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Market Report For August 2007:
The primary goal of this data is to paint the picture of reality in our local housing market, to provide a frank and honest discussion of strengths, weaknesses, opportunities, threats and real market conditions as they truly exist. This data is the result of information pulled from the Pikes Peak Association of REALTORS’ website as well as conditions observed by sales professionals, builders, other competing real estate firms and individuals connected to the sale and exchange of real estate in the Pikes Peak Region.
DISCUSSION:
Subtlety is beginning to disappear from the marketplace as the correction that began in the spring in select areas spread to most areas in July. For the sake of simplicity, this document reports in-depth on the Top Ten selling MLS areas, which in a month like July, represented 75% of the units sold MLS-wide (there are 27 individual MLS areas in the Pikes Peak Region). All ten of these MLS areas are now seeing that the average new listing price is down from April, and while areas like BRI, S/W and N/W started this descent in April, others have since followed suit. After the first quarter the average selling price was $256,000. It is now $278,123. The trends that were limited after the second quarter and now established and widespread. Buying activity has not picked up to the record level it was at in the Summer of 2005 and 2006. June is usually the peak month for sold units in a calendar year, and over the last five years July units sold averaged 6.25% less than June; this year it was an 8% dip. However, that’s better than 2006 when sales slid drastically by 12%. Listing activity remains off from the peak activity it was at in the Summer of 2006, as July marked the fourth consecutive month that new listings to market were fewer than the same month the year before. Big emotional thresholds in the form of numbers still grab the headlines: Barry Bonds has just launched 756 over the center field wall in San Francisco. Somewhere in El Paso County, a homeowner became the 7000th single family home for sale (7065 are active on August 1). You can make the argument that both numbers are pumped up... what the long-term conse-quences will be is also open for discussion.
GOOD: For the last four straight months, new-to-market-listings were less than in 2006. That simply means that in April there were 26.4% more homes for sale than April 2006, and by the end of July, that surplus had trimmed to 18%.
BAD: Year-to-date sales are still off 14.9% and July was off 17.5% compared to 2006 (the dip same as June 07 compared to June 06). Buyer activity has not picked up the pace to match the decrease in listings coming to market.
GOOD: Sellers are getting more realistic in more places and new-to-market prices are also coming down. This is making the housing more affordable to more people.
BAD: With 7065 single family homes and 1142 condo/townhome units with buying activity off by 17.5% from the previ-ous year and 55% of listings NOT SELLING, the probability for success for any seller is lower than anytime in a decade.
GOOD: The Federal Reserve has not yet felt the need to get involved in the national credit squeeze and is allowing the markets - for the most part - to self correct. Assuming the Federal Reserve is right in their observations and predictions, the squeeze will be short-term and the mortgage and credit markets will figure things out.
BAD: Any discussion of the Federal Reserve getting involved obviously indicates a mess. Several big lenders are having liquidity problems because they cannot find investors to buy their loans. The famous 80/20 piggy-back loans that offered accessible and affordable 100% financing to buyers are now gone. How widespread was their use? Forty-five percent of first-time buyers in 2005 and 2006 used some form of 100% financing to get into their home. A buyer can still get 100%, but it comes from more conservative, federally-backed resources like the VA and FHA, and local resources like CHAFA and County Bond Money. These generally carry more credit, income, appraisal and documentation restrictions so it is very realistic to assume that the “easy money” days of 2003 to 2006 are now officially done.
GOOD: Why it’s a credit squeeze and not a credit crisis is because mortgage applications are actually on the rise. Con-sider: the squeeze effects most the buyer who has no money, or no desire to put money, into a home. That person had been able to get into a house for the last few years. But five years ago, that was essentially impossible, a buyer had to have some personal financial exposure in order to purchase. All the loans that were there five years ago, and most of those available 3 years ago, are still available today.
BAD: The market went from 6 months (6.03) of inventory on June 30th to almost 7 months (6.85) on July 31st due to a slight increase in listing inventory (3%) and a 14th straight month of monthly sales being lower than the same month the previous year (down 17.5%).
Advice for:
SELLERS: If you have been on the market more than 30 days, the next 30 may not be pleasant. There will be more discussed in the CONCLUSION to this report, but the credit squeeze and the wild swings going on in both the stock mar-ket and in housing are all tied to the sub-prime meltdown. Plain and simple, there is no way to make the media attention to the mess positive and it will likely stall further buyer’s desire to come to market. School starts in most districts the week of August 13th this year and the attrition of listing competition through buyer’s purchase will be slow with the combina-tion of other pressing distractions, credit unavailability and bad news. Buyers that are buying are buying value. All ten major MLS areas are showing lower new-to-market pricing. If your price is still where it began, there’s a good chance the newer-to-market property (which the buyers are more likely wanting to see in the first place) is coming on at a lower price than what you’re presently offering.
