Edwards Real Estate Group

Housing Activity in Western Washington during October Described as "Disappointing, but Not Unexpected"

KIRKLAND, Wash. (Nov. 6, 2008) – Housing activity for Northwest Multiple Listing Service members was disappointing last month, but not surprising, according to one industry executive. He and other representatives of the Northwest's largest MLS believe the situation is improving.

"The results we're seeing from October's homes sales were not unexpected," said Ron Sparks, managing vice president of Coldwell Banker Bain in Bellevue. He said a unique and historic combination of events has frozen many buyers. "The daily roller-coaster of events in the financial sector this past month has understandably caused a high degree of uncertainty with buyers and sellers alike, and uncertainty is not a good thing when making one of life's most important decisions," he noted.

October's pending sales fell more than 27 percent from the same month a year ago, and dropped nearly 26 percent from September. Northwest MLS members reported 4,445 pending sales of single family homes and condominiums across its 19-county market area last month. All counties reported double-digit drops.

Sparks said the added anticipation of electing a new president who will have his own ideas about how to support the housing recovery created a recipe for the market ‘suspension' this area and other markets experienced during the past month.

Others pointed to the stock market turmoil and misperceptions about the availability of mortgage loans as restraints on activity.

Listing activity also slowed during October, with members adding 9,647 new properties to inventory. The total, which included 8,129 single family homes and 1,518 condominiums, was the smallest number added to inventory since December 2007. Inventory is at its lowest level since February. At month end there were 46,189 active residential listings in the MLS system. That's down 2.5 percent from a year ago when members reported 47,381 active listings. The highest volume so far in 2008 was of 51,817, the total inventory at the end of May.

Prices followed the downturn. For October's 4,512 closed sales of single family homes and condominiums combined, the median price system-wide was $291,000, down 7.4 percent from a year ago. A comparison with September shows a 1.3 percent decline from the median selling price overall of $295,000.

Prices for completed sales of single family homes (excluding condos) fell about 9 percent last month compared with a year ago. Condominium prices dipped only 3.8 percent overall from a year ago.

Despite market volatility and shaky consumer confidence, one industry leader emphasized it's important to understand that advantageous market conditions currently exist for those who are motivated to buy. "The truth of the matter is the market conditions are ideal for first time buyers, move up buyers, and investors," said J. Lennox Scott, chairman and CEO of John L. Scott Real Estate.

Scott noted interest rates are at historic lows for conforming and FHA loans and a variety of great mortgage options are available, despite perceptions to the contrary.

The perception that "no one is lending money" is inaccurate, said NWMLS director Matt Deasy of Windermere Real Estate/East Inc. Most loans have been federalized via Fannie Mae and Freddie Mac, but money is available, he emphasized. Deasy suggests potential buyers talk with real estate agents for referrals to good sources for mortgage loans.

"The public is waiting for a sign that all is going to be okay," remarked NWMLS director Ken Bacon of Windermere Real Estate in Redmond. Incentives are also needed, he believes. For example, Bacon said the suggested reduction in interest rates would be buyers' best stimulus, while admitting some misgivings about federal bailout programs. "The bailouts have to some extent created a different mentality for our buyers who wonder what these bailouts will do for them.

"A 1 percent or so reduction in interest rates would be viewed as a sign that they too may benefit from the bailout mentality," Bacon commented, adding, "It would open the minds of ‘waiting to see buyers' and create the first step for more buyers to pursue their dream of home ownership." He believes a reduction, or buy down, in interest rates could accelerate the stabilization and turnaround of the housing market, and is confident Seattle's market will recover, noting "only the timing is uncertain."

Sparks also commented on the mortgage market. "Our real estate market continues to be affected by lending institutions. Many banks appear to have the ability to lend, but at a time when cash reserves are so precious, lack the desire to lend. This lack of desire is very apparent when you see how mortgage interest rates have increased steadily over the last 30 days," he stated.

(According HSH® Associates, the nation's largest publisher of mortgage and consumer loan information, the rate on a 30-year fixed rate mortgage for the week ending 10/31/08 was 7.05 percent; a year ago it was 6.73 percent.)

NWMLS leaders agreed consumer confidence will take time to rebuild, but are optimistic.

"Thankfully, we now see tangible housing and lending programs being initiated, with many more on the horizon," said Sparks. "Interest rates are softening. We appear to be moving in a positive direction again!"

