These are the disparate data-points I try and draw patterns from to predict the real estate future:
1.) Colorado Springs' real estate market is off approximately 11% in value from the peak in 2007. Compare that to markets like LA and Las Vegas which just saw asking prices drop 10 to 20% in the last quarter (Thank you @Trulia).
2.) There are presently 1400 fewer single family and patio home listings for sale than the same time in 2008. That's a 21% decrease in inventory. And it looks like June 2009 sales volume will be identical to June 2008 volume (when I ran the numbers this morning, the net difference was 3 fewer sales in 2009). So demand is now officially stable and supply has shrunk dramatically.
3.) The first time buyer tax credit benefits marketplaces with a young demographic (Colorado Springs) and an abundance of neighborhoods with properties under $200,000 (Colorado Springs). Generation Y is also a larger generation than the Baby Boomers, meaning that growth in this age demographic is extremely sustainable.
4.) The nationalization of Fannie and Freddie has created a nightmare appraisal scenario when the low rate of demand is factored in. Yes, a consumer deserves a more accurate appraisal as that was the primary tipping point of the over-leveraged real estate bubble, but two of three comps within 90 days is almost impossible in half of our neighborhoods. If a real estate market was terribly homogeneous and Zillow worked perfectly due to lack of variables, this would not be the problem that it is. But a market like Colorado Springs has so many micro-markets within 1 and 2 miles that a comp really isn't a comp in this appraisal format. With the additional new requirement for a 90 day, 180 day, 270 day and 360 day market report supplementing the appraisal, markets like ours should be allowed to use 6 to 9 month history since the rate of value decline has been negligble since December, 2008 and supply-side stimulus has abated for two years.
5.) The volatility of interest rates meshes menacingly with the new Truth in Lending standards. Having seen buyers on three occassions go from qualified to unqualified to qualified within a 6 hour window to the fragility of inter-connected markets, I have no clue how on earth RESPA will enforce the three-day window that the new TLI requires. This will either be patently ignored, or another major restrictor plate on the marketplace.
6.) Throughout 2009 Denver has exhibited market behaviors that are the envy of the rest of the nation in the Case-Shiller index. In two of the last three months, Denver showed the smallest rate of market depreciation and year-to-date is one of the only markets in "the positive" in terms of appreciation. The rate of value decline is slowing nationwide, but Denver, our nearest major market and one we usually track within 3 to 12 months of, is already past the flat line and showing signs of honest-to-goodness gains. This value trend is the product of forces similarly exhibited in Colorado Springs: stable demand, 20% reduction in supply. Private Mortgage Insurance and OFHEO.gov made predictions that this would be the case in 4th quarter 2008, and that third quarter 2009 would see the glimmers of recovery along much of the Front Range. Moody's who nailed the expected price decrease in Colorado Springs, now ranks the state of Colorado 3rd out of 50 states to most quickly rebound from "The Great Recession".
7.) The majority of my buyers have sprouted shark fins and rightly so. The majority of my sellers are ticked that they're selling below market capitalized rates and want to consider all options including renting for a year or two to await some recovery. That means the disconnect is growing, not shrinking between buyer and seller expectations. Buyers see this as the biggest financial opportunity of their lives in many cases... a chance to get in on values as low as 2002 prices (I've sold one property for 70% of it's 1998 price tag this year, and three really nice homes within 1% of their 2002 and 2003 purchase prices) with never before seen interest rates. So they're looking for the deal of deals. Sellers see this as another squirt of lemon juice in their lacerated financial portfolio. The disconnect means that market-value ultimately falls between two really subjective parties, and not on anything objective. Buyers are always "the market" because a seller can't sell to themself, they must sell to a buyer. Buyers are no longer looking at the over-priced inventory of 2007, they are looking at a discounted inventory of 2009. And a lot of these sellers are ticked that they're selling 3% (Manitou, Old Colorado City) to 20% (High-End Luxury over $800K anywhere) below peak. It creates connundrums like I had last week, writing low offers while on vacation and the buyer and seller were 20% apart. The buyer can't be blamed for trying to get a steal of steal. The seller can't be blamed for thinking the worst is over. So a new level of disconnect has arrived: where sellers previously had unrealistic aspirations about what their house could command, buyers now have increasingly unrealistic expectations on what they can negotiate. Buyers are not willing to except this unless some other buyer comes in and buys out a house from underneath them. In the high-end, this doesn't happen very often. But under $250,000 it happens DAILY.