BUYERS: Find some cash when you buy and evaluate your lender’s past performance before committing to work with them. The sexy 100% conventional loan that borrowed the entire 20% down payment is a thing of the past. If you are a buyer that was approved for that in May or June, get re-approved because no investor wants that loan anymore. Lenders that specialized in this type of loan are the ones facing the biggest credit and liquidity problems. As a buyer you do not want to sacrifice your ability to accommodate a seller’s needs. That accommodation comes in two forms: time and money. If your lender and/or your loan has any hint of not being able to close on time, you are losing negotiating power. Bigger lenders will still accept gift funds, and since there are an increasing number of good buys in the market right now, that is something to strongly consider. Believe it or not, this could be more beneficial by exposing better long term loan options. In a market that has some good values, getting smarter financing associated with the purchase is a good idea.
BUILDERS: Buyers are willing to pay for what they want, and spec homes are not as popular among buyers as a build-to-suit where they get exactly what they want. Since overall buying activity is not showing signs of increase, building to real demand on build-to-suit is likely a better economic strategy.
INVESTORS: Balance your short and long-term horizons. It looks like there will be a huge surplus of housing in the fall and many of theses sellers that don’t sell will start to look at any option including renting. While there is an increased demand for rental property (enlisted military increases, relocation, immigration and -unfortunately- former sellers that are now out of their houses), unsuccessful sellers that choose to rent after failing to sell will be increasing as the fall pro-gresses. It remains a great time to buy for a long term investment, but the same drag on rental rates that has been observed for the last several years will exist for new reasons. Previously it was too easy to buy a house, so why rent? This fall, it may be too easy to rent, so as a renter, why not be choosy? For the near future, just getting it rented isn’t a bad idea. But for the long term, Colorado Springs housing on a monthly basis costs less than the national median (our median value is identical to the national median at $225,000). That median value is a full $100,000 lower than the median in the west, and despite our surplus of housing available, it still is better than the majority of the western MLS cities. If you have property, be pragmatic. If you’re buying, buy based on long-term values, and if you know the area, start looking for some really good values this fall.
Strengths | Weaknesses |
| Enormus Selection for Buyers | Giant inventory remains with the relocation season al-most over |
| Prices at Nat’l Median, and well below other Western Cit-ies | More difficult to obtain financing and more lenders having increased difficulties |
| Quality land that's always popular still sells | Continued perception by some buyers that the market is over-valued |
| Rates starting to trickle down, more buyers applying for loans | Many resales, specifically in condos and townhomes, competing directly with new-builds |
Opportunities | Threats |
| Local Buyers who know the area will find surprising val-ues in areas traditionally known to locals and not relocat-ing buyers | Likely surge in foreclosures, late 2007 |
| Sellers are getting increasingly realistic | Lack of job growth |
| Have cash and credit, and you can buy, probably buy well. | Continued Credit tightening |
| Great time for a move-up buy | Continued Negative Media to National Problems |
Dirt Matters: Relocation versus Local Buying Trends
Some of the areas that are seeing the biggest drags in inventory are some of the areas that traditionally are move-up areas for local buyers in Colorado Springs. Southwest and Northwest were among the first areas to start making market correc-tions this spring with reduced new-to-market prices and larger price reductions and negotiations on pricing. Correspond-ingly, while not selling like they did in 2004 to 2006, Powers and Briargate have seen stronger traffic than the west side, primarily from a summer of decent relocation buyer activity. Downtown, which has been hot for years is perceived by many buyers to be over-valued, especially in the less expensive homes that have been only partially improved but are priced as total renovations.
Some of the values of a relocation buyer that are different than a local buyer revolve around peace of mind. A relocation buyer often times has a matter of days to buy a home, and correspondingly, will buy based on variables that are more uni-versal to areas other than Colorado Springs. They will more likely want good schools, consistent neighborhoods and a home that if things don’t work out, they will have an easier time reselling. Correspondingly, the school district matters, newer construction matters and areas that consistently have popular demand matter. A local buyer is more likely to buy based on more subjective values: schools, quality and resale are still values, but proximity to things like mountains and trails, ease of commute, trees and other variables are more likely the concerns of the local buyer.
Looking back on the summer that is already drawing to a close, areas on the east side of Colorado Springs had a rough go, but not as rough as many of the areas on the west and south sides of Colorado Springs. Many local buyers are staying on the fence waiting to see what happens, while buyers that are relocating into Colorado Springs for the first time are finding values that are likely lower than what they observed in their previous market. While supply is substantial here, it remains below the national average of nearly 8 months of inventory to sell through.