Lennox Scott reported having the opportunity to listen to several economists recently, including Lawrence Yun from the National Association of Realtors®. "I feel good about what I'm hearing. The bottom line is that the situation is manageable and things will improve," he remarked, adding, "Despite the uncertainty of the financial markets, homeownership continues to be one of the most solid investments an individual or family can make."

Northwest Multiple Listing Service, owned by its member brokers, is the largest full-service MLS in the Northwest. Its membership includes approximately 28,000 brokers and agents. The organization, based in Kirkland, currently serves 19 counties, mostly in western Washington, plus Grant, Kittitas and Okanogan counties in the central part of the state.

Statistical Summary by Counties: Market Activity Summary - October 2008

October 2008 Single Family Homes + Condos	LISTINGS		PENDING SALES	CLOSED SALES
	New Listings	Total Active	# Pending Sales	# Closings	Average Price	Median Price
King	3,753	14,655	1,727	1,722	$447,281	$358,500
Snohomish	1,546	6,760	626	613	$339,536	$317,000
Pierce	1,515	7,244	754	721	$273,665	$241,000
Kitsap	411	2,461	239	247	$287,310	$250,000
Mason	131	842	40	50	$223,049	$191,500
Skagit	195	1,256	72	93	$298,321	$256,990
Grays Harbor	144	918	66	66	$154,801	$132,500
Lewis	120	796	59	49	$186,069	$160,000
Cowlitz	154	717	66	70	$179,782	$159,500
Grant	116	689	57	62	$156,116	$148,315
Thurston	455	2,002	261	316	$286,967	$254,000
San Juan	41	435	14	20	$543,233	$395,000
Island	156	1,174	66	75	$355,166	$265,000
Kittitas	64	683	29	23	$325,534	$254,500
Jefferson	51	559	16	21	$396,221	$342,500
Okanogan	33	486	17	24	$205,851	$154,750
Whatcom	343	1,989	185	173	$288,796	$260,000
Clark	128	763	46	58	$264,189	$241,000
Pacific	43	412	15	11	$204,986	$169,000
Others	248	1,348	90	98	$207,773	$172,000
MLS TOTAL	9,647	46,189	4,445	4,512	$346,621	$291,000

4-County Puget Sound Region Pending Sales (SFH + Condo combined)
(Totals include King, Snohomish, Pierce & Kitsap counties)

	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
2000	3706	4778	5903	5116	5490	5079	4928	5432	4569	4675	4126	3166
2001	4334	5056	5722	5399	5631	5568	5434	5544	4040	4387	4155	3430
2002	4293	4735	5569	5436	6131	5212	5525	6215	5394	5777	4966	4153
2003	4746	5290	6889	6837	7148	7202	7673	7135	6698	6552	4904	4454
2004	4521	6284	8073	7910	7888	8186	7583	7464	6984	6761	6228	5195
2005	5426	6833	8801	8420	8610	8896	8207	8784	7561	7157	6188	4837
2006	5275	6032	8174	7651	8411	8094	7121	7692	6216	6403	5292	4346
2007	4869	6239	7192	6974	7311	6876	6371	5580	4153	4447	3896	2975
2008	3291	4167	4520	4624	4526	4765	4580	4584	4445	3346

 

Price Analysis for the Seattle-Tacoma Metro Region

Home prices in the Greater Seattle Metro Region decelerated to a single-digit rate of appreciation in the second quarter of 2007. Though still considered strong, the local market has lost its momentum. With job gains continuing at a robust pace, home prices likely will continue to be in the positive territory. A sharp reduction in new home construction will help control the overall inventory situation. Resetting loans and the rising number of foreclosures related to the subprime fallout are clearly negative factors, but the impact will be offset by the fundamentals of the healthy local economy.

Despite some media reports of the worst housing market conditions since the early 1990s or since the Great Depression, the recent home price declines have been negligible at the local level. Unlike past local housing downturns, which were accompanied with severe job cuts, the local economy continues to add jobs. Apartment rents have been rising at the highest pace in five years, which will begin to encourage some renters to seriously consider ownership. Mortgage rates have also been falling recently and stood near a historic low of 6.5% for prime borrowers. Rates could be even more favorable in upcoming months as the Federal Reserve cuts the federal funds rate in late 2007 and in 2008 as there are clear signs of contained inflation. A revival in FHA loans, which had lost substantial market share to the risky subprime market, will provide funding for low-tomoderate income households at much more attractive mortgage rates. If a modernization of FHA loans is implemented including lower initial payment requirements, higher loan limits, and risk-based pricing then there
could be a surge in FHA loan usage.

