October Market Report

INTRODUCTION:
The Purpose of this information is to provide our clients with a comprehensive view of the Pikes Peak Regional Real Estate Market. This document is designed to benefit, Residential Real Estate Owners, Sellers, Buyers, Investors and Builders. Our goal is to provide factual data and locate opportunities in a fluid real estate market. Real Estate sales and acquisitions are investments and all investments involve a certain degree of risk. We hope this document helps make your decision to buy or sell easier, or at least better informed.

THE RULES:
There are many rules in a fluid real estate market, but here are a few that we believe hold true IN ANY MARKET

•LOCATION, IS STILL KING
•MONEY IS MADE ON THE BUY
•SELLERS SET ASKING PRICES; BUYERS DETERMINE VALUE
•BUYERS BUY VALUE
•CONTINGENCIES CLOUD NEGOTIATIONS (THE MORE “IFS” THE FEWER DOLLARS)
•THE HARDEST THING TO GAIN IS TRUST; THE EASIEST THING TO LOSE IS TRUST
•REPUTATION AND ETHICS ARE VALUE-ENHANCING ATTRIBUTES
•A HOUSE HAS DIFFERENT VALUES FOR DIFFERENT BUYERS: BUYER "A" CAN BUY HOUSE "X" FOR LESS THAN BUYER "B"

DISCUSSION:
The previous three months have produced an amazing amount of copy for newspapers, websites, financial and REALTOR blogs, and the nightly news. There is a constant theme running through all of it which was the sub-prime meltdown that began in 2006 but went full-tilt in mid-summer. This factor acted as a tipping point to set in motion a wider breadth of problems in an already unsettled real estate market. Sub-prime had an impact in Peoria and PattyJewett and what is happening nationally is happening in Colorado Springs and vice versa . But a major reality that is hard to translate into headline copy because it just doesn’t grab a reader’s attention like “disaster” and “hysteria” is that market forces do not move in lockstep and problems are not uniform. What also doesn’t write headlines is the fact that one man’s burden isanother’s opportunity. There are some interesting points of reference in the market that seem to indicate that the opportunists are beginning to make moves on the purchasing side of transactions.

In October there were some changes that have not been reported in 18 months: the rate of sale increased, the number of single-family listings decreased, the months of inventory month-over-month decreased and interest rates dropped. As opposed to the wild unit sales dip in September, October sales were actually close to what they’ve been the last several years. What has happened in previous months that was still unsavory news was a major price drop in average selling price and median price. But this has largely been fueled by a major high-end slow down. When you get deeper inside the numbers, some trends start to surface:

Trend One: The resurgence of the first-time buyer. If you look at the numbers below, Central, East, Northeast, Powers and Southeast all had months that showed some signs or multiple signs of improvement. These five areas had a combined average sales price of $198,000, just about where the median sales price for the market is. With the exception of Northeast, each of these areas showed longer time on market but a decrease in months to sell. What that indicates is that the pace of purchasing picked up while the pace of listing slowed... and the buyers that bought were more inclined to go after properties that sat awhile.

Trend Two: High-End Buyers are not common, but they are finding some very good deals and they are choosing to buy now. In Northwest, prices went up and days on market went down. In Northgate, units were down and prices were down, but days on market was WAY down. In Monument, units were down but prices rose and days on market went down considerably. All of these point to a similar condition in buyers: one, they’re out there; two, when they see a good value, they’ll go after it; three, they’ll probably reach upwards in price to get more house.

Trend Three: We probably haven’t hit bottom, but there is data that is in the positive that wasn’t in the positive during peak season. There are trends that are negative AND there are trends that are positive... a few months ago almost every trend was negative. The market is fluid and requires two parties (with likely competing interests) to come to a meeting of the mind for a single property to sell. Buyers have more power than sellers because sellers (commonly) have more needs than buyers right now. However, there is a build up of buyer demand that may be starting to express itself in action right now. For a buyer that really wants to make money on the buy, that opportunity is probably sooner rather than later.

Hard-Boiled Data:

• Number of Single Family Listing Sold in October (%+/-): 723 Year to Date: 8685
• Average Selling Price All Single Family (% +/-): October $243,160 Year to Date: $260,618
• Median Selling Price Single Family (% +/-): October $205,000 Resale: $199,900
• Condo Average Selling Price (% +/-): October $154,737 Year to Date: $175,239
• Condo Median Selling Price (% +/-): $139,900
• Months of Inventory, 
• Locally: 8.94 
• Nationally: 10.3
• Price Differential (Sold/Final List): 97.6%
• Average DOM (only applies to sold listings): 89 Days to Contract
• Percent of Listings that have sold (YTD): 46.9%
  

Advice for:

SELLERS: You are either remarkable or you are invisible. Buyers will not remember a property that does not “grab them”. As a seller faced with a one in nine chance of selling this month (the present months of inventory to sell through), you have two things within your control: your price and your “value”. First-time buyers appear to be making an appearance again and higher end buyers appear to be going after more expensive, good value homes. The lessons to be learned from this are that while buyers are fickle, they will buy something that “they like” as opposed to something that “they have to buy.” Buyers do choose by a process of elimination, but right now they are choosing properties that they are enthusiastic about rather than properties that garner lukewarm affection. If you can look at your residence with objective and critical eyes, ask yourself if a buyer sees a remarkable product, or just another home. If they see remarkable, your odds of selling increase greatly.

