Benny Moo

To Rent or to Own? A Case Study in Colorado Springs

Here’s one pledge to you I’ll make:

I won’t sell you on buying a home. 

I can walk you through the advantages and benefits as well as anyone, but if spending $24,000 a year and not having anything to show for it “feels” like a better idea in light of your past experience… I can’t say anything to that. It very well might be a better decision, and no, there is no tongue in cheek here.

My industry is really good about being totally fearful of what is going on, or under-estimating what has gone on. But I do not think that the real estate industry is very good with being honest about what has gone on.

There are people in Colorado Springs who wrote contracts on new homes in the summer of 2005. In the summer of 2005, this local market like many others operated in a dreamland. The economy was rocking. Interest rates were low. Everyone was buying houses, selling houses and making money. Because builders were so backed up and did some bad planning, the slightest governmental oversight could slow an entire project down to a crawl. This is what happened in Flying Horse. If Classic had their act together, they would have understood their utility problems ahead of actually opening Flying Horse. They assumed the city would bow to pressure like they always did, or maybe consumers would just buy homes without basic services. Maybe they thought the problem would cure itself, or just fix itself in a matter of weeks. Instead, it took months. Because the city made Classic actually create the utilities distribution network for Flying Horse before writing a bunch of contracts and the demand for this neighborhood was huge in summer 2005 from the kinds of buyers you want to move into your neighborhood (upwardly mobile professionals attracted to the awesome master plan and the K-12 school campus), Classic massively messed their own bed. They expected city cooperation that the city wouldn’t provide, and correspondingly, they missed the perfect market. That was step one in a series of very bad dominoes.… Flying Horse had demand but no ability to deliver on it. Eventually, these buyers went elsewhere. Fast forward six months… The first deliveries start in Flying Horse and the utility problem is fixed. They can now start delivering homes.  But some people wanted something 60 days ago. 90. They had bailed. All the builders in Flying Horse are now building homes because it was such a demand place this past summer, but demand is slipping away from those prime, stable consumers. The buyers they wanted, relocating or locally professionals with big down payments… they bought elsewhere. In late 2005, Flying Horse was building supply for an anticipated demand rebound that had already moved on. When they began delivering complete homes and they weren't selling, they had to jump into a different mode altogether. What to do? Call Lehman Brothers. They have a loan for everything. We didn’t have many neighborhoods impacted by “investors”, but from March to August, 2006 we did have waves of them hit Wolf Ranch and Flying Horse and start gobbling up inventory on 100% investor NINJA loans (no income, no jobs or assets). They worked typically with national builders, but also Classic Homes, our biggest local outfit. These “investors” were really just speculators, people buying real estate because real estate always went up in price. They would buy, get a renter in it on a loss for 6 to 12 months and then resell it. Many “flipped” their house right after they closed, never occupying or renting it because prices had gone up $35,000. Do you think that was what those stable, primary residence, never-move-again-because-we-have-our-club-and-k-12-school-homeowners wanted flooding their neighborhood?

This is all obviously unsustainable. But no one really believed it. Everyone was so drunk with the fever of buy, buy, buy and value will go up forever that there were zero concerns about fundamentals. Well here is a concern: when 50% of your product offering is sold to speculators with no skin in the game and their name is spread out on 15 to 20 deeds across the country and their kids don’t go to that school… do you think they care if they get behind and they lose the house? Is that a little different than the early adopters who got in on the front side and wanted to close in February 2006 so their kids could start in the fall of 2006 at Discovery Canyon or Ranch Creek Elementary? The demand balance was totally out of whack. People didn’t ask questions like, “if rates are near 30 year lows and I have to do a 3/1 interest-only ARM to break even on this thing… is that smart?” Instead, what they see is the one other guy who bought at $380,000 and resold for $430,000. $50,000 in taxable profit. Hey, I make that in six months at work. I'll try it! Worked for him. Let’s do it again. Well it worked for Guy A because those same buyers couldn’t have Classic or whoever build them a home fast enough. Demand when the home came do is called a couple things: one is lucky. Another is un-project-able. It didn’t work for Guy B because that demand: had bought. They were now gone. And now there was supply. The speculators didn’t ask fundamental questions because they weren’t personally involved in the outcome. There was an exclusive motive to real estate: profit. Real Estate is a vehicle that is always, always, always lousy/risky to make money in the short run and pretty conservative and excellent at making money in the long-run. It’s still a great tax shelter, but that’s because the government does know one truth about real estate: home-ownership leads to better performance in the citizenry. What was going on in 2006, when 3^rd quarter 38% of all new home sales nationwide were second homes or investor purchases, was that it had nothing to do with home-ownership. It has one common thread: profit.

Now of course the tipping point has come and gone and the total other end of the pendulum is being realized. Just as everyone it seemed was buying for profit motives, now it seems everyone who is buying in 2009 is buying for shelter needs. This is why the National Association of REALTORS advertising campaign is such ill-spent dollars.

1.) No one believes the organization that says "it’s a great time to buy" when that same organization encouraged “buy now or be priced out forever.”

2.) The buyers buying right now don’t have a profit motive. They have a shelter motive. NAR is speaking the wrong consumer language. As usual.

Tons of first-time buyers are hitting the Colorado Springs market and a buyer will have a very hard time finding a decent, clean house under $150,000. In 120 days that will be up to $180,000. It will be a bottom-up recovery that will take 2 to 4 years to be realized in all areas and pricepoints, but it is beginning. The other buyers are people who are getting married, getting divorced, had three kids in the last three years (I almost fit that description!), mom is moving in, dad is moving out, the kids are coming back home, we want to be nearer our kids with the special needs daughter… a totally different demand. It is no longer “I can make a lot of money in real estate by buying and selling” it is “life has gone on and the economy has changed and… we need to do something.” These are people where a change has entered the living room and the present situation no longer works.