The outlook is positive. Homebuilders having drastically cut production will help minimize prolonged oversupply conditions. Further production cuts by builders, which is encouraged, will help the market to more quickly return to a healthy state. On the demand side, job gains have added to the number of potential homebuyers. Historical relationship imply roughly one additional homeowner for every two additional new jobs. Since the peak of the housing market two years ago, the local market added 109,000 net new jobs (August 2007 vs August 2005). A rise in home sales and a strengthening in home prices appear immiment.

Price Forecast Scenarios

The home price forecast in the local region will vary depending upon alternative assumptions regarding

mortgage rates and the sustainability of mortgage debt levels. Prices could climb 7.4% in 2008 (Path 1) if mortgage rates remain relatively stable at around the current 6.4% in 2008. The price increase largely comes due to the rise in income (assumed to rise at the same pace as in 2006) while mortgage rates remain stable. The current mortgage debt servicing capacity is assumed to remain at the current manageable level given continued job gains. If jobs are cut, then one assumptions to consider would be falling mortgage debt servicing capacity - but this case is not considered here.

If debt servicing capacity steadily returns to the historic average level then prices are expected to rise at a slower pace (Path 2). The next two scenarios show outcomes based on whether mortgage rates turn more or less favorable. Prices will likely decline in 2008 if mortgage rates rise to 7.5% next year from the current 6.5%. With the Federal Reserve ready to cut the federal funds rates, it is difficult to foresee such a rise in mortgage rates, however.

The above mortgage rate forecasts are well within the range of credible Wall Street and government economic forecasts. As to the mortgage debt capacity, it would be unreasonably pessimistic to say that local households have already stretched to the maximum in the past year - and now need to fall greatly from the historic average levels.

There is always a possibility, however small, that the economy could suddenly turn for the worse. Oil prices - assumed to remain at around $70 per barrel for most of the next two years - are always a wild card. The weakening of the dollar or changes in foreigners' appetite for holding onto dollar-backed assets, including mortgage-backed securities, could suddenly and measurably push interest rates much higher. Also, homebuyers' confidence could remain weak despite solid gains in jobs, income, and wealth. In such cases, home prices could weaken measurably from what is assumed in the above cases.

* Debt capacity is the mortgage payment amount at the prevailing mortgage rate as a percentage of income. Income is assumed to rise at the same rate as in the most recent past year. It is based on 100% financing and does not include property tax and other homeownership costs. Because this definition is the same for all periods, what is relevant in the analysis is the relative position of the debt capacity and not its absolute level. That is, using 80% LTV financing would not have changed the price forecast.

Price Activity

Many analysts who have called for a major housing market correction often point to the disconnect between income and home price growth in recent years. This local market is one where home price growth outpaced income growth as can be seen in the below chart.

However, such a reliance solely on price and income growth is inapproriate. For a homebuyer, what is relevant is not home price in relation to income, but rather the mortgage payment in relation to income. Since 1990, interest rates have generally trended down, thereby permitting more purchasing power with the same level of income. Furthermore, the fees associated with taking out a mortgage have fallen from about 2% to less than 0.5%. As such, any home price analysis needs to taken into account the lower overall mortgage borrowing costs.

Affordability

A more important factor for assessing the risk of a home price bubble is the median mortgage servicing cost relative to median income. As shown below, mortgage servicing costs have been trending only slightly above the historic average. Such a condition implies a manageable financial mortgage debt load for homeowners in the region on average.

Another key question for the Seattle market is whether or not the current debt servicing cost can be sustained or if it will trend higher over time. Perhaps, due to the fast changing nature of the local market, in terms of job growth, land prices, the dwindling supply of developable land, international buyers, or even the less tangible "vibrancy" factor, the mortgage servicing cost now should be higher than the historic average. The local area is active in cultural performance and is close to many outdoor recreational activities. The sustainable debt servicing cost could, over time, reach to a level comparable to that of San Francisco, for instance (see next chart). In such a case, prices could make a significant gain over the next decade.