BUYERS: Pick three to five non-negotiable items and apply those to the market. As mentioned last month, if you are honest with the fundamentals of Colorado Springs, and look at this market relative to the west, it is pretty easy to see through the headlines that grab the bad news in bold face type and see some decent fundamentals that will translate to wealth in the long-term. How you buy and buy well is to think about what is terribly important to you and stick to that. That helps eliminate dozens of listings that you just aren’t interested in seeing. When you do this, you’ll probably find something you didn’t expect: all of a sudden, there aren’t that many juicy properties. This really helps the good deals stand out.

INVESTORS: Cash In or Jump In. The market favors someone who can accept a seller’s closing timeline. That’s the definition of an investor. An investor will want positive return on their investment and as little risk as possible. Applying the “buyer’s non-negotiables” to the market, an investor may be surprised to see that there aren’t a ton of great buys. That’s because they are starting to disappear. Money is made on the buy, but some good buying is starting to happen. That means the window to make that money on the buy is not always open.

Conclusion:

Lots of Data, How to Spot Trends?

Merrill Lynch and Citicorp, as “blue-chip” as they come are now looking for new CEO’s due to billions in losses on subprime mortgages and the collateral damage suffered to their lines of credit from these losses. Holy Headlines, Brian Williams. The bottomline for the casual consumer is that “after sub-prime” (the era in time we all now live in) the high-risk, high-reward mortgage-money-making machine no longer exists. Lenders are now forced to self-police their entire portfolio. Money was ridiculously easy to get six months ago. It’s a lot harder right now. That’s why if you have cash and you have good employment history you are a powerful buyer right now, even if your credit has a ding or two. Lending based strictly on credit is why lenders got into this mess. Lenders are not interested in reporting future billion dollar losses to their investors and are self-policing on more conservative criteria when approving new loans. That means 10% down, 20% better, longer-term proof of employment (6 months rather than 60 days, maybe more) etc. That’s the present tense reality.

Shouldn’t this produce a lot of foreclosures? There has been an increase in default on sub-prime mortgages so the lenders are at risk for losing money. Foreclosures are rising nationally, but much more notably in areas that saw significant year over year price appreciation. Multiple studies are showing problems in coastal marketplaces due to their over-heated price inflation and the higher risk that went unchecked in extending loans and credit to this region. Colorado and more locally, The Pikes Peak Region had plenty of exposure to risk: our mortgage industry is still mostly-unregulated and was almost completely unregulated during “the boom”, Colorado’s real estate fortunes also road the tails of new construction and there were plenty of investors buying here without intention of ever occupying their home (an interesting fact about the foreclosure surge is the number of non-owner occupant homes that defaulted... without the personal emotional attachment to the piece of real estate and the steely attitude of “it’s just an investment”, foreclosures have been much higher onnonowner occupied than residential occupied dwellings). So while we’re not coastal, the other things that were tied to foreclosure increases are present in Colorado. So a bystander is likely to conclude “hey, there just aren’t many buyers out there if that’s what the lenders are approving, and rather there are a lot of foreclosures here or not, there will be pressure to drive prices down. It remains stupid to buy a home here or anywhere...”

The bystander is right in their observations, but they are rushing to conclusion on a single piece of data that expresses itself a couple different ways. Sub-prime and foreclosures are a big nasty reality, but they are two problems from the same source: sloppy lending. There are other facts that stimulate the real estate market outside of lending which paint a different picture.

Jobs are one. From 2006 until now the American economy has created almost 2 million jobs. Over the last two decades, the National Assoc. of REALTORS has correlated one home purchase to every two jobs created. That hasn’t happened. Interestingly, since the start of 2006, the market has slowed significantly. Remember that post 2001-Recession was called a “jobless recovery?” A lot of that recovery was in the real estate industry, both in the job creation in that industry, construction and other facets. Now, the rest of the economy has picked up the pace while real estate has “tanked”. But in that pick-up, the media attention and conventional wisdom of the herd is to stay away from real estate. This while some of the conditions that lenders actually like (job creation, income regularity,downpayment build-up) are beginning. That’s an interesting wrinkle that points to sooner rather than later recovery.

