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

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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.

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/.

Our most recent market report newsletter from Prowserealestate.com is reposted here in its entirety.

A recent Wall St Journal Article by Economics Editor David Wessel ("Geithner Gets Some Credit–But Still No Cheers") highlights the current paradox with the economic recovery. Stocks have rebounded, helping banks raise more capital. Mortgage rates have come down, but the value of commercial and industrial loans held by commercial banks continues to fall, recently down about 18% from a year earlier (while their cash assets have increased almost 30%). While the Treasury Secretary's policies have worked better, faster, and more cheaply in getting capital flowing back into the big banks, the lack of commercial lending hurts all but those corporations large enough to sell their own bonds. Large banks see their stock rising and want to return to paying large bonuses to their employees, while main street sees 9.7% unemployment and 15% of homeowners (almost 25% of all borrowers) owe more than their homes are worth. For them, to be told things could be worse is not comforting.

The Making Home Affordable loan modification program is in flux as officials now realize that the present program of reducing payments by adjusting interest rates and loan terms rather than reducing principal is not helping several million homeowners as anticipated. Fewer than 100,000 permanent modifications have been approved to date. Experts are predicting many additional foreclosures, since the trial modification period is approaching for many homeowners. Others are debating the merits of revising the program to allow principal reductions, allowing homeowners to stay and rent, or pushing for more short sales or deed in lieu of foreclosure sales. For those buyers making offers on short sale properties, the biggest drawback has been that the bank loss mitigation departments are understaffed and overloaded with offers and associated seller financial paperwork, thus taking far longer to respond to sellers than the typical buyer is willing to wait.

As we look at our January Kitsap real estate market, there are some other trends around the country worth noticing:

• The latest survey of refinancing by Freddie Mac shows that 33% of owners refinancing are putting cash in to reduce their loan balances, an all time high.
• The number of million dollar sales in California declined by 24% last year. In Kitsap County, while total closed residential sales in 2009 exceeded 2008 by 8%, the number of 2009 sales above $1 million fell by 12% compared to 2008. The number of sales above $2 million fell by 86% in 2009 compared to 2008.
• Half of off all outstanding mortgages are at rates that exceed 6%. Despite the current low 30 year fixed conventional rates of about 5%, the wave of refinancing is mostly over, with many homeowners (more than 25 million) lacking equity to refinance and lower their payments.

Pending sales in January rebounded while closed sales declined, much as pending sales had declined in the previous two months. Short sales, foreclosure sales, and even some non distressed sales are delayed or are failing to close because of the added difficulties in getting bank approvals and the more difficult lender climate, which makes it more difficult for any borrower to obtain a loan. In December, there were 228 closed sales and 196 pending sales. In January there were 172 closed sales and 252 pending sales. Shown below is a graph of month-by-month pending sales vs closed sales. 

Residential Highlights
Kitsap County's residential inventory in January (1437 listings) is about 5% higher than December and down about 20% from a year ago. This is the first rise in the number of listings in some time, and may be evidence that we'll see a more typical seasonal listing curve, with then number of properties for sale rising into mid summer and falling off as the we get later into the year. We may at least see some of the shadow inventory become active again as foreclosures increase and sellers come back to test the market. The number of pending sales in January was up 5% compared to a year ago. You may recall that financial crisis really hit a year ago in December with the failure, takeover, or bailout of the largest banks, investment banks, AIG, Fannie Mae and Freddie Mac, and other entities - so the comparative numbers with the previous year will start looking better as we go forward.  The 3 month moving average number of closed sales Countywide is up 57% compared to a year ago, up from plus 38% last month, but temper this with knowing that we were at the very bottom of our market a year ago. Closed sales were down 11% compared with December 2009.

Prices are steady...
The median price in Kitsap County has been pretty steady this year, and is up slightly from the beginning of the year. January's median price ($239,700) was almost the same as December (see graph of 3 month moving average below), and is less than 1% higher than a year ago. The current low median price coupled with historically low interest rates offers good affordability. Conventional mortgage rates are now just below 5% for 30 year loans. There is speculation that rates will rise later this year, and one significant factor is the Federal Reserve's stated intention to curtail its purchases of GSE (Fannie Mae and Freddie Mac) mortgage backed securities. Jumbo loans are offered at about .8 to .9% higher than the 30 yr fixed rate conventional.  Earlier this year passage of the President's Stimulus Program restored the conventional, VA, and FHA loan limits to $475,000 in Kitsap County, which has helped sales of higher priced homes. Now the homebuyer tax credit has been reworked to give some incentive to move up buyers as well as first time buyers. Our median price graphs shows a 3 month moving average of prices, which better shows trends and reduces the month-to-month fluctuations.

Seller expectations…
The January median list price fell again from $309,000 to $299,900. This is significant since our market median list price remained nearly steady at $350,000 for a couple years before falling off significantly late in 2009. The trend of falling sale prices has convinced many sellers who remain on the market to lower their asking price. The County has a listing inventory turnover rate of about 8.35 months, slower than December's 6.0 months. Shown below are graphs of inventory and inventory turnover for Kitsap County in 2007-10.

Last month’s slowing of inventory turnover rate was the result of fewer closed sales and the first increase in inventory in some time. The inventory turnover also varies significantly 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 much more difficult to reduce in inventory because with today's lending environment the pool of buyers have been greatly reduced. See the graph below for a better perspective. With this month's slowing in inventory turnover, the turnover in the upper price ranges fell significantly. 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 January was up 5% compared to a year ago. The statistics for January pending sales (compared to January sales last year) varied for different parts of the County. Below is a busy graph showing the 3 month moving average of pending sales for different parts of the County. Notice how pending sales have fallen off since their peak last fall.

That's our report for January! We look forward to having the opportunity to help with your future purchase or sale.

Brenda Prowse

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