a new way forward, but will only have real effect to the extent that Congress acts upon his proposals. The new budget proposes as one of its tax revenue schemes to limit the deductions of those tax payers in the 33% and 35% tax brackets to the amounts that could be deducted if they were in the 28% tax bracket. This will impact the very popular home mortgage interest deduction, causing those in the higher brackets to give up 20% of the interest they could previously deduct.

POSTED BY: Hugh Nelson AT 09:43 pm | Permalink | 0 Comments | E-mail this

Thursday, 12 February 2009

Stocks Jump on News of Subsidies for Homeowners

An article about homeowner mortgage subsidies on Reuters this afternoon caused a sharp rise in end of the day stock prices. Unlike existing plans, the new plan still under discussion would seek to assist homeowners before they fall behind on loan payments. The basic elements involve use of a standardized appraisal and a uniform standard of eligibility for applicants. In a program FDIC used to modify delinquent loans at IndyMac Bank, all 5400 delinquent loans were modified so that the borrowers payments did not exceed 38% of pretax income. It’s likely that a similar program, possibly with a reduced limit on maximum percentage of pretax income, will be offered in the new program.

POSTED BY: Hugh Nelson AT 03:51 pm | Permalink | E-mail this