The August Stat Pack is done and like so many recent months, the bag is mixed.
Sales activity is stable and listing inventory is dropping. I personally wish this began three months ago, although after 2 and a half years of market decline, I'll take any improvement I can find, even if that improvement is a flat-line as opposed to a descent. The combination of unit sales going up in July over June (this only happened once in the previous 8 years) is positive and the fact (I like facts!) that there are now 500 fewer properties for sale than the same time last year makes it clear that the market has reached bottom.
But it is wrong to say that there is no place to go but up.
I want to pay attention to two things today working together that explain why parts of this market remain in for a long bumpy ride. They are Sales Volume and the High-End Market.
Sales Volume is the Sum of all the units of real estate sold through the course of a year. Presently Sales volume is off 23.8% from 2007. In 2007, sales volume in July was off 13.4% from 2006. In 2006, it was up 4.5% from the year before. What does this mean?
In 2006, there were 3500 licensed agents. At renewal last year, there were 4000 (although indicators are that there is a serious drop off in numbers over the summer as the market has "gotten worse"). The people trying to work the pie gained 14% in membership, and 1/3rd of the pie they were working disappeared.
If you think about it from that angle alone, it indicates the level of conflicts of interest operating in the market. There is less business and more people competing for it. But from the individual REALTORS perspective, it is a far more serious problem:
- Citywide, agents this year will average 4.5 total transactions. Making some big assumptions in terms of what agents get paid, that is $7500 in gross commission per transaction or a gross wage of $33,750. The average agent has at least $1000 a month in expenses (I have $3700), which means that before taxes, their adjusted income is $21,000. How good is the advice given by the average agent in a market like this when they are this cash-strapped?
- Go further down this same rabbit hole: the average co-op commission now is no longer 3%. Why? If the property is bank-owned or being short-sold, it often is not offering "full co-op" or 3%, but 2% or 2.5%. So that gross wage per transaction just got smaller by 1/3rd. Yes, some homes are offering 4%. Some are offering bonuses. But these tend to be among higher-end properties, and without buyers for these homes, those co-ops are ineffective because there just aren't buyers for them, and correspondingly, no closings paying out those bonuses.
- Even premier agents in this market are hurting badly. There have been 23, $1 million dollar or larger transactions year to date. This time last year? Forty-six. Not one sale in the MLS has exceeded $2 million. This is really expensive business to maintain and there are 275 homes for sale in excess of a million right now. Those marketing these homes have huge expenses. And the margin just isn't there. The sales volume of over $1 million transactions was 2.7 TIMES larger last year. The over $1 million home averaged $1.5 million. This year it average $1.17 million. It's not just fewer of them, but it's the "barely" over a million that is selling.
- Sellers are watching a ticking time bomb on their rates ready to adjust. Those on 5/1 ARM schedules with an interest-only feature could get hammered. These were extremely popular in the acquisition of properties from $400,000 to $600,000 from 2004 to 2006. From $575,000 to $650,000 there is a 30-year supply of housing right now. At the same time these homeowners will likely see their interest rates go up AND they will have to stop making minimum Interest-only payments but also pay an additional $250 or more in principal every month. So the rate goes up AND they have principal, so it's not just a $150 a month gain in interest but also principal. Suddenly, $400 to $500 just evaporated from the monthly budget. And buyers for their home are scarce. The same thing is true on less expensive properties, those in the "average" category, but the effects won't be quite as severe. The big trend from 2000 to 2006 was the "big house". The average home size increased 18% nation-wide from the mid-90's to 2006. How that house was acquired was with exotic financing, financing you can't get into any more, and probably can't get out of without proving a hardship and blowing up your credit rating.
- The reality that many of the bigger homes were purchased via a method of finance that doesn't exist today looms as a storm cloud in this market. The old measuring stick of "buy or don't buy" used to be "could you afford to buy your home today?" That axiom was meant to say "don't get in over your head." Well in 2004 through mid-2007, Jumbo rates were only a half percent higher than conforming rates. Today they are 1.5 to 2.0% higher. Most people never stopped to ask if Jumbos would move well-away from the conforming values. Just like the assumption that all home values would go up, no one assumed Jumbos would stop acting like conforming loans, even though they have never been backed by Fannie and Freddie and are significantly more risky for a lender (hence their name). It wasn't just interest rates that changed. It is the entire method of financing. All the rules of then, are gone now. Piggy-back seconds are gone too. So the old thoughts of "well, I'll just re-finance, even if rates are high, I'll figure out something" really doesn't apply now.
This all sounds very dark and ugly. But it is meant to illustrate something to both buyers and sellers. The game has changed. Those who adapt to change first are the first to succeed. In 2003, foreclosures were widespread in Colorado Springs and nobody paid attention to it because there was demand, and demand ate up that supply. You could look at foreclosures if you wanted to... or not. NOW... we will have the fewest number of listings come on the market since 2001. This during a time when the active inventory is almost double the active inventory on the market in 2001. So what's the catch? A lot of what is coming on is garbage, over-leveraged, in-distress, rate-adjusting, bank-owned, heading-to-foreclosure or the like. There is a very telling line in the Stat Pack this month, the Pricing Trends slide showing the relationships of price between Average Price New List, Average Sale Price, Average Price List. The Average Sale Price and Average Price New List have a wide gap between them of almost $60,000. But the average price of all homes on the market (Average Price List) has soared another $60,000 higher than that to over $372,000. The reason? The high-end is sitting. Units are moving, it's just the units acquired by "the everyman".
When "the everyman" figures out that they can sell their house and has the desire to buy a nice home at a price $100,000 to $200,000 more than their own. The worst is over for "the everyman" and that is over 80% of the market. Yes, the "everyman" might have to list their house for a $5000 discount. Maybe $10,000. But the home they're looking at may not have had a showing in 45 days. How do you think that seller will react to an offer? Will the "everyman" make up their $10,000 loss? Will the "everyman" end up $10,000 ahead? $20,000?
Where are these everymen? There is an almost balanced market below $275,000 (6 months supply of housing equals no advantage to either buyer or seller). There is less than six months from $250,000 to $275,000, the prime "move-up" price range. There is less than six months supply of housing right now in N/E, EAS, N/W and BRI right now and it is right at 6.02 months in S/E. The average selling prices for these areas:
- BRI: $317,000
- EAS: $186,000
- N/E: $244,000
- N/W: $320,000
- S/E: $143,000
The Briargate homeowner who lives in Fairfax and wants to move to Pine Creek: CAN.
The Old Farm homeowner who wants to move to District 20: CAN
The Hallmark or Richmond homeowner in Wagon Trails who wants to move into a Saddletree or Allure with views by the school: CAN
The homeowner in Pinon Valley who wants to move into Mountain Shadows or Peregrine: CAN
The Sand Creek Homeowner who wants to move to Springs Ranch or Cheyenne Hills: CAN
That's not to typecast or stereo-type a move. It is to describe common local buying patterns and move up buys of $100,000 to $200,000 in higher price.
All politics are local. There's a big debate as to whether all real estate is local. Right now, the best way for the high end to get some movement, is if the local market gets cranking.