Wednesday, June 11, 2008


Active Homes on the Market as of 5/31/08: 26,333
Active Homes on the Market as of 5/31/07: 28,845
Change: - 9.54%

Homes Under Contract as of 5/31/08: 6,338
Homes Under Contract as of 5/31/07: 6,354
Change: - 0.24%

Homes SOLD in April 2008: 4,664
Homes SOLD in April 2007: 5,046
Change: – 8.21%

There is no denying that we are seeing a significant shift in this market.

It starts with foreclosures, which have been the black cloud hanging over us for more than four years. I have said for some time that because Colorado was the first state to go into a foreclosure crisis, we would be one of the first to come out, and that is happening right now.

First, let’s explain why this is…

In the early part of this decade, home prices were spiraling upward everywhere… except Colorado. The tech crash and scaling back in the airline industry after 9/11 hit our economy hard, and we were losing jobs at a time when the rest of the nation’s economy was roaring.

So let’s look at the case of two “subprime” buyers who bought homes in 2003. Remember that as long as values were going up, banks were fearless about lending money.

Buyer #1 is in California, and he uses a “subprime / stated income / no doc” loan to purchase a $300,000 home. He takes an adjustable rate loan and figures he will ride the appreciation wave. Twelve months later, his payments balloon and he can no longer make them.

Because his home is now worth $350,000, there’s no risk to the bank. So Buyer #1 either slaps a HELOC on his house and pulls out equity to make his payments, or he sells for a $50,000 gain, pays off the bank and buys another, bigger house.

Buyer #2 is in Colorado, and this person uses a “subprime / stated income / no doc” loan to purchase a $200,000 home. Twelve months later, when payments go up, this buyer finds his home is only worth $195,000, and now he’s got a problem.

Buyer #2 can’t make the payments, can’t sell his home for enough to pay off the bank, and has no equity to access.

He is dead.

And that is why Colorado led the nation in foreclosures (per 1,000 households) in 2005 and 2006. By 2007, we had fallen to 12th, and this year, depending on which report you look at it, we are somewhere between 20th and 27th.

The biggest single shift in the market over the last 90 days has been the sudden, fierce competition for foreclosures. Buyers and investors seem to be in agreement that we have hit bottom, and the reality is that foreclosures in decent condition are now selling for over list price, with multiple offers.

The effect this has on the rest of the market is positive, because there is a glut of privately owned homes on the market priced at $250,000 and below that simply could not compete with discounted bank inventory.

Get rid of the bank-owned homes (or at least reduce the flow from a flood to a fast drip), and now this large group of owners at the lower price points have a chance to sell and move on.

Activity breeds activity, and as long as rates stay low, you have the potential to see quite a healing over the next 12 months.

Back to the inventory numbers above.

The most striking figure is simply the trend in homes on the market over the past four months.

For single family homes, the year over year inventory trend looks like this:

FEB: 4.21% MORE homes on the market than one year earlier
MAR: 0.02% FEWER homes on the market
APR: 2.07% FEWER homes on the market
MAY: 5.66% FEWER homes on the market

For condos, the trend is even more pronounced:

FEB: 8.73% FEWER condos on the market than one year earlier
MAR: 13.16% FEWER condos on the market
APR: 17.13% FEWER condos on the market
MAY: 20.50% FEWER condos on the market

This huge drop in inventory, especially among condos, is happening at the lower price points in our market. Basically, it’s less foreclosure inventory.

Days on market for SOLD homes has fallen from 111 for single family homes in February to 99 today, and from 123 for condos in February to 104 today.

If you are a buyer in this market, your choices are starting to shrink.

Keep in mind that at the mid-level price points ($250k to $400k), we have a mostly normal market, and at the higher price points ($400k and above), there is still a six to ten month supply of inventory.

The healing starts at the bottom of the market, and it seems to be happening right now.