Parker Colorado Real Estate Trends

Well, there seems to be some soft mumbling about that the Denver area real estate market may be waking up from a long slumber. It may be too early to tell but we are starting to see some subtle signs of change. I am not talking of the mass media hopefuls that are making the broad and general statements that its a great time to buy but rather watching the actual local data of homes sold, prices and foreclosure rates. Like many Wall Street investors, following the charts can give you a head start on what’s to come.

Before looking at the hard data in numbers, I would like to point out some of the not so obvious trends that are indicators of where we are heading in Denver. First, if you follow the mass media, politicians, law makers, etc. you have heard the mass outcry “give me their heads” when talking about all the bad guys that created mortgage fraud, etc. Well the bad guys are going to jail and laws are being passed to protect the consumer from these bad guys in the future. It is almost like a replay of the savings and loan scandal that hit the Denver market hard in the 80’s. And I haven’t seen the Denver Post run any new updates on the foreclosure hardships in their special “foreclosure” series since January. Further, it seems that builder incentives are around but aren’t what they use to be a few years ago. Hmmm….

It looks as though the numbers are giving us a sign that we may be setting ourselves up for a rebound. Inventory levels are even or coming down in some locations, median prices are going up slightly, the actual days a home stays on the market is down by an average of 30 days and the amount of foreclosure filings have come down dramatically. Now, all of this data is fresh and not showing a constant month over month improvement but the trend seems to be positive. Further, savvy investors are starting to return to the market.

Finally, Colorado has historically bucked the national trend so when all you read about is a slowing national market, Colorado seems to be accelerating. Job growth has picked up, unemployment is down and it was recently reported that the cost of living is only forty percent of what it is in San Jose and San Fran, CA. So, all the cards are starting to line up. If you were waiting to buy, now is the time. When the secret gets out you may be competing with other buyers and have to pay a little more than you wanted to and builders will start to become less friendly with incentives. Bottom line…. the real estate cycle runs about 7-10 years. The Denver area started the downward slide in 2000. 2008 will be here before you know it and historically 2008 will be the time you better grab the proverbial board and surf the wave.

With the New Year started and newly elected officials now ready to get to work one of the issues both sides have agreed to take on is the foreclosure epidemic that has hit the Denver area. However, deciding what legislation will actually protect the comsumer from themselves is not easy. Everyone is in heated debate over doing away with 100% financing, prepayment penalties, licensing mortgage brokers, enacting legislation to keep appraiser independent from the mortgage broker and even allowing civil lawsuits against everyone from the mortgage broker, appraiser and borrower. But is any of this really going to work to keep the foreclosure rates down?

Now, I know there are some preditory lenders out there that devour the unsuspecting first time buyer and often convince them to go with 100% financing, no money down and do an adjustable rate mortgage. However, much of the foreclosure epidemic has been brought on by the consumer themselves. Just like gossip magazines, papparazzi, violence in vidoe games and movies….. if the consumer didn’t crave and expect it…… it wouldn’t be here. Many of the same people that buy a house with no money down or bad credit are the same ones that blame their obesity on McDonalds.

I know this sounds terrible but the fact of the matter is there are many other people with very good credit and money to put down that choose to buy their home on 100% financing and an adjustable rate mortgage and never land in foreclosure. The problem comes in the lack of understanding and education of money, finance and the real estate market. The people that often land in foreclosure do so out of ignorance of the system. They were “sold” on a product without understanding it.

I like to compare it to the stock market. Many people got into “day trading” and stock investing in the hot technology cycle of the 90’s. Do it yourself sites like Ameritrade allowed you to invest without a broker, make trades, play the market…..become a mover/shaker…. so exciting. However, so many people that lacked the education of knowing the stock market trends lost huge amounts of money. Even the ones that decided to use a broker ended up losing. These people lost lifetime savings and retirement money, got angry and started suing the brokers, the companies and anyone else with a deep pocket. The problem is they allowed their money to be taken.

The natural law of making money or creating wealth whether through real estate, stocks or business is “the greater the risk…. the greater the reward”. Buying a home you can’t legitimately afford on your own is a big risk to take. But not understanding your contract terms on the mortgage or lacking an understanding of the real estate cycle only amplifies the problems. Allowing someone to tell you that you can afford it when you know you can’t is a big shame on you.

Home buyers stopped seeing their home as a home and looked at it as a bank account in the “good market”. The idea of getting into a house and then refinancing or selling in two years became the norm. They didn’t think they bought at the height of the market becuase they didn’t know there was a peak.

The idea that licensing and policing mortgage brokers and appraisers will stop the problem is not a well thought out plan nor has enough research been done by the ones proposing this idea. There are many states that require mortgage brokers to be licensed but the state is still struggling with mortgage fraud and delinquncies (Florida being one).