Is this a reason to buy?

Maybe. Maybe not. I think it’s important to know why people are buying right now:

• good inventory
• depressed prices
• low interest rates.
  

But also, life has gone on while the economy has hit the toilet.

• Two hours a day of commuting would get me to move.
  
• Three kids in a 2 bedroom apartment would get me to move.
  
• My mother-in-law moving in would get me to move (for the better!).
  
• Being nearer caring parents when I had a child with special needs... I'd move for that.

The first set appeal to profit. The second set appeal to people involved in change. People who buy with the first set must be comfortable with risk. People who buy with the second set must be comfortable for the long-term and with a long-term window tied to their decision. Of the two, the second set is much more sustainable, and better suited to the long-term value of real estate than “maybe you’ll make a lot of money, an outcome which you can not control because buyers always decide market value, and you as a seller use your asking price as a marketing point and nothing else.”

If you the reader are thinking of buying, or know someone who is, here is a Quiz:

• Is the desire to own (if there is one) based on need or want?
  
• Obligation or Opportunity?
  
• A planned, known outcome, or quality of life?

2008 Market Data for Colorado Springs

Download Ben's January 2009

Here are some statistics that I think best embody the changed marketplace.

In December, there were 495 single family sales and 71 condo/townhome sales for a totaly of 566 units closed.

Of those properties, agents chose to indicate in the "optional disclosures" field of the MLS listing some form of seller-distress. These are terms like "foreclosure", "pre-foreclosure", "Bank-owned", "VA REPO," "Short-Sale", etc.

My important point here is "Voluntarily". Agents were at one time required to put this information in. The Association's own legal counsel threatened them with legal action since it wa so contradictory to an exclusive-right-to-sell listing contract. I personally would require a seller to indicate this because it does appeal to the most preferred segment of the marketplace for such a seller... and afterall, that's the point of marketing such a home. Selling it. But I also check every listing I show or preview in the public records before I visit it to see if it is a foreclosure. For one such buyer in December, more than half the homes that were pending foreclosure action or already bank-owned... didn't disclose this in the optional disclosures.

But of the ones that did... 41% of the market place in December...what percent of the closings were actually distress sales? Conservatively, I'd say 20% of the agents don't disclose this in their listing. So probably half of the closed sales in December were distress sales.

Here are some ratios worth paying attention to:

229: 964

495: 4950

The first: number of distress-sale closings compared to the number of distress-sale listings.

The second: number of single-family closings compared to the number of single-family listings. One is around 1:4, the other is 1:10.

Is it any wonder the average sales price is $227,000 right now? Or the median is $180,000?

Or that there were 41 $1 million dollar or larger sales last year after the record performance in 2007 of 67? That only 3 sold over $2 million the entire year? That there is a 5 year inventory of $1 million and up housing on the market?

I talk to 50 people a week, and the consumer's question seems to be changing. It was: "is it getting worse?" It is now: "is it______?" Yes, they're asking, "is it ______?"

That's one of the two forces of recovery. The other I just mentioned. When everything that is selling is foreclosures, and 229 stinking distress sales closed in amidst all the economic gloom of this December, that indicates that the supply of housing has dramatically changed. When the consumer says "buying a distressed property now makes sense"... that's a stamp of approval.

The other stamp of approval I call "The Treasure Factor". This is when the individual consumer comes to their own conclusion that something needs to change. Perhaps they've been in denial about it. Perhaps they've been too afraid to make a move for so long. Perhaps life has been thrust upon them, either for the good or for the bad. In any event, they've concluded something personally and powerfully: "money is a tool. I need to do this."

In a way, it is in defiance of "economics" but it is more importantly in defiance of conventional wisdom.

It's a choice. People make their decisions based on pleasure or based on pain. Consumers in divorce? Pain. Consumers getting married? Pleasure. Consumers with two new kids? Maybe both.

When the consumer gets to the point that is "hey, you know what, something has to give, this commute is too long / our house is too small / I hate the snow / Mom and Dad are moving in / I don't want the teenagers upstairs anymore"... they are making a declaration. The funny thing about declarations... there is no turning back.

The not-so-funny and really good thing about declarations: those who make them, tend to come to the conclusions pretty convincingly and from a position of power. Leveraging a house with a 100% loan to get Mom and/or Dad under the same roof isn't a great idea. Buying a ridiculously large house "for appreciation purposes" with a 100% loan is an equally bad idea. No, no. The treasure-buyer is not buying something to make treasure from it. They are spending their own hard-earned dollars on it. They put skin in the game. They want to make a good financial decision, but economics is not dictating what they're doing. Life is dictating what they're doing.

One would think in the midst of "the greatest financial crisis since the Great Depression" that people wouldn't allow such trivial things as their own life to get in the way of the darkening clouds of doom and gloom. Guess what? I showed four buyers Friday and Saturday. I had not done that since 2004. Four different buyers in 48 hours. One wrote. Two are ready to. The fourth now has a pretty good idea of what they want.

We are at a place where people are buying with different wants. Part of it is need. Part of it is a long-term goal. A lot of it is personal. It is radically different from 2005 when people bought because it was stupid or unpopular not to. To some, it makes as much sense as the map below. But to those buying, the market recovery can be summarized thusly: "For me...It's just time. It's worth my treasure."