Applying National Real Estate News to the Kitsap County Washington Local Market

 There is a recurring scene in the movie, "Shakespeare in Love", where in the midst of what appear to be dire circumstances with performing the play, Hugh Fennyman (Tom Wilkinson) asks Philip Henslow (Geoffrey Rush) "What do we do?" Henslow replies, "Nothing. Strangely enough, it all turns out well." "How?", Fennyman asks, and Henslow replies, "I don't know. It's a mystery."

So it goes now with the national real estate market and our own fate here in Kitsap County. The circumstances appear dire enough - National unemployment just rose to 5%. Inflation is up as commodity prices are going through the roof, so the Fed would really rather not cut interest rates much further to fend off the huge losses that may be coming because of mortgage defaults and subprime losses. Single family home starts are at their lowest levels since 1991. Overall mortgage delinquencies are at the highest rate since 1986. Builder confidence in the market for single family homes is at the lowest reading since the series began in 1985. It seems that we have no end of reasons to be pessimistic. What do we do?

Not being a perfectly competitive market, housing prices tend to be strongly persistent - sellers are reluctant to lower their prices. If you’ve been gaging the market by how prices have changed, things may not look too bad - but you should not be misled. If we focus on inventory levels, we can predict that prices must decline. Currently Kitsap County has an inventory turnover rate of about 10 months. In rough terms a neutral inventory is about 6 months supply of homes, so we argue that there is a very substantial possibility that prices will fall to allow the inventory to be reduced.

There are a couple metrics we might try out on the Kitsap market. If the relationship between median family income and median prices is 2.8 in a normal market, in our mid December Outlook we calculated that it is about 4.3 in Kitsap County. Prices tend to fall slowly, so it might take a couple years to get back within the normal range of income to median home price.

Another metric says that annual gross equivalent rent less the cost of utilities should be about 5% of a home’s value. This came from a study by Morris Davis , an economist at the University of Wisconsin-Madison and formerly at the Fed. The study tracked the percentage of annual gross rent less utilities divided by average price and interpolated year over year using the CPI equivalent rent component. The data show that nationally this ratio has fallen to about 3.5%, meaning that home prices have risen much more quickly than the equivalent rent that the homeowner might receive. We could not duplicate the data for Kitsap County but have been able to verify that the trend since 2000 appears to be correct.

Wonder how the Kitsap Market fares using this standard? Mortgage lending flexibility has been greatly reduced - most buyers must currently use loans that conform to Freddie Mac, Fannie Mae, or FHA standards. Is there any upside for buyers? If you are a buyer at a foreclosure sale, are there hidden dangers you should be aware of?

Prowse and Company has been producing detailed statistics about the Kitsap County market for more than a year, and we hope to be addressing all the these topics in the coming months. We post market condition reports and analysis to our web site several times a month and email them to over 3,000 interested buyers. If you might be interested please visit us.

Hopefully the mystery will turn out well for you.

• Kitsap Real Estate Market Report - December 2007

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