Bottom line…..Education is power. If anything it should be a requirement for a new home buyer to have to take a class on mortgages, real estate trends, and finances before being allowed to do 100% financing. Or how about show proof of being able to purchase the home with traditional means of down payment, etc. before being allowed to use 100% financing. There could be an exemption for purchasers that have high credit and have purchase by nontraditional loans before and have been able to keep up. I am sure someone will say this can’t be done or would be illegal. However, being a home is not a constitutional right nor is getting a loan. So long as everyone is treated the same and abides by the fair housing laws.

One statistic that isn’t being talked about is the fact that people with credit scores over 720 and higher education levels are doing high risk loans such as stated income, 100% financing, etc. and managing just fine. These people find ways out of crisis before foreclosure. They know their options.

Finally, does anyone remember the last foreclosure market in the lat 80’s early 90’s? The real estate market is cyclical. This epidemic shall pass but another one will come. They run about 7-10 years…. Denver is about six years into the down cycle.

It was reported over the weekend that Colorado dropped to the number two position for having the highest rate of foreclosures. This may be a relief to many but don’t get a false sense of hope. As one leading economist put it, “this is the tip of the ice berg”. The Mortgage Bankers Association reported in their delinquency survey last week that approximately 1 in 20 mortgage holders were at least 30 days late on their mortgage in the third quarter. So, even though it looks like foreclosures are down….. they may just be taking a breather. It takes over 90 days before a bank will file a notice of Lis Pendens (notice of pending lawsuit).

Banks aren’t in the business of owning property and thus more interested in other options. Foreclosure is a last resort for not only the homeowner but also the bank. By understanding the under currents in the delinquency pattern, you can better gauge where we may be heading. For example, the bank is willing to negotiate with a delinquent homeowner even after 90 days of none payment. The bank knows that the homeowner could file bankruptcy which could complicate the foreclosure proceedings. Further, in Colorado’s current market, the banks understand that the property may not be worth what the homeowner owes and if the property goes into foreclosure, the bank is looking at taking a loss on the value and incurring additional expenses related to the foreclosure process and sale of that property. Banks don’t like holding or managing property……. it just isn’t their business.

Have you ever heard the saying, “it is less expensive to keep the current customer than market for new ones”? The banks know that it would be less expensive to renegotiate payments with the current homeowner than try to find a new one. The problem comes when the homeowner can’t meet the banks bottom line or breaking point. If it is completely impossible for the homeowner to make new arrangements for payment, the bank has no choice……… which brings us to our current situation.

Many Colorado homeowners have been running through all their options over the last three years. The “foreclosure chatter” in the real estate industry started the beginning of 2003. Since then, many have renegotiated with the banks…. often more than once. Many of these people were promised they could afford the American Dream….. they assumed that dream was home ownership. In reality, they got the American BAD Dream of instant gratification and debt.

From 1998 to 2003 I watched as people bought new homes, entangled in the emotions of the purchase and “dream”. I would often advise these people that they needed to budget for home maintenance, landscaping, home furnishings, window coverings, etc. I was often ignored and I would see people move in and hang sheets from the windows and see dirt backyards for months and often year after year. Or they would use 100% financing so they had some money in the bank to spend on the “accessories” and then reduced their payment by doing an adjustable rate mortgage. Mortgage brokers were telling them that they could refinance before the rate adjusted. This was often the case; however, the mortgage broker would convince the owner to do a “Cash out” refinance. This meant they would take the equity out if the home in the form of cash to pay credit card debt, pay for the landscaping they never did or buy those cars, boats and motorcycles. People were squeezing into the biggest house they could get away with and most with the idea of selling in two years and making money. Homes were no longer homes, but ATM machines.

Now here we sit….. these people couldn’t afford the original payment, thought they could sell if they needed to in order to save themselves and now they can’t sell for what they owe. Whatever the life changing circumstances, these people have to pay money they don’t have to get out of their home.

It could be another year before we see a stabilization or decline in the foreclosure rates in Colorado. There are still too many people that are doing a balancing act to keep their head above water. If the job market continues to grow, energy prices stay low and wages increase, we may see a decline in foreclosures. Lets keep our fingers crossed!

I often get calls regarding interest in buying HUD or bank owned property or a/k/a foreclosure properties. Everyone assumes that by being a foreclosure property it is by default a good deal. However, that is not always the case and could increasingly become less so. Let me explain….

If you went back in time, before all the creative financing, where buying a home meant dropping a twenty percent down payment, you would find a place where it was more favorable to get a “good deal” on a foreclosed property. However, 100% financing and cash out re-financing, interest only and adjustable rate mortgages coupled with the option of not having to include property taxes and insurance in the monthy payment have often left homeowners owing more than the original purchase price for the home. And this doesn’t even include the fees to sell the property which often include attorney fees, fines, late fees, back taxes or recording,filing and attorney fees.