Another factor is that in residential real estate, it matters (sometimes tremendously) who the seller is and who the buyer is. Take for instance some of the odd trends in Northwest, Northgate and Monument that appear to be linked. Buyers that wanted to go to one price range, say $350,000 start looking and don’t like what they see. At the same time rates dip, sellers show a willingness to deal, and all of a sudden at $375,000, their money buys them a lot of house. “Wow,” thinks the buyer, “let’s really do that move-up purchase and get something we can live in for a while.” This is evident in sold prices going up and a great concentration of either short (less than 50 days on market) or long (over 100 days on market) purchases. Buyers always like fresh inventory, but they also like deals. Properties listed between 50 and 100 days are neither.

Rationally, it doesn’t make any sense that any property would sell in a market like this in the first two weeks of marketing for a price at or very near full asking. The odds of selling are 46 in 100after all , since more than half the listings taken in 2007 have failed to sell on-time (within their written length of listing contract). So purely rational thinking needs to discount an entire area like Northgate where the average property that sold was only on the market 45 days. It needs to discount all of Fountain Valley where the average property closed at 99.6% of asking price. It needs to discount Northeast, Northwest and Monument which all had healthy price increases last month. If you’re sensing sarcasm, it’s to illustrate a point: there is a lot of emotion involved in real estate. There are two human parties deciding whether or not to dance. This is not the definition of a rational exercise. Thinking a little differently and looking for trends helps the exercise work effectively.

Here are some trends to watch that ALL favor a return to real estate normalcy in the next 24 months. Some of these will express much sooner and in certain areas much earlier than others:

Trend 1: An increasingly customized society. Real estate has taken a tangible place in the American investment portfolio outside of simple dwelling and tax write-off. Increasingly builders and re-modelers need to be in flow with buyers that want personality expressed in a property, be that a party deck, home theatre, tumbled travertine bath surround or the like. This factor helps differentiate property to keep all properties from blending together.

Trend 2: America is a growing nation. That sounds pretty evident but in the last five years the number of immigrants purchasing property has surged and it is a goal of most immigrants to the United States to eventually own property (NAR Buyer and Seller Profile, 2006). As our nation crosses 300 million in population, supply and demand and location, location, location increasingly matter. A nation of wide-open spaces is increasingly a nation of more and more people.

Trend 3: The slow down in construction is bad for the building industry, probably very good for the real estate industry. Resale homes could not compete with new construction in 2006. New construction has been able to compete with resale largely only due to price wars and incentives in 2007. This major slowdown is an opportunity for the building industry to reconsider their business plans, re-formulate a product in line with Trends 1 & 2 above, and position itself as a unique alternative to resale as opposed to just “new”. Trends are already evident with several builders re-positioning their products at more affordable prices and introducing a slew of new floorplans for a new wave of customers.

Trend 4: April 2006 was the month when all the numbers went haywire in Colorado Springs... and at the time, not many noticed. An interesting pre-cursor was October and November, 2005. In both those months some of the signs of the coming correction began to express. They didn’t do so in any consistent manner, but there were price corrections, inventory surges and lengthening of time to sell long before April 2006. It’s just that from April, 2006 forward, everything moved towards a more buyer-focused market. October 2007 is showing signs that might be the polar opposite of October 2005...
while some of the trends started to dip negative then, some of our trends are starting to creep positive now. There is not the momentum to flip any of this data until full-on trends now, especially since November through January sales activity is usually so slow it just can’t get any traction. But from February forward, tracking supply, months of inventory, days to sell and specifically what’s-selling-where will give some clues as to whether all of the market will recover or if it’s just darn good values that are the homes that are selling. Seeing a very seasonal monthly sales number for October 2007 seems to indicate something more positive than anything seen in almost 12 months.

Trend 5: One of the biggest factors in a buyer coming to the conclusion to make a move-up purchase is an event at a friend or family member’s house. Suddenly the individuals go from “I’m fine, everything’s okay” to “I’m not okay... I need a bigger dining room... honey, did you see their master bedroom closet? Why don’t we have a three car garage with all the kids’ stuff?” Something switches. Interestingly, about 120 to 180 days later, title companies become a hard place to schedule a closing. If there ever was a proof of the non-rational manner of real estate it’s the ol’ holiday party effect. People leave the party and start noticing For-Sale signs, some of which they’ve driven by for 90 days and paid no attention.

For six consecutive months listing stimulus had decreased (number of listings coming to market compared to the previous year), even while the inventory has increased. Last month was the first in seven that listings increased year-over-year... but that increase was made up for by an increase in buying activity. Months of inventory dipped for the first time all year. Real estate is a different kind of investment because the individual participates in the macro-world, yet the individuals own personal position can have advantages unrealized by another individual. In a market such as ours with hundreds of buyers operating instead of thousands, those advantages are intensified. A local buyer interested in a move-up purchase has an opportunity this fall and winter to make a significant move that will provide financial and personal benefit in three years, and likely substantial benefit in five to ten years.