Conclusion: The Semantics of Credit
One of the painful effects of the media age for a business reliant on conservative long-term gains like real estate is what to do with information that isn’t at all local, and still effects the local market and local emotions of the market. Listening to the radio this morning, a French bank has turned off credit a global equity fund in Paris because of it’s over-exposure to the sub-prime lending markets in America. In New York City, American Home Mortgage loses liquidity on the funding of it’s mortgages because investors find problems in some of the batches of 100 loans that are sold as a unit, and their capital to support the loans forces them to buy them back. With an empty wallet, they shutter the operation.
This sounds awful. This sounds like the house across the street that went into foreclosure could be hurting the balance sheet of an English billionaire trekking in New Zealand. This sounds like the inter-relationship between the housing mar-ket, the mortgages propping up that housing market, and the investors financing it all, could be ready to collapse in a spec-tacular cataclysmic fashion. Well, yes to the first two. Hold on a second with the last one.
A known problem with the real estate explosion from 2001 to 2006 was that at the end, credit became extraordinarily loose, some of the buyers that were buying had no business buying a home, no individual or entity was auditing the proc-ess, and the supply of buyers buying homes was borrowed from the future supply of demand by the lure of easy money, low interest rates and the hype of “everybody’s doing it”. The reaction to how easy that money was to obtain has now been witnessed, and the market’s own self-policing actions have been the shut-off valve. When given the opportunity to lecture on the mortgage markets and liquidity problems associated with investors no longer wanting anything sub-prime of fishy in their mortgage soup, Ben Bernanke, Chairman of the Federal Reserve instead decided to talk about inflation and the Policy Committee decided against lowering interest rates to free up more credit.
If the present problems of lending were actually a credit crunch, the Federal Reserve would have done something. If it is a credit squeeze, that eventually would loosen on it’s own, the reaction of do-nothing seems to be more appropriate. In fact, the rate of self-policing done in the industry is pretty amazing. The lenders are reacting quickly to create new rules of do-ing business, even if they are not the rules required by the more conventional products regulated and purchased by Fannie Mae and Freddie Mac. The 80/20 piggyback loans have disappeared, and most lenders will only lend a 10% second if they will lend it at all. But true 100% finance-it-all and pay mortgage insurance still exists, as does 95%, as does Low-Downpayment-Rate-Adjustments that add onto the interest rate a percentage based on down payment so that mortgage insurance can be avoided, as are FHA, VA, and community vehicles that will loan or grant some or all of the down pay-ment. In some examples, some lenders will still accept large deposits and not have to document them as gifts. Buyers will not go flocking to these other vehicles partially out of shock to the change. But if a buyer looks at all their loan options with as much scrutiny as their home purchase decision, they may find that some of these products over the long-term al-low them to buy more house rather then less.
Who is left in the dark? Those with bad credit and no cash. The market anomaly was that bad credit and no cash could still be financed over the last few years. The correction if very close to that of a surgical procedure. the funny part is that the lenders are operating on themselves. The operation involves going in and removing the anomaly, in this case the easy-money, high-risk loans, and then a period of rest and sedation and low impact rehabilitation while the market recuperates. that will make August and probably September a very interesting month for financial media reporters. When big lenders go under, that’s unfortunately very news worthy. Some buyers that were approved for loans earlier this summer may not even have the loan they were approved for still available to them. Closings will be delayed and some will fall apart by lender liquidity problems. But the startling truth that buyers rate of mortgage applications is rising and not going down indicates that buyers are starting to sense the wave of opportunism that the market affords. It also puts back into balance the risk-relationship lenders afford their customers.
For the next 60 days, the conservative, peace-of-mind, buy-without-risk attitudes of buyers will only be amplified by the credit squeeze. For a seller that needs to sell in the next 60 days, or indeed a seller that needs to sell this fall, a proactive reaction to this latest development is to reduce price. That increases the probability of sale by increasing the number of individuals that qualify to buy the home. It is important that a property be exposed to as many possible buyers as possible. But over the next six months, the values that should be available due to high inventory, lengthy times on markets and a new negative stimulus to buying activity should be excellent. The bottom line is that the sub-prime meltdown is not over, but the lack of demand for real estate may also be abating. The average selling price was $60,000 less than the average new asking price after the first quarter. Those two numbers are only $20,000 apart. These trends should continue into the fall.
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Joe and Jennifer Boylan
ERA Shields Real Estate
1710 Jet Stream Dr. #100
Colorado Springs, CO 80921
Toll Free: 888-611-5935
Local: 719-388-4000