Price differentials among local markets can exist for prolonged periods due to many factors (including those difficult to measure). Measurable factors like income, housing shortage, job growth, and foreclosures certainly play a role. But, intangible (non-measurable) factors like the quality of life, water views, city vibrancy or quietness, cultural amenities and zoning laws also impact home prices. San Francisco has always been one of the priciest markets in the country. As such, it also has a higher debt servicing cost capacity. It would be naive, therefore, to categorize San Francisco as overvalued based solely on side-by-side comparisons with other markets. It is more appropriate, in our view, to take higher-than-average debt capacity for markets like San Francisco as a fact of life. What matters is how that debt capacity changes in relation to its historic average and not in relation to other markets. Though not shown here, top international cities like London, Paris, and Tokyo have cost burdens higher than nearly any U.S. city.

The question for the local market is whether or not the city should be commanding a higher premium for the higher debt capacity than in the past. If so, then home prices could increase strongly. If not, then the local debt service cost could just revert back to its historic norm, in which case, home price growth will still be solid over the next few years.

Another reasoning to help understand whether a higher premium is justified, we look at the local fundamentals in order to determine if excess housing demand is present. If housing demand exceeds housing supply then there are even more reasons for higher prices and higher sustainable debt servicing costs.

Local Fundamentals

The local job market is very important in supporting housing demand. At the same time, changes in housing supply can quickly upset the market balance. It is, therefore, critical to monitor the housing demand and housing supply factors to assess if the local market is trending to a tighter or looser condition.

Fortunately, job gains have continued. In the past 12 months, 57,600 payroll jobs were added to the local economy. Such a job growth gains should provide underlying support for housing in the local area.

On the supply side, there has been a marked reduction in new home construction in the past year. A drop in new housing supply helps prevent prolonged oversupply conditions. The below chart illustrates the declining trend in the past two years.

As can be seen above, zooming-in on construction activity from January 2006 to current shows a significant supply reduction. Also it can be seen in the charts below that more jobs were added than new single-family homes were constructed in the past 12 months. Such conditions are favorable for future home price growth. A similar picture emerges if viewing on a longer 3-year basis. Because of the job losses at the early part of the decade, the trend is less strong if viewing over a 5-year cycle.

Second Homes and Investor Demand

One area of weakness to consider is the short-term oversupply of existing homes on the market. The local market was fueled partly by exceptionally strong second-home buying activity. Undoubtedly, at the height of the market boom - with prices rising at a double-digit pace, sometimes in a span of only a few months - many speculators entered the market. Based upon mortgage data (HMDA), loans taken out for vacation and investment properties soared in 2004 and 2005. As home prices moderate, investors unable to pay the mortgage carrying cost are evidently pulling out. As a result, this component of demand fell in 2006 and 2007. At the same time the supply was "artificially" elevated as investors put properties on the market.

Mortgage Market Conditions

Foreclosure rates have been rising. The increase has been dramatic for subprime loans. The prevalence of subprime loans (those loans with rates at least 3 percentage points higher than the market rate) soared in 2005. The data for 2006 is not yet available, but it is likely that similar mortgage origination activity took place last year. The recent cleansing of bad lenders will hold back homebuying, but it will be good for healthy market conditions over the long run. The market shares for GSE and FHA loans will surely rise as a result.

Summary

Sales activity has been down significantly, but home prices have largely held on in the Seattle market. The local economy is quite strong and is generating jobs at a respectable pace. The national economy is also fundamentally sound due to rising exports and business spending. Consumer spending will be a bit weaker because of stagnant home price and its accompanying wealth impact. One interesting observation is that the continuing low mortgage rates have not led to more buyers - implying that there is an issue of confidence, or lack thereof - in the homebuying decision. Also, the recent subprime fallout is a concern, though the shakeout will be good for the housing market over the long-run as the market eliminates bad mortgage lenders.

Inflation appears to be contained. Both the headline and the core consumer price index decelerated to 2.8% and 2.1%, respectively, over the past 12 months to September. Better yet, most economists anticipate a further deceleration of inflation in 2007. Such an outcome could well lead the Federal Reserve to cut the federal funds and prime rates down the road. A fed funds rate cut is no guarantee of a fall in mortgage rates, but the signal that inflation is contained will force bond buyers to demand lower inflation premium, and hence, lead to lower mortgage rates as well.

With job additions continuing and mortgages rates hovering at about 6.4% as of early October 2007, the housing market is poised to slowly climb back. If, however, mortgage rates were to rise to 7.5% or higher, then the housing market would continue to limp along with the possibility that home prices and overall housing wealth could fall. If rates were to move lower, then the market will recover at an even quicker pace.

Additional Informative Charts

Source: NAR 2007 Market-by-Market Home Price Analysis. Used with permission. Reprinting or retransmission of this data is prohibited without written permission.