September 2008 Colorado Springs Market Update

DISCUSSION:
In the real estate industry, the joke of the last two years has been that you’d know when the market had turned when it looked better than your stock portfolio. In an unprecedented turn of events, at this writing, the Dow Jones Industrials are off almost 40% from their October 9, 2007 all-time high, while the first real signs of a market improvement have just shown in the local marketplace.

The Bail Out: There is no disputing that the turmoil that has rocked all the G8 Nations, not just the United States, began in the high rate of default in American home mortgages. If you have not bought or sold a home in a while, and it seems all so unreal that lenders were really giving out these loans, well, it was all pretty unreal. The rate of sale in Colorado Springs in 2004 was 10% higher than the previous best-year ever in 2003, and then 2005 blew away 2004. By 2005 and 2006, 40% of all national home sales were not primary residences. “Investors” (better called speculators) were so into real estate they were buying anything with 2×4’s and a roof. The housing bubble never really went burst, but it did deflate quickly. What burst was the lending bubble. How these homes were acquired was far too often due to exotic mortgages. While the rate of subprime loans was never more than 8%, it is factual that almost half the loans used to purchase homes in Colorado Springs in 2005 and 2006 were some form of 100% financing (VA less than 20% of that mix). So while media outlets rant about “toxic subprime mortgage securities” the problems are far deeper: when you look at the graph above, some ndividuals obtained loans when they shouldn’t have received loans (subprime). But that was 2 out of 25 loans. What was being pitched to the other 23 out of 25 were products no one should use (these were still called conventional). The problem was not just a sub-prime product. It was a sub-prime process with sub-prime thinking spread all around. Leverage is good. Over-leverage is bad.

Credit revolves around trust. Ninety-two percent of the loans were supposed to be made to trustworthy individuals. But the products themselves required infinite growth in the housing sector. The second that stopped, it seized the flow of cash, especially to those who made questionable loans. Now, banks and corporations don’t trust consumers, consumers don’t trust consumers, and banks don’t trust banks (the overnight lending rate is an astounding 5% add-on right now)

.“How on earth are the numbers getting better in Colorado Springs real estate? Apparently global credit is seized, and yet the Colorado Springs market saw more closings in September 2008 than September 2007. That doesn’t sound like a seized credit market.

Here are the new realities of loans: Though Must Have Assets. Though Must Have a Stable Stream of Income. Though Must Have Credit. Got the Trio? Go buy something. Lack one or more? You’re on the sidelines and for a while. Some lenders lent money in ways that were more flagrantly destined for failure than others. Today, a lender with a risky reputation has no liquidity. That means they have a hard time lending, and may be headed out of business. If a lender abused their investors’ trust by creating negative-amortized adjustable 80/20 financed loans for investment property (in layman’s terms, a risk on top of a risk on top of a risk on top of a risk on top of a risk… see Washington Mutual) that lender stopped receiving cash from their investors. This system only works with a steady infusion of currency, which in mortgage terms, is called a loan origination. The investors control the pipeline of origination with their cash. and no investor with cash has the desire to be fooled with right now. So the lenders with the highest rates of default are falling apart… quickly. The lenders that maintained some (or a lot) of dignity and passed up the easy bucks for a sustainable business model (see Chase, PHH, Wells Fargo), are often the companies the consumer hears today buying the smoldering assets of these other lending titans. Make no mistake: ALL LENDERS have tightened their underwriting. But in Colorado Springs, they funded over 700 purchases last month. For the first time since March, 2006, this local market can say “it’s actually better than it was last year.”

Remember sub-prime mortgages versus sub-prime thinking? The sub-prime mortgages went to only 8% of the population. The other 92% were offered crazy loans to make their expenses as low as possible. Some of that 92% is now in the category of a sub-prime consumer because their credit was laid waste in the implosion. But most of them are healthy and doing okay. The national numbers may be one in six with problems, but that is not the case in Colorado Springs. Year to date, the entire market is off around 7% in pricing. Most of the rest of the nation is off in excess of 10%, many competing markets in the west are off 15% or more. Most markets are in an inventory build phase: we are in inventory reduction. Most markets are seeing fewer and fewer buyers. We just saw an increase.

IN SUMMARY:
Stephen Covey’s famous circle of influence and circle of concern is writ large on the Fall, 2008 American Economy. There are the things you can’t control and the things you can, influence and concern. Right now, what is holding back the real estate market in Colorado Springs (and most of the Front Range) are national problems. Jobs aren’t being created, credit is tight, and our inbound buyers are still frustrated sellers in the markets they are coming from. But for buyers in the local market, this is as rich an opportunity as any in decades. Rates are at 6% or better on 30-year fixed mortgages. Colorado has had a surge in relocation traffic every year this decade creating new households for decades to come. Depending on the neighborhood you’re looking in, prices could be at 2005 or even 2004 levels. Inventory is down 12% from a year ago and sales activity was up almost 6%. Yes, the economy is in a recession. But chance favors the prepared mind.

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