8.) Seasonally we are in the peak of activity. What the fall brings is really anyone's guess. If the first-time buyer tax credit is not renewed, properties under $225,000 will continue to find ready, willing and able buyers and this price range will literally be a seller's market with bidding wars to beat the deadline of November 30th. There could even be an artifical spike in units sold this fall. If the tax credit is renewed, I actually think the market will pick up more gradually, but steadily through 2010. That is, if interest rates stay below 5.5%. Americans are actually saving money (the credit crisis began with a negative 0.5% savings rate!) and lenders have rethought who is a good candidate for their cash. If the tax credit is expanded to any residential buyer, there will be benefit to the higher reaches of the market (before inflation goes ape-you-know-what within 6 months). That could create a false recovery before a bigger tank job shows up. The big "but's" are:
A. UNEMPLOYMENT: Can a market continue any recovery when 10% of Americans are jobless?
B. JUMBO FINANCE: Colorado and most of the US that is non-coastal has a conventional cap at $417,000. Even with B of A, Wells Fargo and Chase now offering sub 6% Jumbo Loans, they still usually require 25% down. That's why there is almost a four-year backlog of inventory over $500,000 around here.
C. APPRAISALS: How on earth will any property appraise in February when November, December and January will probably have only 400 to 500 sold units each month in the entire MLS? How many homes sold in Mountain Shadows over $400,000 last year in that time period? ZERO. Peregrine and Hunter's Point had 8, but Mountain Shadows in D11 had nada, none, zippo. An appraiser can't use a Blodgett Comp for a home on Brogan's Bluff. Sorry. But Happy Selling! The same problem is keeping qualified individuals trapped in their dumb loans of 2005, 2006 and 2007 because the three-month window won't produce sufficient value for their re-finance appraisal.
So what do I conclude?
Our market is getting marginally better, not marginally or significantly worse.
The market is going to take two to four years to recover, and for high-end sellers, three to six years.
Dirt Matters. Condition matters and price matters, but ulitmately, dirt carries the day. Where a home is physically located is 50% of the equation as to whether or not it is a good buy or a bad buy. The market in D20 right now is dead, dead, dead for properties over $550,000. There still is too much inventory in Flying Horse, Cordera and among the ranch plans in Pine Creek. Peregrine has one closed sale this year of any note and a good 15 properties competing with each other in a knife-fight. Six homes dropped $25,000 in price OR MORE in the last two weeks up there. But where a buyer can see with their own eyes "remarkble"... that's the area they need to pay attention to. Because even with inventory thinning and demand stabilizing, there are fewer and fewer remarkable homes. They're often at the top of a buyer's price spectrum, but there's a reason: That Remarkable Home started out WAY above where they were looking and has fallen precipitously ahead of it's peers to a point where it suddenly looks like a great value. Case in point: 7975 Ruststone. This was on the market way too high at $899,000 initially. It made a couple of adjustments and went to coporate buyout. That didn't come in so nice and the corporation priced it to get rid of it: at $700,000. Total time it took for a $200K price reduction? Four months. Verbally agreed to contract as of today. Time it took to get to contract since last price reduction: 4 days. Why? Great house at a remarkable price in a superb area. This one sale, while low, could be the catalyst that starts to spin the Peregrine market forward, proof that not everything will sit. Where's the lesson? THE REMARKABLE ONE'S SELL FIRST, NOT LAST. We are now past the inventory growth stage of the market. The only inventory that a buyer can rightly expect to see through the summer are drop-downs from one price range higher onto their radar screen.
Finally: YOU CAN BUY A HOME for $0.90 on the dollar. Sometimes $0.80 on the dollar. Maybe $0.70 on the dollar. The question is: today's dollar? Or 2005's dollar? With inventory levels now below where they were in 2006, it is easier and more likely that a buyer will make a smart buy rather than a dumb buy. But you have to really sort through all of the above to know if it is a GREAT BUY as opposed to a pedestrian "everyone's getting a deal."
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