Now, take the above costs and add a decline in property value. You may find that the bank is trying to re-coup its investment but the homes around the bank property have sold for less than what the bank in trying to get. Or even worse, there are more foreclosed or abandoned properties in the neighborhood, dragging down the appeal and values of the entire neighborhood. I can see this becoming more and more common in the future. But it will have a trickle effect on the market.

First, for every four homes where the notice of foreclosure is filed with the courts (known as Lis Pendens), only one of those will end up being on the market as a foreclosure property for sale. The other three will have the notice dismissed or released due to a last minute effort on the borrower’s part to come up with enough money to extend their stay at the property. However, many of these folks are on borrowed time and will re-enter the forclosure cycle again. This will continue to add foreclosure homes to the market. It will take the commitment of savey investors and serious homeowners to turn this trend around and absord the inventory.

So how does the inventory get absorbed if the bank wants more than the house is worth? This is difficult to answer. However, one option that has peaked the interest of investors around the nation is catching these homes before or as soon as notice (Lis Pendens) has been filed with the court. Often, these investors will send letters or even post signs in neighborhoods advertising their offer to “help you out of foreclosure” or they will sit at the court house steps to with cash in hand to purchase. This type of investing in real estate is high risk and not a simple process nor for the weak at heart but there could be deals to be had.

Bottom line…. often the properties listed for sale to the public are not automatically a good deal. Most of the “deals” have been bought up by the more savey investors before the public knows about them. However, if you are looking for your first home, you are a teacher, police officer or fireman, you may be able to benefit from the HUD and first time buyer programs to get a good deal on these properties. These programs require the home be owner occupied and not an investment/ rental.

The best way to know if a foreclosure property is a good deal is to work with an experienced professional in the field. It can be a complex process and HUD will require your bids to come through a HUD authorized broker anyway.

Although Colorado has seen some up and down trends in the market, in general it is a great place to live no matter where we are in the real estate cycle. Some of the factors that drive people to the state include a some what mild climate, the Rocky Mountains, the arts and the wide range of year round activities such as hiking, biking, rafting, snow skiing, horse back riding, camping and golfing.

If you do a search for the best place to live and you will find Colorado communities on almost every list. Colorado’s small community of Fort Collins has made CNN’s best place to live list for 2006 and Louisville made the list in 2005. Colorado counties of Pitkin and Douglas have earned a top five position of best places in the nation to live and Colorado Springs has made the number one spot for the best large city to live in. When surveyed, Europeans and U.S. citizens sited Colorado as the number four place in the nation to live….. falling behind California, New York and Florida.

So what does this have to do with the current market trend and how it helps predict where we are heading? First, these surveys show that people want to live in Colorado. It is a great place to send the kids to college, retire or just vacation. I believe Colorado is similar to Florida in this respect. However, I think Colorado is overlooking the second home market of the baby boomer generation. Working in Florida, I have had many discussions with people that are ten years before retiring and are buying their retirement property in Colorado and leaving Florida. Many Floridians tell me that Colorado is far more attractive than Florida and is quickly becoming more affordable than Florida due to a couple of factors.

First, Florida has gone through the boom that Colorado saw in the late ninety’s and thus property prices have become less affordable. Second, property taxes are very high and property insurance is even higher, if you can get it at all. Finally, we have watched what the “fear factor” has done to Floridians and Florida businesses when it comes to hurricanes, flood, wind, sink holes, lightening, etc. The threat of a storm can last for a week or more and it paralyzes everyone. Colorado has a much more stable climate in regards to the aforementioned.

Colorado’s tech industry is the hub of the Midwest and even though it has been difficult for this sector to pick up steam again, tech stocks are doing well again. Does this mean we could see employment growth in this area again? Also, the attention that has been given to mass transit, the environment and education overshadows many other places. The light rail system in Denver and the 470 corridor alone will help ensure growth over the next twenty years. The mining industry and manufacturing in Colorado is doing well due to energy costs.

Colorado (Denver metro) is currently going through what seems to be a foreclosure crisis in many areas but it seems to be limited to lower income demographic areas thus far. Many areas in Denver have seen appreciation and have been untouched by this crisis. Denver has been in the trough of the market for about a year or more. There is speculation of another wave with the foreclosure market and this may delay a come back in the real estate market in some areas.

I predict many areas will still see appreciation and growth but it will maintain its modest incline. I believe that many areas will start to see an upswing in activity in the next year or two. And although there will be inventory to absorb in the “foreclosure belt”, I think a bump in rental rates will help investors justify purchases in this area. Interest rates moving up will take some would be buyers back to the rental market and the homeowners that have defaulted on mortgages will now be in need of rental property. This will also help boost demand for rental property and rental rates will push up.

Bottom line….. real estate is historically cyclical. Colorado’s boom phase ran its course showing signs of cooling in year 2000. The cycle has historically run about 7 years…. keep your eyes open, the time may be nearing.